Relief pitching?

“You can settle your credit card debt for pennies on the dollar without filing for bankruptcy.”

For people struggling to stay afloat, Debt Relief USA’s national TV ads must have seemed like a lifeline.  When consumers called the company, representatives assured them that low monthly payments to Debt Relief USA would cover both the settlement of their reduced debts and the company’s fees. For the service to work, said the reps, people had to stop making payments to their creditors — and stop talking to them at all.

But according to a lawsuit filed by the FTC, consumers who enrolled in Debt Relief USA’s service didn’t get the promised results and often found themselves worse off than when they started.  First, just to get the enrollment documents, they had to authorize a bank account debit over the phone.   Among the paperwork they had to wade through was a lengthy agreement containing provisions not disclosed upfront and contradicting what they’d been told.  For example, the agreement said “in no manner has [Debt Relief USA] represented that Client stop making payments to their Creditors.” That’s curious, because according to the FTC, that’s often what reps had said on the phone.

And then there were the fees: hefty administrative fees, monthly maintenance fees, sizeable negotiation fees — all of which were taken directly from customers’ bank accounts. According to the FTC, the negotiation fee had an interesting good news-bad news angle. The good news: Many people never paid that charge. The bad news: That’s because the company didn’t settle any of their debts.

But at least customers could count on the company to move fast to resolve their mounting financial troubles, couldn’t they? Not so, says the FTC. The agency alleged that Debt Relief USA often didn’t contact creditors until after customers had paid the administrative fee in full — which could take them six months or more — and had saved enough in a “set aside” account to settle the debt with that creditor.  By that time, additional late fees, finance charges, and other costs had increased the total even more.

The FTC’s lawsuit named Debt Relief USA, as well as four corporate officers. The proposed settlements — which are subject to court approval — ban the company from doing further business and ban two principals from ever marketing financial products or services. Litigation continues against the two other officers.

What about refunds for customers? Debt Relief USA has declared bankruptcy, but through a separate action filed by the Texas Attorney General, customers have received $3.7 million in refunds and will get more money soon. In addition, the FTC’s $19.7 million judgment against the two settling officers — suspended due to their inability to pay — will kick in if financial information they gave the FTC proves untruthful.

These days there are new protections in place for consumers in financial distress. As of October 27, 2010, changes to the FTC’s Telemarketing Sales Rule prohibit companies that sell debt relief services over the phone from charging fees before they settle or reduce a customer’s debt. Looking for compliance guidance?  Read Debt Relief Services & The Telemarketing Sales Rule: A Guide for Business or watch this video.