Debt Settlement Industry Is on the Hot Seat

by Dawn Handschuh, Personal Finance Writer   

Fourteen debt settlement companies and one law firm were subpoenaed by New York State Attorney General Andrew M. Cuomo on May 7, 2009. Because most of the debt settlement companies do business on a nationwide basis, the investigation has potentially broad repercussions for an industry that is no stranger to negative attention for its unscrupulous business dealings. 

In a recent press release, Attorney General Cuomo called debt settlement companies "a rogue industry" that "offer[s] consumers false hope, charging tremendous fees, and leaving them in a worse financial situation." 

The 15 companies named in the investigation include:

• American Debt Foundation, Inc.
• American Financial Service
• Consumer Debt Solutions
• Credit Answers, LLC
• Debt Remedy Solutions, LLC
• Debt Settlement America
• Debt Settlement USA
• Debtmerica Relief
• DMB Financial, LLC
• Freedom Debt Relief
• New Era Debt Solutions
• New Horizons Debt Relief Inc.
• Preferred Financial Services, Inc.
• U.S. Financial Management Inc. (d.b.a. My Debt Negotiation)
• Allegro Law, LLC

The subpoenas seek details on the companies' fee structures and the actual debt relief they provide.

Cuomo is also separately investigating Phoenix-based Nationwide Asset Services, Inc., and Addison, Texas-based Credit Solutions of America, Inc.

According to the New York State Attorney General's press release, debt settlement loans are inherently flawed for two reasons:

1. Many companies falsely claim they can eliminate as much as 75% of consumers' credit card debt.
2. Many companies require up-front payment but fail to reimburse consumers even when they don't deliver promised results.

"Some of the companies also urge consumers to seek additional sources of funds through means such as selling their blood plasma, mowing lawns, cutting down on car insurance, and borrowing from their neighbors and church," the press release stated.

By the time most consumers turn to debt settlement companies, their financial situation is often too precarious to benefit from negotiations with creditors. Many consumers end up in worse shape than they were in before they signed up with a debt settlement company. Bad advice by these firms, such as instructions not to discuss their debts with creditors, only exacerbates consumers' plight and leaves them open to collection efforts and lawsuits by creditors, as the press release noted.

Consumers who feel they have been defrauded by a debt settlement company should call the Attorney General's office at 800-771-7755 or visit www.oag.state.ny.us.