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New York Subpoenas Debt Settlement Companies

Attorney General Cuomo launches nationwide probe of companies' practices

May 8, 2009

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Charging that they offer consumers "false hope" while charging "tremendous fees," New York Attorney General Mario Cuomo has launched a nationwide investigation of debt settlement companies, which he said too often prey on consumers who have fallen onto financial hard times.

A lawyer who represents an industry trade group said Cuomo was engaging in "a P.R. stunt."

“Today, millions of hardworking Americans are finding themselves imprisoned by debt. In response, a rogue industry has stepped in, offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation,” Cuomo said. “Our mission is clear: to hold unscrupulous businesses accountable; to rein in a renegade industry; and to ensure that people are not victimized when faced with financial hardship.”

Cuomo said he has issued subpoenas to 14 debt settlement companies and one law firm: 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); and the Allegro Law Firm.

The subpoenas include requests designed to uncover the companies’ fee structures, how many people have benefitted from the companies’ services, and what kind of relief the companies are actually providing.

Cuomo is also currently investigating Nationwide Asset Services, Inc., based in Phoenix, Arizona, and Credit Solutions of America, Inc., based in Addison, Texas.

Debt settlement companies typically promise to negotiate with credit card companies and other lenders on consumers' behalf. Most charge an initial fee of 15 percent or more of the initial debt.

But Cuomo said the debt settlement plans are often "inherently flawed" and he said that, based upon consumer complaints, it appears that many consumers are being misled regarding the nature of the services offered by these companies. For example, he said that some companies falsely represent that they can reduce consumers’ credit card debt by as much as 75 percent through negotiations with creditors.

The debt settlement plans are generally premised on consumers aggregating savings, over one to three years, from which both the payment of the company’s fees and any negotiated settlement are to be made. Yet most consumers who are targeted by these companies are unable to meet the savings requirements because of their precarious financial situation, Cuomo charged.

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. Even for those consumers who can meet the requirements set out by a plan, their amount of aggregated savings is ordinarily insufficient to settle their debts, Cuomo said. As a result, many consumers find themselves worse off financially because of these debt settlement plans.

Consumer advocates say that many consumers would benefit more from working directly with their creditors, seeking credit counseling, or consulting an attorney about filing for bankruptcy. Additionally, even when enrolled in a debt settlement plan, consumers are often still subjected to collection efforts and lawsuits filed by their creditors. Consumers are even told not to discuss their debt situation with creditors.

On April 14, 2009, Cuomo arrested the owner of Long Island-based American Legal Process for allegedly providing “sewer service” to thousands of New Yorkers owing debt. According to the Attorney General’s criminal complaint and civil suit, this company failed to properly notify individuals that they faced debt-related lawsuits. As a result, individuals would unknowingly default and have judgments entered against them, without the chance to defend themselves.

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