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October 29, 2008

FTC smites debt negotiation firms (updated)

Filed under: lawyer news or ethics,q.s. quickies — David Giacalone @ 6:18 pm

We posted a short blurb this morning about the recent WSJ article “Debt-Relief Firms Attract Complaints” (by Eleanor Laise, Oct. 14, 2008).  Such firms claim to “negotiate” with creditors in order to greatly reduce your overall debt.  The article underscores our own concerns about the services and fees of “debt settlement” or “debt negotiation” firms, some of which are run by lawyers.  See our comprehensive prior post “doubts over debt-negotiation fees” (July 21, 2008), which focused mainly on Net Debt and the affiliated Contego Law Firm. We dug a little further this afternoon, because a person who represents the industry left a comment yesterday saying that the Federal Trade Commission “endorses what we do.”  From my prior research, I doubted that claim.

update (Oct. 30, 2008): has been covering the sordid story of The Consumer Law Center, a Florida debt settlement firm run by lawyer Laura Hess and Hess Kennedy Chartered LLC. They have been under investigation by the Florida Attorney General and other state regulators, and by the Florida Bar.  On October 8, 2008, Laura Hess agreed to disbarment.  On Oct. 15, 2008, Florida Attorney General Bill McCollum announced an Initiative to Clean Up Florida’s Debt-Relief Industry (see Sun-Sentinel article; ). And see, “Look Out for that Lifeline,” Business Week, March 6, 2008; and “Insider: Confessions of a Debt-Settlement Company Worker,” The Consumerist (March 2008)

update (May 9, 2009): See “ATTORNEY GENERAL CUOMO ANNOUNCES NATIONWIDE INVESTIGATION INTO DEBT SETTLEMENT INDUSTRY: Subpoenas Fourteen Debt Settlement Companies and One Law Firm in Connection with Probe” (Press Release, NYS AG, May 7, 2009);  and “Cuomo subpoenas debt settlement companies” (Newsday, by John Riley, May 7, 2009, which discusses the Allegro Law Firm); and Consumer Reports (March 2009), on high-fee debt settlement as a “financial trap”.

Here’s what I found out about the FTC and Debt Settlement:

In September 2006, the Federal Trade Commission got an injunction putting several debt negotiation firms out of business, and announced a continuing investigation. (FTC File No.: 052-3091) Its Sept. 21, 2006 Press Release, titled “FTC Stops Nationwide Debt Negotiation Scheme,” notes:

As requested by the Federal Trade Commission, a federal judge has issued a temporary restraining order against a nationwide operation that claimed it could reduce consumers’ debt by up to 60 percent, leading many people into financial ruin and bankruptcy. The FTC charged five companies, including Homeland Financial Services, National Support Services and Prosper Financial Solutions, and their principals with deceptive and unfair practices in violation of Section 5 of the FTC Act.

“These defendants are charged with targeting consumers who were knee deep in debt and luring them with false promises,” said Lydia Parnes, Director of the FTC’s Bureau of Consumer Protection. “Consumers should be leery of anyone who says they can eliminate your unsecured debt, or that you can pay it off for pennies on the dollar. Debt negotiation can be very risky.”

A month ago, the Commission announced the completion of the investigation, saying Debt-Negotiation Defendants Agree to Settle FTC Charges in Nationwide Operation that Led Many Into Financial Ruin.” (Press Release, Sept. 25, 2008)  Click here for links to the Stipulated Orders and other important materials in FTC v. National Support Services, LLC, Dennis Connelly, et al.  (US Dist. Ct., CD Cal, Civil Action No.: SA CV 06-701 DOC (RNBx) ; FTC File No.: 052-3091).  The Orders prohibit the respondent debt negotiators from continuing many of their claims and practices.

The banned activities reflect the Commission’s attitude toward the way debt negotiators conduct their business — often amounting to deceptive, misleading or unfair conduct that harms consumers. The points made in the body of the Press Release are well worth repeating, and I will leave you with them here and beneath the fold:

  • The settlement bars them from falsely representing that enrolling in a debt-negotiation program is likely to enable consumers to pay off their credit-card or other unsecured debts for a substantially reduced amount;
  • that consumers’ creditors are likely to negotiate settlements under which they will accept substantially less than the amount owed;
  • that debt negotiators can negotiate better settlements with creditors than consumers can negotiate themselves; or
  • that debt negotiators have an established relationship with creditors that gives them an advantage in negotiating favorable settlements.

The defendants also are barred from falsely representing that negative information that appears on a consumer’s credit report as a result of participating in a debt-negotiation program will be removed upon completion of the program; that any such negative effect on a credit rating, credit score or credit report is likely to be minimal or short-term; that creditors are unlikely to sue consumers who participate in a debt-negotiation program or otherwise fail to make minimum monthly debt payments; or that participating in a debt-negotiation program is likely to end most or all harassment or contact from creditors.

The defendants also are barred from falsely representing that creditors will not contact the consumer after a consumer notifies them to stop; that consumers who participate in a debt-negotiation program do not need to worry about balances on their credit accounts increasing while they are in the program; or that any defendant or any other person will begin negotiating with all of a consumer’s creditors immediately upon enrolling in a debt-negotiation program; or misrepresenting any other fact material to a consumer’s decision to participate in a debt-negotiation, debt-reduction, or debt-management program, or to buy any good or service.

In addition, they are barred from failing to disclose, clearly and conspicuously, before purchase, all information material to a consumer’s decision to buy any debt-negotiation services or credit-related products, programs, or services, including the possibility that, if consumers stop paying creditors, one or more creditors may sue the consumer; the fact that federal law prohibits creditors from misrepresenting a consumer’s payment history to credit reporting agencies and that creditors can report accurate negative information such as delinquencies and charge-offs for seven years; and that when consumers stop paying creditors, their credit account balances will increase due to interest, interest rate increases, and late fees and other charges.

The Commission has basically prohibited debt negotiators from making the claims that are most likely to attract customers, while mandating that they give the debtors the kinds of information that will probably scare them away.  If lawyers providing debt-settlement services — or the firms referring debt-negotiation customers to them — are engaged in any of the practices prohibited by the FTC in this case, they clearly need to assess whether they are living up to their duties under the Rules of Professional Responsibility.


  1. […] The case of Hess Kennedy, repeatedly covered in this space, got attention in the Wall Street Journal earlier this month after “a Florida Circuit Court judge entered an order to wind down the firm and approved a process for consumers to apply to get their money back.” (Eleanor Laise, WSJ, Oct. 14). David Giacalone has a few links (Oct. 29, scroll, as well as a more extensive post). […]

    Pingback by Walter Olson - — October 30, 2008 @ 6:43 am


    Ed. Note: Hello, Larry. I do not have information on particular debt negotiation firms. You might contact the FTC staffers mentioned in the above Press Release, or contact the consumer section of your State Attorney General’s office, or the Better Business Bureau, to see if they have information or complaints about the firm.

    Comment by LARRY LEWELLIN — November 6, 2008 @ 8:23 am

  3. It is my understanding that we should get at least most of our money back that we paid in. What about any other recourse though. My credit was being destroyed for the year that I was paying into this scam. I was on time with most of my debt until I signed up. I was told that this would take 3 to 5 years and now I am starting over with additional debt for interest and late fees. How do you put a dollar amount to my credit rating to include in my claim? As if times wern’t difficult enough.

    Comment by Jody Dowdle — November 14, 2008 @ 2:38 pm

  4. Jody, You ask very good questions. I think you might be able to get some answers from the FTC staffers who worked on the case (click on the Press Release link in the above post). Otherwise, you’ll need to sit down with a lawyer to talk about other damages. Of course, whether a lawsuit would be worthwhile, and whether the defendants have any more assets, is questionable.

    Comment by David Giacalone — November 14, 2008 @ 3:38 pm

  5. One of the main reasons so many debt negotiation firms end up getting shut down is they do not fully disclose the process a prospective client will be going through. Many companies sugarcoat the debt negotiation process and make it seem like it is the easiest thing in the world. And truth be told it is not, while the consumer can end up saving a ton of money and become debt free in a few years, they must accept the fact of falling behind and dealing with collection calls. And unfortunately many companies lie to people and do not let them know the truth of how the process works, then get a tone of complaints and shut down by the FTC

    Comment by Steven B — February 10, 2009 @ 11:54 am

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