If you’re struggling financially enough so much that you seek out a debt settlement firm, the last thing you need is to get stung by an upfront fee. Federal regulators saw that, and in 2010 they barred debt settlement from taking advance fees from their debt-weary clients.
|THE LAWYER-LED LOOPHOLE
Federal and state regulators have cracked down on the “attorney model” of debt settlement, calling it nothing more than a ruse to dodge the federal ban on upfront fees. Click image to enlarge.
Some operations continue doing so, under the mantle of providing legal services.
They’re not fooling the Consumer Financial Protection Bureau, which made a bid to close the loophole this week. It filed a lawsuit against Morgan Drexen Aug. 20, accusing the Nevada-based company of operating a giant debt settlement business under the guise of providing support services for bankruptcy lawyers. The company has collected millions of dollars in upfront fees from clients, the agency charged, while leaving its televised promises of debt freedom almost entirely unfulfilled.
Morgan Drexen isn’t just denying the charges — it made a pre-emptive legal attack on the consumer protection bureau. In a lawsuit filed about a month before the CFPB action dropped, Morgan challenged the agency’s constitutionality and called its probe “attempts to data mine personal protected consumer information.”
The court will decide who is in the right. But so far, Morgan Drexen isn’t getting applause from consumer advocates.
“I think there is a pretty big line between traditional legal relationships and what Morgan Drexen is doing,” said Andrew Pizor, a staff attorney with the National Consumer Law Center in Washington, D.C. “It’s not one attorney representing one client.”
In a public response to the consumer bureau’s lawsuit, Morgan Drexen said it does not collect fees from consumers, but works for lawyers who do. The attorneys provide bankruptcy services, and may help with debt settlement as part of that.
The CFPB’s lawsuit presents a different picture. The company promises debt relief with no advance fees in its commercials, then charges fees for bankruptcy services, up to $1,950 in initial fees plus $50 a month. The company gets authorization for automatic deductions from clients’ accounts, “and immediately withdraws $100,” the agency said in court papers. The bankruptcy services are characterized as a safety net.
Attorneys receive $1.66 per month in retainers for each consumer in their client base, and $5 for approving or rejecting each settlement offer, the civil charges state. Actual representation in a bankruptcy proceeding is not covered by the bankruptcy services contract — you’ll need to pay the lawyer extra for that, or find another lawyer. The consumer bureau’s lawsuit also names company CEO Walter Ledda as a defendant.
Morgan Drexen said it works at the direction of the attorneys, and that the propriety of its support services model has been confirmed by 16 jurisdictions nationwide.
Wisconsin would not be among them. Its Department of Financial Institutions ordered Morgan Drexen to pay $6.1 million and stop operating in April. An administrative law judge upheld the department’s finding that the company’s business model is “a pretense to evade regulation” under Wisconsin law, according to a DFI statement. The company collected about $8.1 million from Wisconsin consumers since 2007 and turned over less than half of that to their creditors, keeping nearly 53 percent as fees. Morgan Drexen has filed an appeal of the ruling in circuit court, a DFI spokesman said.
It isn’t that hard to tell a real attorney from a debt settlement company, legal experts say. “If someone says ‘we’ve got lawyers,’ but you’re not dealing with them, that ought to be a red flag,” said Henry Sommer, former president of the National Association of Consumer Bankruptcy Attorneys.
Settling debts while on the verge of filing bankruptcy can happen. But contacting creditors from a bankruptcy lawyer’s office doesn’t provide the leverage you might think. “With experienced debt collectors and attorneys, I can almost hear their eyes roll,” said Trisha Connors, a bankruptcy lawyer in New Jersey. They know that if her client was keen to file bankruptcy, she would not be calling about a settlement.
The allure of ads promising debt freedom can be powerful. Connors sees some clients who have already tried the debt settlement route, but managed only to dig their holes deeper. For consumers who think they have the resources to settle debts outside of bankruptcy, Connors recommends a do-it-yourself approach. Creditors have fairly standard offers, so negotiating skills are not that important. Saving the money for the settlement is the difficult part, she said — and no professional can do that for you.
Related story: Debt settlement companies morph into law firms to duck fee ban