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Legal Speak

Scam Alert: Debt Renegotiation Companies

Published October 7, 2010 10:57 AM by Tony DeWitt

In England at around the time of the American Revolution, a person who fell behind and could not pay his debts was placed in debtor's prison. It was the lender's ultimate remedy: pay up or go to jail. American law replaced the concept of the debtor's prison with the idea of bankruptcy. Bankruptcy was designed to forgive debts and give persons and businesses a fresh start. Hundreds of nursing homes and even chains have taken an option under bankruptcy called Chapter 11, which allows companies to reorganize their finances to permit them to pay their creditors. General Motors is one recent successful user of the federal bankruptcy system. 

There is a perception among Americans that taking bankruptcy is a terrible thing, or that it makes the person taking bankruptcy a "bad person." In 2007 the federal government, recognizing that too many people were taking bankruptcy for the wrong reasons, rewrote the bankruptcy code to require debtors to try restructuring their debt through credit counseling and other avenues prior to taking bankruptcy. Congress' intent in this regard was laudable, but the results have been catastrophic for many Americans who have fallen victim to the worst of the worst in the con-artist realm: The "debt renegotiation" companies. 

Many of these are not credit counseling services at all, they are long-running bunko operations disguised as legitimate businesses. They are an invitation to a debtor's prison of a different kind.

You've all heard these company's ads on the radio or websites:

The banking crisis has reached never before seen levels. ... This has created an historic opportunity for Americans drowning in debt.  You can now be rid of your debt forever.  [company] already has agreements in place ... so you can restructure your debts and pay pennies on the dollar... This is a once in a lifetime opportunity for you to get your life back ...."

They all have the same basic pitch: there is a special program that lets you cut your credit card debt in half, act now, tomorrow may be too late. The truth is, the banking crisis isn't even relevant to this issue. There is no federal law that lets you cut your debt in half. You cannot usually get away with paying pennies on the dollar to your creditors unless you take bankruptcy. And while you can legitimately dispute incorrect charges on a credit card account, in most cases you can't simply work out a deal with a creditor to take 50% of the original amount. And if you quit paying creditors, they tend to get less reasonable rather than more reasonable.

What debt renegotiators promise is that credit card companies will work with them and they can "renegotiate" your debt. The idea borrows from a concept that is seen in business frequently: a creditor will take less money to be paid in full today. Sometimes a company will write "2/10, net 30" on its bills. That means the person paying the bill can take a 2% discount on the total if they pay within ten days, but after that they must pay the full amount in 30 days. Sometimes, when a company falls behind on a debt, a creditor who wants to preserve the customer relationship may discount that debt 10 to 15 percent. But nothing requires the creditor to do so.

Here is how the debt renegotiation scam really works: The scammer tells you to stop paying your credit card bills and pay them instead. He provides you with the name of a lawyer that the creditor can call. You think you've stopped the bill collectors from calling, and that they are speaking to the negotiators. But in fact, the creditor has no obligation to speak to the lawyer, they just can't call you if they have been properly noticed. 

The first payment to the scammers includes a little extra to pay their fee, and each time you send them money they take a fee from that money before putting it  into an account for you. The amount of money is almost always less than the amount of money you're currently paying in credit card bills, and you feel very relieved; you have some spending money back. The money you send to the company goes into an escrow account.  Ostensibly this account is used to pay the creditors, but in fact, it is money that the scammer simply intend to steal from you with a clever contract. This because their "guarantee" is only to try to renegotiate your debt; it doesn't require them to actually do anything. And if you quit paying at any time, their contract says you forfeit all the money to them.

In the meantime the creditor lets a few months go by before contacting legal counsel, who drafts a petition/complaint and sues you in your home county. When they realize that you're being scammed for more money, they take action to protect their interests. They demand full payment in a lawsuit. When you contact the debt negotiation company after being served with a lawsuit, they'll tell you they can't give you legal advice, and to contact a lawyer.  In many cases your only option at this point is to seek bankruptcy protection whether you wanted it or not, because creditor's lawsuits mount up when they have not been paid. There is even a provision in the bankruptcy statute for them to drag you into bankruptcy court against your will.

Don't confuse legitimate non-profit organizations like Consumer Credit Counseling Service with the fly-by-night debt negotiation companies. Always check with the Better Business Bureau and your state's Attorney General's office to determine if a company is legitimate. Some states, like Minnesota, require a license to enter into debt negotiations on behalf of a consumer. And if the firm represents that it is a lawyer-driven debt renegotiator, contact the state bar to find out if they can even offer services in your state. Most lawyers can only practice in their state, and taking clients in other states is unlawful.

If you've been scammed by one of these outfits, contact an attorney who practices consumer law, and see bankruptcy counsel as soon as you can. There is a way for you to get a fresh start and find your way out of credit card purgatory. But you can't ignore the lawsuits, and you must take positive action.

posted by Tony DeWitt
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    A.L. "Tony" DeWitt, RRT, CRT, JD, FAARC
    Occupation: Attorney
    Setting: Jefferson City, Mo.
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