When done honestly and correctly, debt settlement can be a win-win situation: Borrowers pay only a fraction their obligations. Creditors receive at least part of the debt owed (all of which might be lost should the borrower need to declare bankruptcy). And the debt-relief company earns a fee for services rendered.
But not every company performs this service honestly and correctly. In fact, officials with the Consumer Financial Protection Bureau (CFPB), the federal agency in charge regulating consumer protection, say some debt-relief companies swindle the most vulnerable borrowers.
The most recent example stems from a complaint filed in May by the CFPB against American Debt Settlement Solutions, Inc. (ADSS) of Boca Raton, Fla., and its owner Michael DiPanni. The suit alleges ADSS “misled consumers across the country and charged illegal upfront fees for debt-relief services that rarely, if ever, materialized.”
The bureau submitted a proposed consent order that would stop ADSS and DiPanni from operating and providing debt-relief services in the future, as well as levying a $15,000 civil penalty fine, if approved by a judge. A notice on the ADSS website now reads: “American Debt Settlement Solutions is winding down operations and is no longer able to service its clients.” Its phone is disconnected.
“Consumers struggling to pay off a debt are among the most at risk and deserve better,” CFPB Director Richard Cordray said in an agency statement. “We will continue to crack down on this type of harmful behavior.”
Allegations Against American Debt Settlement Solutions
The CFPB filing shows ADSS deceived hundreds of consumers in multiple states by charging approximately $500,000 in fees while making misrepresentations about its debt-relief services.
Since its inception in 2008, ADSS did not provide any debt relief for 89 percent of its enrolled clients, according to the filing.
Although consumers deposited nearly $10 million into accounts designated for debt repayment, the company directed less than $2 million in payments to creditors, according to the complaint filed in a federal district court in West Palm Beach, Fla.
The complaint charges ADSS and DiPanni with “abusive” acts or practices in the consumer-financial marketplace. This is the first time that the CFPB has applied the abusive standard under the CFPA (Title X of the Dodd-Frank Act), and it signals the use of an important new tool in protecting American consumers from financial predation.
Legacy of Accusations
The May complaint against ADSS leads a trail of earlier accusations made against the debt-relief company.
Minnesota Attorney General Lori Swanson in 2010 filed a lawsuit against ADSS, charging it violated numerous provisions of a 2009 state law that limits the origination and monthly fees that may be charged by licensed debt settlement firms.
In 2011, Oregon’s Department of Consumer and Business Services filed a cease-and-desist order against the company and fined it $55,000 for the same illegal conduct it perpetrated in Minnesota.
The Better Business Bureau (BBB) had already given ADSS an “F” rating, noting 63 complaints filed against the company over the last three years. In January 2013, the BBB requested American Debt Settlement Solutions’ voluntary cooperation in resolving the complaints, but never received a response from DiPanni.
Debt-Relief Agencies Targeted by CFPB
American Debt Settlement Solutions is one of approximately 2,000 debt-relief companies in the United States, and it’s not the only one targeted by the CFPB for its deception of the American public.
- CFPB officials on May 7 accused Mission Settlement Agency of New York and its principal, Michael Levitis, and Premier Consultant Group LLC of New Jersey, of charging consumers $1.3 million in illegal advance fees for debt settlement services and engaging in other deceptive and unfair practices. The Bureau is currently seeking to halt the operations and obtain penalties and relief for victims.
- Attorneys General from New Mexico, North Carolina, North Dakota and Wisconsin, and the Hawaii Office of Consumer Protection, in conjunction with the CFPB, filed a similar action in Dec. 2012 against Payday Loan Debt Solution, Inc. (PLDS) and its owner, Sanjeet Parvani. Officials alleged the Miami-based debt-relief firm charged consumers a fee ahead of actually settling their debts, violating the FTC’s Telemarketing Sales Rule, the Dodd-Frank Act and the laws of various states. PLDS paid $100,000 in restitution to consumers who were charged fees, but received no services; and paid the CFPB a $5,000 civil penalty.
Protect Yourself from Debt Relief Scams
Today there is one less dishonest debt-relief company in operation, but that doesn’t mean that there aren’t other dishonest players out there.
For many people in debt, debt settlement is a viable method for resolving their financial problems – but only if their debt-relief company does its job honestly and well.
In addition to charging illegal upfront fees, as well as unlawfully keeping money that should be paid to a creditor to settle an account, a dishonest company could also force a debtor into more trouble by suggesting that he or she stop paying a creditor before a debt settlement plan has been negotiated and accepted. This practice can lead to further erosion of a borrower’s credit worthiness, or worse – complete financial ruin and bankruptcy.
If you are in debt and looking for a company to help you negotiate a debt settlement, make sure you do your homework and understand your rights under the law:
- Check the company’s credentials and references, including its rating with the BBB.
- Talk to people who have used, and were satisfied with the company’s services.
- Don’t believe inflated or unrealistic claims about how soon you can get out of debt and how much money the company can save you. Companies can’t claim that they can get you out of debt in any specific time period.
- Get everything from the company in writing: Exactly what it will do for you, how, and when. This should be in your contract.
- If you are asked to pay money up front, make sure the money is being used for attorneys who handle debt settlement.
- Follow up constantly. Ask for a copy of every creditor settlement letter.
If you suspect a debt-relief company of dishonest behavior you have several options. You can contact your local Better Business Bureau, your State Attorney General’s Office, the Federal Trade Commission, and/or the Consumer Financial Protection Bureau.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- State of Oregon Department of Consumer and Business Services. (2011, October 13). Cease and Desist Order. Retrieved from http://www.cbs.state.or.us/dfcs/securities/enf/orders/DM-11-0071.pdf
- South Florida Business Journal. (2013, May 31). Complaint Says American Debt Settlement Solutions Misled Consumers. Retrieved from http://www.bizjournals.com/southflorida/blog/morning-edition/2013/05/complaint-filed-against-american-debt.html
- Consumer Financial Protection Bureau. (2013, May 30). CFPB Takes Action to Stop Florida Company from Engaging in Illegal Debt-Relief Practices. Retrieved from http://www.consumerfinance.gov/pressreleases/cfpb-takes-action-to-stop-florida-company-from-engaging-in-illegal-debt-relief-practices/
- Better Business Bureau. (n.d.). American Debt Settlement Solutions, Inc. Retrieved June 4, 2013, from http://www.bbb.org/south-east-florida/business-reviews/debt-relief-services/american-debt-settlement-solutions-in-boca-raton-fl-22002352
- Consumer Financial Protection Bureau. (2013, May 7). CFPB Takes Action Against Two Companies for Charging Illegal Debt-Relief Fees. Retrieved from http://www.consumerfinance.gov/pressreleases/cfpb-takes-action-against-two-companies-for-charging-illegal-debt-relief-fees/
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