Characteristics. Debt Management Companies are not specifically defined by statute although there are some laws in this area which will be discussed below. These are the characteristics that I have encountered in dealing with these companies:
- Fee driven. These companies are focused on fees, usually expressed as a percent of the debt to be reduced. Typically, they charge 15% based on the total debt to be negotiated.
- Unsecured Debt only. These companies only deal with unsecured debt. In fact, the vast majority of the debt they negotiate is credit card debt. Thus, there are no mortgage loans or car loans that they negotiate.
- Advertising promises cancelled by contract language. Virtually every advertising promise made by these companies is cancelled by the language in their contracts. By the time you exclude their contractual waivers, the only thing they agree to do is take your money.
- Sham debt negotiation. The debt negotiation usually consists of a letter that is a combination of a cease and desist debt collection letter and a representation notice. It may include an offer to contact the debt management company at a later time. The more responsible companies do seem to set up some payment plans for the consumer with at least some collection relief.
- Don't Pay strategy. The debt managers advise the debtor to stop paying the targeted creditor and allow the collection process to take its course. From the debt manager's perspective this has an added benefit: it provides a time period (usually about 6 months) when the debtor is not paying his creditors so that he can pay the debt manager's fees. Negotiation usually begins at the six month period.
- Unauthorized Practice of Law. The high risk don't pay strategy involves counseling a debtor about fair debt collection, contract defaults, exempt property, credit reporting, arbitration actions and lawsuits. The contract usually has a disclaimer that "we do not practice law." In practice, the debt management associates freely give such advice.
- Lack of transparency. These companies will generate a lot of paper but will rarely send copies of their negotiation correspondence to the debtor. It is also difficult to get a record of what payments have been made either to the creditor or to the debt management company. The limited communication will usually be by telephone and occasionally by email.
- Clicks but no Bricks. These companies will often operate under an assumed name. The legal identity and location of the entity that provided the services is often far more difficult to determine. These companies usually conduct the majority of their business over the internet so your client clicks (on an internet site) but never (visits a) bricks (location).
When to Sue. These are some suggestions on when to sue a debt management company:
a. Sued on enrolled debt. If you have been sued on an enrolled Debt Management Service account;
b. Arbitration on enrolled debt. If you have been called to arbitration on an enrolled Debt Management Service account;
c. Large fees. No Results. If you have paid significant fees to the Debt Management Service but the DEBT MANAGEMENT SERVICE has not achieved the promised results.
d. Potential Client in Good Financial Standing before contracting with Debt Management Service. This is a more difficult case, but if you were in good standing with your creditors (not in default or at least not in complete default) before contracting with the Debt Management Service, you may have a claim. However, be careful. You may have been overextended with your financial barrel marginally floating in the river. If you were just financially upstream from Niagra Falls, a lawsuit may not be a good idea.
The Disclosure. The CREDIT REPAIR ORGANIZATION ACT 15 USC 1679 requires a disclosure:
"Consumer Credit File Rights Under State and Federal Law
"You have a right to dispute inaccurate information in your credit report by contacting the credit bureau directly. However, neither you nor any 'credit repair' company or credit repair organization has the right to have accurate, current, and verifiable information removed from your credit report. The credit bureau must remove accurate, negative information from your report only if it is over 7 years old. Bankruptcy information can be reported for 10 years.
"You have a right to obtain a copy of your credit report from a credit bureau. You may be charged a reasonable fee. There is no fee, however, if you have been turned down for credit, employment, insurance, or a rental dwelling because of information in your credit report within the preceding 60 days. The credit bureau must provide someone to help you interpret the information in your credit file. You are entitled to receive a free copy of your credit report if you are unemployed and intend to apply for employment in the next 60 days, if you are a recipient of public welfare assistance, or if you have reason to believe that there is inaccurate information in your credit report due to fraud.
"You have a right to sue a credit repair organization that violates the Credit Repair Organization Act. This law prohibits deceptive practices by credit repair organizations.
"You have the right to cancel your contract with any credit repair organization for any reason within 3 business days from the date you signed it.
"Credit bureaus are required to follow reasonable procedures to ensure that the information they report is accurate. However, mistakes may occur.
"You may, on your own, notify a credit bureau in writing that you dispute the accuracy of information in your credit file. The credit bureau must then reinvestigate and modify or remove inaccurate or incomplete information. The credit bureau may not charge any fee for this service. Any pertinent information and copies of all documents you have concerning an error should be given to the credit bureau.
"If the credit bureau's reinvestigation does not resolve the dispute to your satisfaction, you may send a brief statement to the credit bureau, to be kept in your file, explaining why you think the record is inaccurate. The credit bureau must include a summary of your statement about disputed information with any report it issues about you.
"The Federal Trade Commission regulates credit bureaus and credit repair organizations. For more information contact:
"The Public Reference Branch
"Federal Trade Commission
"Washington, D.C. 20580".
15 USC 1679c (a). (emphasis added).