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Testimony: 

Before the Committee on Commerce, Science, and Transportation, U.S. 
Senate: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 2:30 p.m. EDT:
Thursday, April 22, 2010: 

Debt Settlement: 

Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers: 

Statement of Gregory D. Kutz, Managing Director: 
Forensic Audits and Special Investigations: 

GAO-10-593T: 

GAO Highlights: 

Highlights of GAO-10-593T, a testimony before the Committee on 
Commerce, Science, and Transportation, U.S. Senate. 

Why GAO Did This Study: 

As consumer debt has risen to historic levels, a growing number of for-
profit debt settlement companies have emerged. These companies say 
they will negotiate with consumers’ creditors to accept a lump sum 
settlement for 40 to 60 cents on the dollar for amounts owed on credit 
cards and other unsecured debt. 

However, there have been allegations that some debt settlement 
companies engage in fraudulent, abusive, or deceptive practices that 
leave consumers in worse financial condition. For example, it has been 
alleged that they commonly charge fees in advance of settling debts or 
without providing any services at all, a practice on which the Federal 
Trade Commission (FTC) recently announced a proposed ban due to its 
harm to consumers. The Committee asked for an investigation of these 
issues. As a result, GAO attempted to (1) determine through covert 
testing whether these allegations are accurate; and, if so, (2) 
determine whether they are widespread, citing specific closed cases. 

To achieve these objectives, GAO conducted covert testing by calling 
20 companies while posing as fictitious consumers; made overt, 
unannounced site visits to several companies called; interviewed 
industry stakeholders; and reviewed information on federal and state 
legal actions. GAO did not use the services of the companies it called 
or attempt to verify the facts regarding all of the allegations it 
found. 

What GAO Found: 

GAO’s investigation found that some debt settlement companies engage 
in fraudulent, deceptive, and abusive practices that pose a risk to 
consumers. Seventeen of the 20 companies GAO called while posing as 
fictitious consumers say they collect fees before settling consumer 
debts—a practice FTC has labeled as harmful and proposed banning—while 
only 1 company said it collects most fees after it successfully 
settles consumer debt. (GAO was unable to obtain fee information from 
2 companies.) In several cases, companies stated that monthly payments 
would go entirely to fees for up to 4 months before any money would be 
reserved to settle consumer debt. Nearly all of the companies advised 
GAO’s fictitious consumers to stop paying their creditors, including 
accounts that were still current. GAO also found that some debt 
settlement companies provided fraudulent, deceptive, or questionable 
information to its fictitious consumers, such as claiming unusually 
high success rates for their programs—as high as 100 percent. FTC and 
state investigations have typically found that less than 10 percent of 
consumers successfully complete these programs. Other companies made 
claims linking their services to government programs and offering to 
pay $100 to consumers if they could not get them out of debt in 24 
hours. To hear clips of undercover calls illustrating fraudulent, 
abusive, or deceptive practices, see [hyperlink, 
http://www.gao.gov/products/GAO-10-593T]. 

Figure: Examples of Fraudulent or Deceptive Marketing Claims by Debt 
Settlement Company: 

[Refer to PDF for image: 2 illustrations] 

New Government Programs! 
New free and easy programs are available for those who are in debt 
right now! Take advantage while they’re still available. 

If We Can’t Get You Out Of Debt In 24 Hours: 
We’ll Pay You $100. 

Source: Debt settlement company Web site. Images enhanced by GAO. 

[End of figure] 

GAO found the experiences of its fictitious consumers to be consistent 
with widespread complaints and charges made by federal and state 
investigators on behalf of real consumers against debt settlement 
companies engaged in fraudulent, abusive, or deceptive practices. 
Allegations identified by GAO involve hundreds of thousands of 
consumers across the country. Federal and state agencies have taken a 
growing number of legal actions against these companies in recent 
years. From these legal actions, GAO identified consumers who 
experienced tremendous financial damage from entering into a debt 
settlement program. For example, a North Carolina woman and her 
husband fell deeper into debt, filed for bankruptcy in an attempt to 
save their home from foreclosure, and took second jobs as janitors 
after paying $11,000 to two Florida companies for debt settlement 
services they never delivered. Another couple, from New York, was 
counted as a success story by an Arizona company even though the fees 
it charged plus the settled balance actually totaled more than 140 
percent of what they originally owed. 

View [hyperlink, http://www.gao.gov/products/GAO-10-593T] or key 
components.For more information, contact Gregory D. Kutz at (202) 512-
6722 or kutzg@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

Thank you for the opportunity to discuss our investigation into 
fraudulent, abusive, and deceptive practices in the debt settlement 
industry. As historic levels of consumer debt have dramatically 
increased the demand for debt relief services, a growing number of for-
profit companies have appeared, offering to settle consumers' credit 
card and other unsecured debt for a fee as an alternative to 
bankruptcy.[Footnote 1] The companies say they will negotiate with 
creditors to accept a lump sum settlement less than the amount owed-- 
purported to be as low as pennies on the dollar in many cases. In 
addition, these companies often say their programs can result in lower 
monthly payments for consumers than what they had been paying their 
creditors, and that their programs will help consumers get out of debt 
sooner than going through bankruptcy or making only minimum payments 
on their credit cards. They commonly use radio, television, and 
Internet advertising to solicit consumers. The marketing claims appeal 
to consumers who may be vulnerable, given the stress of their 
financial situations. 

Some consumers who have hired these companies have complained that 
they did not obtain relief from their debts and ended up in worse 
financial circumstances. For example, according to a sworn statement 
given to state attorneys, a 75-year-old New York woman ended up paying 
more than $5,100 to a company to settle only $3,900 of debt on one 
account. The company failed to settle a second one, which she 
ultimately paid off for about $1,000 more than what she originally 
owed. At the time she signed up for the debt settlement program, she 
had been a widow for several years and was working as a pharmacy clerk 
to help pay her bills and mortgage. She stated that she often 
neglected her own needs and accrued more debt trying to help her adult 
daughter care for two children and a sick spouse. She also stated that 
she was desperate for help and was easily sold on entering a debt 
settlement program through an unsolicited telephone call and an offer 
to reduce her debts by 24 to 40 percent. Even though the debt 
settlement company cost her more than she originally owed, it still 
counted her as a success story. 

Federal and state agencies have made allegations that some debt 
settlement companies engage in fraudulent, abusive, and deceptive 
practices. You asked us to conduct an investigation of these issues. 
As a result, we attempted to (1) determine through covert testing 
whether these allegations are accurate; and, if so, (2) determine 
whether these allegations are widespread, citing specific closed 
cases. To achieve these objectives, we conducted covert testing by 
calling 20 companies while posing as fictitious consumers with large 
amounts of debt; made overt, unannounced site visits to several 
companies called; conducted interviews with industry stakeholders, 
such as industry trade associations and the Better Business Bureau 
(BBB); and reviewed information on federal and state legal actions 
against debt settlement companies and consumer complaints. We did not 
actually use the services of any of the companies we called. 

For our first objective, we identified debt settlement companies by 
searching online using search terms likely to be used by actual 
consumers, and by observing television, radio, and newspaper 
advertisements. We selected companies from across the nation to call 
as part of our covert testing by using several criteria, such as (1) 
types of marketing claims or pitches, such as refund offers, service 
guarantees, or targeting of specific groups of consumers; (2) 
presence, if any, of consumer complaints through BBB and other 
resources; (3) represented size of businesses, to include both small 
and large companies; (4) availability of consumer-friendly information 
on companies' Web sites, such as financial education resources, 
comparisons to other types of debt relief, or advice on handling 
credit card debt; (5) membership in various industry trade 
organizations, which requires adherence to specified standards of 
conduct; and (6) claims of advertising presence on television or 
radio. In one case, we identified a company through a spam e-mail 
message received by one of our staff members, which provided a link to 
the company's Web site.[Footnote 2] The 20 cases that we selected 
incorporated a range of debt settlement companies, including some that 
appeared to make egregious claims and others that appeared more 
reputable. We found that some of the 20 companies we called are 
marketing companies that refer potential clients to other--sometimes 
multiple--affiliated companies. In most cases, we were unable to 
determine the exact business relationship between these entities. For 
the purposes of this testimony, our 20 cases represent the original 
company we called, plus any related marketers and any other affiliated 
companies with which we spoke. In addition, we called some companies 
more than once, depending on the circumstances. The findings for these 
20 cases cannot be projected to all debt settlement companies. For our 
second objective, we identified allegations against debt settlement 
companies from review of closed and open civil and criminal 
investigations pursued by federal and state enforcement agencies over 
the last decade. We did not attempt to verify the facts regarding all 
of the allegations and complaints we reviewed. We also identified five 
closed civil and criminal cases where courts found the debt settlement 
companies liable for their actions and interviewed affected consumers. 

We briefed Federal Trade Commission (FTC) officials on the results of 
our investigation. In addition, we referred cases of fraudulent, 
deceptive, abusive or questionable information provided by the 20 debt 
settlement companies we called to FTC as appropriate. We conducted our 
investigation from November 2009 through April 2010 in accordance with 
standards prescribed by the Council of the Inspectors General on 
Integrity and Efficiency. 

Background: 

For-profit debt settlement emerged as a business model as other, 
decades-old forms of consumer debt relief came under increased 
regulation. Traditionally, consumers with large amounts of debt turned 
to nonprofit credit counseling agencies (CCA) for debt relief. CCAs 
work with consumers and creditors to negotiate debt management plans 
(DMP), which enable consumers to pay back unsecured debts to their 
creditors in full, but under terms that make it easier for them to pay 
off the debts--such as reduced interest rates or elimination of late 
payment fees. In addition, CCAs often provide consumers with financial 
education and assist them in developing budgets. In order to qualify 
for a DMP, consumers must prove they have sufficient income to pay 
back the full balances owed to creditors under the terms of the 
potential DMP. As part of a DMP, CCAs contact each of a consumer's 
creditors to obtain information about what repayment options the 
creditors may be willing to offer to the consumer. The CCA then 
creates the final DMP and a repayment schedule, with payments 
typically spread over 3 to 5 years. Throughout the length of the DMP, 
the CCA distributes funds to each of a consumer's creditors after the 
consumer makes each monthly payment to the CCA. Nonprofit CCAs 
typically receive funding from consumers and from creditors. 

Many for-profit CCAs emerged as the level of consumer debt rose over 
the last decade, leading to new consumer protection concerns. FTC and 
state attorneys general took legal action against unscrupulous CCAs 
that engaged in deceptive, abusive, and unfair practices. For example, 
some CCAs charged excessive fees, abused their nonprofit status, 
misrepresented the benefits and likelihood of success of their 
programs, and committed other deceptive and unfair acts. The Internal 
Revenue Service (IRS) also undertook a broad examination effort of 
CCAs for compliance with the Internal Revenue Code and revoked or 
terminated the federal tax-exempt status of some agencies. As federal 
and state actions cracked down on these consumer protection abuses, a 
growing number of consumers became unable to afford traditional DMPs. 
As a result, many companies began offering for-profit debt settlement 
services for consumers. 

Debt settlement companies offer to negotiate with consumers' creditors 
to accept lump sum settlements for less than the full balance on the 
consumers' accounts. The process typically requires consumers to make 
monthly payments to a bank account from which a debt settlement 
company will withdraw funds to cover its fees. Some companies require 
consumers to set up accounts at specific banks, while others allow 
consumers to use their existing bank accounts. These monthly payments 
must accumulate until the consumer has saved enough money for the debt 
settlement company to attempt to negotiate with the consumer's 
creditors for a reduced balance settlement.[Footnote 3] 

Debt settlement companies typically charge a fee for their services 
and require payments either at the beginning of the program as an 
advance fee or after settlement as a contingent fee. Some companies 
structure the payment of advance fees so that they collect a large 
portion of them--as high as 40 percent--within the first few months 
regardless of whether any settlements have been obtained or any 
contact has been made with the consumer's creditors. Others collect 
fees throughout the first half of the enrollment period in advance of 
a settlement. Companies that charge a contingent, or "back-end," fee 
generally base it on a certain percentage of any settlement they 
obtain for consumers. They sometimes charge a small, additional fee 
every month while consumers are attempting to save funds for 
settlements. In addition, some debt settlement companies handle only 
one part of the overall settlement process, such as the front-end 
marketing or the negotiation with creditors, while other debt 
settlement companies conduct every part of the process themselves. 

Currently, there has been only limited federal action taken against 
debt settlement companies. Since 2001, FTC has brought at least seven 
lawsuits against debt settlement companies for engaging in unfair or 
deceptive marketing.[Footnote 4] In August 2009, FTC issued a Notice 
of Proposed Rulemaking to amend the Telemarketing Sales Rule (TSR) to 
enhance consumer protections related to the sale of debt relief 
services,[Footnote 5] including debt settlement services.[Footnote 6] 
In its notice, FTC offers multiple criticisms of the debt settlement 
industry and states that its "concerns begin with the marketing and 
advertising of the services, but also extend to whether such plans are 
fundamentally sound for consumers." The proposed rule would amend the 
TSR to do the following, among other things: 

* prohibit companies from charging fees until they have provided debt 
relief services to consumers;[Footnote 7] 

* require companies to disclose certain information about the debt 
relief services they offer, including how long it will take for 
consumers to obtain debt relief and how much the services will cost; 
and, 

* prohibit specific misrepresentations about material aspects of debt 
relief services, including success rates and whether a debt relief 
company is a nonprofit. 

In its notice, FTC demonstrates that the requesting or receiving 
payment of advance fees before debts are settled meets its criteria 
for unfairness, and therefore designates advance fees for debt 
settlement services as an abusive practice. FTC considers advance fees 
an abusive practice due to the following: 

* the substantial injury to consumers caused by advance fees, based on 
the low likelihood of success for debt settlement programs and the 
significant burden on consumers paying advance fees--especially fees 
charged at the front end of a debt settlement program, which FTC 
states ultimately impede the goal of relieving consumers' debts; 

* the injury to consumers caused by advance fees outweighing any 
countervailing benefits; and, 

* the business practices prevalent among debt settlement companies 
making the injury to consumers reasonably unavoidable, such as 
representations in advertisements obscuring the generally low success 
rates of debt settlement. FTC also states in its notice that many 
consumers entering debt settlement programs are counseled to stop 
making payments to their creditors in order to facilitate settlements, 
which has a harmful effect on these consumers' credit scores. 

Given the absence of specific federal law, some states have taken the 
initiative and enacted their own legislation regulating the debt 
settlement industry. The regulations vary widely from state to state, 
however. For example, Virginia's detailed legal framework requires 
debt settlement companies to apply and pay for an operating license, 
to enter into written agreements with potential customers that 
describe all services to be performed and provide the customer a right 
to cancel at any time, and to charge only a maximum $75 set-up fee and 
$60 monthly fee, among other restrictions.[Footnote 8] Other states, 
such as Arkansas[Footnote 9] and Wyoming,[Footnote 10] have chosen to 
simply ban most types of for-profit debt settlement companies from 
operating in their states at all. Individuals who violate those 
states' bans are guilty of a misdemeanor and could face up to 1 year 
imprisonment in Arkansas and up to 6 months imprisonment in Wyoming. 
On the other hand, New York and Oklahoma, among others, have not yet 
enacted any laws specifically targeting this industry, thus leaving 
the public to rely on generally applicable consumer protection laws. 

Covert Testing Shows That Some Debt Settlement Companies Engage in 
Fraudulent, Abusive, and Deceptive Practices: 

Our investigation found that some debt settlement companies engage in 
fraudulent, deceptive, and abusive practices that pose a risk to 
consumers already in difficult financial situations. The debt 
settlement companies and affiliates we called while posing as 
fictitious consumers with large amounts of debt generally follow a 
business model that calls for advance fees and stopping payments to 
creditors--practices that have been identified as abusive and harmful. 
While we determined that some companies gave consumers sound advice, 
most of those we contacted provided information that was deceptive, 
abusive, or, in some cases, fraudulent. Representatives of several 
companies claimed that their programs had unusually high success 
rates, made guarantees about the extent to which they could reduce our 
debts, or offered other information that we found to be fraudulent, 
deceptive, or otherwise questionable. We did not actually use the 
services of any of the companies we called. A link to selected audio 
clips from these calls is available at: [hyperlink, 
http://www.gao.gov/products/GAO-10-593T]. 

Advance Fees: 

The debt settlement companies we called generally represented that 
they would collect fees before settling our debts--a practice FTC has 
proposed banning due to the harm caused to consumers. We were able to 
obtain information about fee structures from 18 of the 20 companies we 
called while posing as fictitious consumers with large amounts of 
debt,[Footnote 11] and found that their fee structures generally 
recall the concerns expressed by FTC. Specifically, we found that 17 
of the 20 companies represented that they collected advance fees 
before debts were settled. Company representatives told us that the 
advance fees are calculated based on a percentage of the consumer's 
debts to be settled, citing figures that ranged from 10 to 18 percent. 
Moreover, representatives from several companies told us that our 
monthly payments would go entirely to fees for up to 4 months before 
any money would be reserved for settlements with our creditors. Only 1 
of the 20 companies we called represented that it followed a 
contingent fee model based on a percentage of the reduction of debt it 
says it obtains for consumers. Representatives from this company said 
a fee equal to 35 percent of each client's reduced debt was charged. 
Some companies also represented that they assessed monthly maintenance 
and other additional fees. One of the 17 advance-fee companies also 
revealed that it charged a contingent fee after each debt is settled 
based on a percentage of the debt reduction. 

FTC has banned advance fees in several industries, such as credit 
repair, based on analyses that determined these practices to be unfair 
because sellers often do not provide the services for which they 
charge. The agency has proposed a similar ban for debt settlement, 
stating that the advance fees cause substantial injury to consumers. 
FTC justified this stance toward debt settlement, in part, based on 
the following findings: advance fees induce financially strapped 
consumers to stop making payments to their creditors; and consumers 
are unlikely to succeed in debt settlement programs, given evidence 
from federal and state agencies that generally shows single-digit 
success rates.[Footnote 12] Moreover, FTC stated concerns in its 
notice that advance fees for debt settlement may actually impede the 
process of saving money to settle debts, especially substantial fees 
collected at the beginning of a program. This business model may be 
especially risky for consumers who are already in financially stressed 
conditions, given that interest, late fees, and penalties often 
continue to accrue on the consumers' accounts as they work to save 
money toward settlements. In addition, consumers with already limited 
financial resources may be unable to direct adequate funds toward 
saving for settlements if their resources are being devoted to paying 
fees. 

We asked representatives of some companies what services we would 
receive as we paid advance fees while saving money for settlements. 
These representatives generally stated that our advance fees would pay 
for financial education, updates from attorneys, and communications 
with our creditors--such as cease and desist letters, to attempt to 
prevent harassing telephone calls. One representative, however, was 
unable to provide an explanation of what services we would receive for 
our advance fees beyond the fact that her company's attorneys would 
"look at" our accounts every month. Several companies we called had 
basic financial education resources on their Web sites or provided 
links to such resources by e-mail. Industry representatives have 
stated that advance fees are needed to cover essential operating 
costs, such as overhead and providing the types of services mentioned 
above for their existing clients. However, FTC found that marketing 
and acquiring new customers make up a large portion of the operating 
costs for debt settlement companies. We were unable to verify whether 
any companies we called provide ongoing services for clients they 
enroll in their programs, given that we did not enter into business 
relationships with them. 

Directing Consumers to Stop Paying Creditors: 

We also found that the companies we called generally follow a business 
model that poses a risk to consumers by encouraging them to stop 
making payments to their creditors, a practice that harms consumers 
because of the damage it typically causes to their credit scores. 
Representatives of nearly all the companies we called--17 out of 20--
advised us to stop paying our creditors, by either telling us that we 
would have to stop making payments upon entering their programs or by 
informing us that stopping payments was necessary for their programs 
to work, even for accounts on which we said we were still current. The 
following quotes demonstrate some of the statements made by 
representatives of the companies we called regarding our payments to 
creditors: 

* "You stop paying, uh, those payments out to those creditors. The 
only thing you're going to have to worry about is this payment here 
[to company]." 

* "One-hundred percent of our clients stop making their monthly 
payments as soon as they enroll into the program." 

* "I won't tell anybody not to pay their bills; I said one-hundred 
percent of the clients who have been successful have stopped paying 
their bills." 

* "Say you enrolled in the program. At that point you would no longer 
make any of your credit card payments. All of them would go late." 

Among the 17 companies encouraging us to stop paying our creditors or 
representing that stopping payments is a condition of their program, 
[Footnote 13] 5 were members of an industry trade group called The 
Association of Settlement Companies (TASC) at the time we made our 
calls. TASC's written standards, adherence to which is required of all 
member companies, explicitly state "No Member shall direct a potential 
or current client to stop making monthly payments to their creditors." 
A representative of 1 of these 5 TASC member companies told us that 
she could not direct us to stop paying our creditors, but later stated 
that if we could afford to make our payments then her program was not 
"the best solution" for us. In addition, a representative of 1 of 
these 5 TASC member companies appropriately screened us out by telling 
us that we had too low of income to afford that company's program 
under the scenario we presented; he later described his company's 
program as requiring clients to stop making their payments. In 
addition to these 5 TASC member companies, we spoke to a 
representative from another TASC member company who told us that we 
did not have enough debt to qualify for that company's program. In 
addition, 4 of the companies that told us to stop paying our creditors 
or represented that stopping payments was a condition of their program 
were members of a different industry trade group called the United 
States Organizations for Bankruptcy Alternatives (USOBA) at the time 
of our calls. According to USOBA representatives whom we interviewed, 
its member companies do not tell potential clients to stop paying 
their creditors. We received particularly good advice from a 
representative of 1 additional USOBA member company--not among the 4 
listed above--whose representative told us that we should worry about 
taking care of our late mortgage payments before we worried about 
settling our credit card debts. 

Stopping payments to creditors results in damage to consumers' credit 
scores. According to FICO (formerly the Fair Isaac Corporation), the 
developer of the statistically based scoring system used to generate 
most consumer credit scores, payment history makes up about 35 percent 
of a consumer's credit score. Moreover, the damage to credit scores 
resulting from stopping payments is generally worse for consumers who 
have better credit histories--such as consumers who maintained good 
payment histories prior to entering a debt settlement program that 
required them to stop making payments. In its notice, FTC also 
discussed the harmful effect that stopping payments has on consumers' 
credit scores. 

Success Rates: 

In several cases, representatives of companies we called claimed 
success rates for their programs that we found to be suspiciously 
high--85 percent, 93 percent, even 100 percent. In its notice, FTC 
cites claims of high likelihood of success as a frequent 
representation in the debt settlement industry. The success rates we 
heard are significantly higher than is suggested by evidence obtained 
by federal and state agencies. When these agencies have obtained 
documentation on debt settlement success rates, the figures have often 
been in the single digits. For example, as part of an annual 
registration process in Colorado, the state's Attorney General 
compiled data on success rates for all debt settlement companies 
statewide. The data show that, from 2006 to 2008, less than 10 percent 
of Colorado consumers successfully completed their debt settlement 
programs. Our case studies discussed below provide additional evidence 
of similarly low success rates. 

Industry-reported data have claimed a higher success rate for debt 
settlement programs. According to TASC, data gathered from a survey of 
some of its largest member companies in 2009 shows that 34.4 percent 
of consumers participating in a debt settlement program offered by a 
TASC member company completed their debt settlement programs by 
settling at least 75 percent of their enrolled debts.[Footnote 14] A 
previous study released by TASC in 2008 claimed overall completion 
rates between 35 and 60 percent. However, federal and state agencies 
have raised concerns with the methodology behind TASC's data. For 
example, these agencies have argued that (1) TASC's data were self-
reported by its member companies, and may not reflect all member 
companies; (2) not every TASC member company that submitted data 
defined completion in the same way; and (3) the fact that consumers 
complete a debt settlement program does not necessarily imply that 
these consumers successfully obtained the debt relief services for 
which they paid. We did not attempt to validate success or completion 
data from TASC or federal or state agencies. 

TASC and USOBA have cited several factors that might contribute to 
consumers' success rates in debt settlement programs, such as that 
most consumers entering debt settlement programs are in extreme 
financial hardship and may choose to quit their program after settling 
some debts and improving their financial situations. However, FTC 
stated in its notice that the prevalent fee structure in the debt 
settlement industry--substantial up-front fees--may be a major factor 
in the generally low consumer success rates as well. TASC and USOBA 
have both offered suggestions for ways to boost consumer success 
rates, such as improved processes for determining consumers' 
suitability for debt settlement programs. 

Debt settlement success rates also play a key role in the BBB rating 
system for companies in the industry. Due to the volume and nature of 
consumer complaints,[Footnote 15] among other factors, BBB recently 
designated debt settlement as an "inherently problematic" type of 
business and, in September 2009, implemented new rating criteria for 
debt settlement companies to reflect this designation. Under this 
designation, no debt settlement company may earn a BBB rating higher 
than a C-.[Footnote 16] While BBB has designated other types of 
businesses as inherently problematic--such as pay-day loan centers, 
businesses that charge fees for publicly available information on 
government jobs, scientifically unproven medical devices and products, 
advance fee modeling agencies, and wealth-building or real estate 
seminars--debt settlement companies are the only type of business 
currently allowed by BBB to escape the inherently problematic 
designation if they provide evidence to BBB that they meet a series of 
criteria. These criteria require a debt settlement company to prove, 
among other things, that: 

* It has substantiated all advertising claims, including claims 
relating to the benefits or efficacy of debt settlement; 

* It makes certain disclosures to consumers, including clear and 
conspicuous disclosure of program fees and the risks of debt 
settlement; 

* It has adequate procedures for screening out consumers who are not 
appropriate candidates for debt settlement; and: 

* A majority (at least 50 percent) of its clients successfully 
complete its program and obtain a reduction in debt that is 
significant and exceeds the fees charged by the company. 

According to a BBB official, he was unaware of any debt settlement 
company that had yet successfully demonstrated that it met these 
criteria, as of March 2010. Officials from TASC and USOBA told us they 
strongly disagree with BBB's new rating system for debt settlement 
companies. According to these officials, the new rating system 
minimizes the importance of resolved consumer complaints, requires an 
unrealistic measure of programs' success rate--50 percent--and 
inhibits consumers' ability to differentiate between reputable and 
disreputable debt settlement companies. 

Guaranteed Reductions in Debt: 

Representatives from some companies also guaranteed or promised that 
they could obtain minimum reductions in our debts if we signed up for 
their services. For example, some representatives stated that they 
would save us 40 to 50 cents on the dollar once they negotiated 
settlements with our creditors. In its notice, FTC cites claims of 
specific reductions in debt as an example of a consumer protection 
abuse in the debt settlement industry. 

Fraudulent or Other Deceptive Representations: 

We found examples of companies offering fraudulent or other deceptive 
information, such as using names and imagery for their services that 
indicates that their program is linked to the government. Table 1 
below shows examples of fraudulent or deceptive information from 
companies we called. 

Table 1: Examples of Fraudulent or Deceptive Information Provided by 
Debt Settlement Companies We Called: 

No.: 1; 
Representation: Debt settlement companies are "licensed and regulated" 
by TASC, which is "like the SEC [United States Securities and Exchange 
Commission] for stock traders"; 
Comments: TASC is a nonprofit trade association that lobbies lawmakers 
on behalf of the debt settlement industry. It is not a licensing or 
regulatory authority. 

No.: 2; 
Representation: Stopping payments will "knock [credit score] down a 
couple of points…However, unlike bankruptcy or any other credit 
counseling program, this only affects your credit while you're in the 
program"; 
Comments: According to FICO, stopping payments to creditors as part of 
a debt settlement can drop credit scores anywhere between 65 to 125 
points. In addition, missed payments leading up to a debt settlement 
can remain on a consumer's credit report for 7 years even after a debt 
is settled. 

No.: 3; 
Representation: Debt settlements will be noted on consumers' credit 
reports as "paid in full" or "paid as agreed"; 
Comments: According to FICO, settlements are typically listed on 
consumers' credit reports as "settlement accepted on the account" or 
"settled for less than full balance." 

No.: 4; 
Representation: Company advertises a "National Debt Relief Stimulus 
Plan"; 
Comments: The company's services are not affiliated with a government 
program or part of the American Recovery and Reinvestment Act of 2009 
(the "stimulus"). 

No.: 5; 
Representation: Company promised that calls from creditors seeking 
money will "slow down and eventually stop" if we just told our 
creditors we had hired the company; 
Comments: Debt settlement companies cannot prevent creditors from 
contacting consumers. Companies often advise consumers to terminate 
all communication with their creditors, ask consumers to assign power 
of attorney to them, and send cease and desist letters to creditors in 
an attempt to cut off further communications. 

Source: GAO. 

[End of table] 

Five of our cases are highlighted below. The companies in these cases 
made multiple fraudulent or deceptive representations either to our 
fictitious consumers by telephone, on their Web sites and through 
company documents or to our staff during unannounced, overt site 
visits. Table 2 below shows basic information represented by these 
companies, including the location, fees, and industry trade 
association membership of each of these companies and their 
affiliates, if any. (Table 4 in appendix I provides summary 
information on all 20 companies we called.) 

Table 2: Representations Made by Select Debt Settlement Companies We 
Called: 

No.: 1; 
Location of company and affiliates: Florida; 
affiliates in Florida, Massachusetts, California, and New Jersey[B]; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt, with monthly payments 
required throughout program; 
Association membership[B]: TASC;[C] affiliates in TASC and USOBA. 

No.: 2; 
Location of company and affiliates: Unknown; 
affiliates in Arizona, Texas, and California[B]; 
Fees[A]: 
* Advance fees based on 12% of enrolled debt; 
* First three monthly payments go to fees; 
* $25 monthly maintenance fee; 
* Additional contingent fee based on 4% of reduction in debt company 
obtains for clients; 
Association membership[B]: Affiliate in USOBA. 

No.: 3; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 16% of enrolled debt, with monthly payments 
required throughout program; 
* First three monthly payments go to fees; 
* $100 fee for out-of-state clients; 
Association membership[B]: TASC (at the time of our call). 

No.: 4; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 17% of enrolled debt, with monthly payments 
required throughout program; 
* First three monthly payments go to fees; 
* $840 maintenance fee (total throughout program); 
* $623.50 trust account fee (total throughout program); 
Association membership[B]: TASC. 

No.: 5; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt; 
Association membership[B]: TASC (at the time of our call). 

Source: GAO analysis of information obtained from debt settlement 
companies. 

[A] Fee information reflects fees disclosed to us; some companies may 
charge additional fees that were not disclosed. Debt settlement 
companies typically charge fees requiring payments either at the 
beginning of the program as an advance fee or after each settlement as 
a contingent fee. Some companies structure the payment of advance fees 
so that they collect a large portion of them--as high as 40 percent-- 
within the first few months regardless of whether any settlements have 
been obtained or any contact has been made with the consumer's 
creditors. Others collect fees throughout the first half of the 
enrollment period in advance of a settlement. Companies that charge a 
contingent fee generally base it on a certain percentage of any 
settlement they actually obtain for consumers. They sometimes charge a 
small, additional fee every month while consumers are attempting to 
save funds for settlements. 

[B] Some companies we called referred us to one or more affiliates. It 
was not always clear to us exactly with which company or affiliate we 
were speaking, where the companies or affiliates were located, or what 
the relationships were between the companies and affiliates. In some 
cases, separate affiliates of the same company claimed to be members 
of different industry trade associations. 

[C] While Company 1 claimed to be a member of TASC, it appears this 
was a false representation. 

[End of table] 

Company 1: 

Company 1 made several fraudulent and deceptive representations. We 
identified Company 1 when one of our investigators received an 
unsolicited spam message through his private e-mail account 
advertising debt settlement services, with a mailing address in the 
country of Lebanon listed at the bottom. A link in the message brought 
us to a Web site advertising "New Government Programs! New free and 
easy programs are available for those who are in debt right now! Take 
advantage while they're still avaiable [sic]." (See figure 1 below.) 
The Web site also featured logos for TASC and BBB, along with other 
insignias declaring "Satisfaction Guaranteed" and "Privacy 100% 
Guaranteed." When we called the number listed on the Web site, a 
representative answered using the name of an affiliate different than 
the company name listed on the Web site. He explained that the Web 
site was a "generic advertisement" to spread information about his 
company. Throughout our conversation, he made multiple statements that 
we found to be deceptive or questionable. According to the 
representative, the "worst case scenario" for settlement of our debts 
would be "40 cents on the dollar." He stated that his company has 
helped 100 percent of its clients get out of debt in 3 years or less, 
and that "every single creditor settles. There's not one creditor we 
haven't been able to reach a settlement with." When asked about the 
government programs advertised on the Web site, he replied "What we're 
offering is not part of any government program whatsoever…. It's just 
that the government is allowing this to take place at this time…. The 
government is putting pressure on banks to allow things like this so 
that, you know, there's no more bankruptcies or things along those 
lines." Even though the Web site displayed a TASC logo, we were unable 
to find either Company 1 or this affiliate on TASC's member directory. 
The executive director of TASC confirmed to us later that neither 
Company 1--as it listed itself on its Web site--nor this affiliate is 
a member of the organization. The affiliate's Web site displays a logo 
for USOBA, and we confirmed its membership with that organization. 

Figure 1: Fraudulent or Deceptive Advertising Claims Featured on 
Company 1's Web Site: 

[Refer to PDF for image: 2 illustrations] 

New Government Programs! 
New free and easy programs are available for those who are in debt 
right now! Take advantage while they’re still avaiable. 

If We Can’t Get You Out Of Debt In 24 Hours: 
We’ll Pay You $100. 

Source: Debt settlement company Web site. Images enhanced by GAO. 

[End of figure] 

Shortly after we called Company 1 the first time, we noticed that the 
Web site contained some changes--when we attempted to leave the Web 
site on later visits, a pop-up message appeared declaring "If we can't 
get you out of debt in 24 hours we'll pay you $100!" (See figure 1 
above.) We called Company 1 again and a representative said that he 
was with Company 1. He later stated that he was actually with an 
affiliate of Company 1--a different affiliate than the first 
representative with whom we spoke. He described the Web site for 
Company 1 as a "landing page" used to attract business to his company. 
This second representative also offered deceptive or questionable 
information, such as a 93 percent success rate for his program. When 
asked about the government programs advertised on Company 1's Web 
site, he replied that the government program was related to creditors' 
ability to obtain tax credits from the IRS for the debts they sell to 
collection agencies. Regarding the offer to get consumers out of debt 
within 24 hours, he said that this was for clients who have the 
financial resources to make a large lump sum payment at the very 
beginning of the program. However, he added that "ninety-nine point 
nine percent of the people that come to us do not have the ability to 
do that." When we asked about the risk of being sued by our creditors, 
he told us that "a judgment is nothing more than a fancy I.O.U." We 
were able to find this second affiliate on TASC's member directory, 
and the executive director of TASC later confirmed that this affiliate 
is a member of TASC.[Footnote 17] 

We made a site visit to Company 1 in Florida. The owner of Company 1 
admitted that the company does not really exist and is really just a 
marketing Web site, and told us he actually owns a different company 
that offers both debt settlement and mortgage modification services. 
He claimed that he did not know that Company 1's Web site contained 
information about an alleged government program, and logos for TASC 
and BBB. However, he acknowledged that neither Company 1 nor his real 
company is a member of TASC despite the logo featured on the Web site. 
[Footnote 18] When asked about the offer to get consumers out of debt 
within 24 hours, he replied that this was a "typo" and that the offer 
should say 24 months rather than 24 hours.[Footnote 19] Our 
investigators observed employees at the location listed for Company 1 
representing on the telephone that they were employees of the second 
affiliate mentioned above. Moreover, when the owner of Company 1 gave 
our investigators a copy of the script his employees use when speaking 
with potential clients, the text of the script implied that they were 
representatives of the second affiliate. We were unable to determine 
the actual relationship, if any, between Company 1, its affiliates, or 
the other company the owner claimed he runs. 

Company 2: 

Company 2's online and radio advertisements feature multiple 
fraudulent or deceptive claims. The company's Web site advertises that 
its services will "Reduce balances to 40% - 60%," "Eliminate excessive 
Credit Card Debt interest immediately," and "End late payment fee's 
[sic]." When we called Company 2, it referred us to at least 3 
different affiliates. It was not always clear exactly with which 
company's representatives we were speaking.[Footnote 20] 
Representatives from these affiliates described Company 2 as a 
marketing group that referred potential clients to them. We also 
identified radio advertisements placed in several major cities 
purporting to be from Company 2, in which it claimed to offer a 
"government authorized" and "government approved" debt settlement 
program. When we called the telephone number listed in one of the 
radio advertisements, a representative answered from one of the 
affiliates of Company 2 that we had spoken to earlier. When asked 
about the government-approved debt settlement program, the 
representative acknowledged the radio advertisement and replied "it is 
government approved…. They allow for us to do this. You know, the 
banks received, you know, bailout money last year. I'm sure you saw it 
on the news. There has to be some type of assistance for people on a 
consumer level also." According to this representative, Company 2 runs 
similar advertisements on television and radio stations nationwide. 

We were unable to visit Company 2 because we could not determine its 
physical location. However, we visited the affiliate whose 
representative discussed the radio advertisement with us, which is 
located in California. Officials from this affiliate told us that 
their company is "the most legitimate debt settlement company," and 
that their employees receive commission based on the number of clients 
they enroll in the company's program. They also claimed that their 
company was not associated with Company 2, and refused to disclose to 
us the number of clients in their program or the total amount of 
consumer debt their company is currently handling. On two separate 
covert telephone calls we made to Company 2, representatives of this 
affiliate stated they were with Company 2 at the beginning of each 
call but later informed us that they actually were with the affiliate 
and that Company 2 handled their marketing. When asked during our site 
visit if we could see their call center, officials refused. 

Company 3: 

Company 3 targets Christians for its debt settlement services by 
employing a Biblical marketing theme, both on its Web site and over 
the phone. Representatives of Company 3 told our fictitious consumers 
that they run a nonprofit ministry affiliated with their for-profit 
debt settlement company, with funds from debt settlement feeding into 
the ministry and missionary trips overseas. In addition, 
representatives told us that their program has an 85 percent success 
rate and that they would negotiate our debt down to 40 or 60 percent 
of what we currently owed. About the risk of being sued by our 
creditors, a representative remarked to us that "It's just a computer 
thing. I mean, sometimes there's a handful of them that they'll have 
reserved to go after and it's just random. But even if they were to do 
that in your case, it's just a small percentage; we'd be able to 
advise you at that time, too. You don't need an attorney in the matter 
or anything like that. It's just a civil thing." 

We visited Company 3 in California, where we found it located in a 
strip mall near a grocery store. The owner of Company 3 told us that 
he owned a mortgage company and sold cars prior to entering the debt 
settlement industry. Company 3 handles the front end of the debt 
settlement process by signing up clients, and uses a third-party 
company and law firm for the rest of the process. Most of the 
employees of Company 3 are contractors who earn $200 commission for 
each client enrolled, with bonuses for employees who enroll a high 
number of clients. According to Company 3 officials, they enrolled 
approximately 1,200 to 1,300 new clients in the first 2 ½ months of 
2010. When asked if we could see a copy of their IRS Form 990 for the 
nonprofit side of their operation, the owner replied, "The Bible says 
you should never let the left hand know what the right hand is 
doing."[Footnote 21] Company officials provided us with a sample of 
its contract, which states that "In the event Client comes into a lump 
sum of money and wishes to settle an account before original 
designated completion date, Client must first pay [Company 3] Fee. The 
remainder of the lump sum will be utilized in settling Client's 
unresolved program debt." The contract also states that Company 3 does 
not provide legal representation or any legal advice to its clients. 

Company 4: 

We became interested in calling Company 4 when we noticed on its Web 
site that it advertised a "U.S. National Debt Relief Plan," with a 
logo depicting a shield filled with a U.S. flag. When asked about this 
plan, a representative stated that it was "a consumer advocacy program 
entitled [sic] to help consumers get out of debt" but that "it's not a 
government agency. We just take advantage of the fact that the 
government are [sic] giving money to the banks to get out of debt and 
we just show you and go through the route of settling out your 
accounts." The representative also told us that our first three 
monthly payments would go entirely to paying fees with no money set 
aside for savings. He said that Company 4 uses this advance fee 
structure because, during the first few months of the program, the 
company would be setting up our account and mailing cease and desist 
letters to our creditors, and "to show that you have the commitment to 
be in the program." 

When we visited Company 4 in California, officials told us that the 
company only handles the front-end marketing of the debt settlement 
process, and that it had enrolled approximately 1,000 clients in the 
first 2 ½ months of 2010. In early March 2010, TASC issued a statement 
on its Web site noting a recent increase in companies practicing 
deceptive marketing, including companies sending letters to potential 
clients resembling government documents and using terms like "U.S. 
National Debt Relief Plan." Company 4 marketed the "U.S. National Debt 
Relief Plan," and is a member of TASC. 

Company 5: 

A representative of Company 5 advised us that we could not afford its 
debt settlement program because our fictitious consumer's income was 
too low and his expenses were too high. He suggested that we consider 
credit counseling or bankruptcy as options if we were unable to make 
substantial improvements in our budget. However, when we indicated 
that we may obtain a new job soon that would boost our income, he 
provided details on how Company 5's debt settlement program works. He 
told us that it generally takes about 7 to 8 months to save up enough 
money to begin negotiating settlements. When we asked what services we 
would be paying for during those first 7 to 8 months, he replied that 
our fees would pay for the ability to get out of debt within 36 
months, and monthly education and updates from the company's 
attorneys. Company 5's Web site advertised that it can help consumers 
who are experiencing stress, anxiety, and depression associated with 
being in debt. When we asked about these services, the representative 
laughed and said these services are arranged through debt negotiators 
who will hold monthly strategy calls with us. 

We attempted to visit Company 5 in California, but found that it was 
no longer at the location listed on its Web site. Employees of several 
other companies in neighboring office suites told us that Company 5 
had moved to another office down the hall, which was listed under a 
different company name. An official from this company denied knowing 
anything about Company 5, and claimed that his company did not provide 
debt settlement services. However, records we obtained indicate that 
the name of Company 5's owner is the same as the name on this 
official's driver's license. In addition, the Web site for this other 
company indicates that it does, in fact, provide debt settlement 
services. After we returned from our site visit, the Web site for 
Company 5 was down for maintenance. 

Allegations of Fraud, Abuse, and Deception in the Debt Settlement 
Industry Are Widespread: 

We found the experience of our fictitious consumers to be consistent 
with the widespread complaints and charges made by federal and state 
investigators on behalf of real consumers against debt settlement 
companies. We identified allegations of fraud, deception and other 
questionable activities that involve hundreds of thousands of 
consumers.[Footnote 22] We drew this figure from closed and open civil 
and criminal cases governments have pursued against these companies 
over the last decade. Our calculation likely underestimates the total 
number of consumers affected, since we obtained information from only 
12 federal and state agencies about the clients within their 
jurisdiction that they identified in some of the cases they pursued. 
[Footnote 23] Federal and state agencies have reported taking a 
growing number of legal actions against companies that offer these 
services in recent years. As mentioned above, since 2001, FTC has 
brought at least seven lawsuits against debt settlement companies for 
engaging in unfair or deceptive marketing. The National Association of 
Attorneys General (NAAG) said in an October 2009 letter to FTC that 21 
states brought at least 128 enforcement actions against 84 debt relief 
companies, including debt settlement companies, over the previous 5 
years.[Footnote 24] The group stated that the number of complaints 
received by the states about debt relief companies--especially debt 
settlement companies--had more than doubled since 2007. Lastly, the 
group noted that any business model requiring "cash-strapped consumers 
to pay substantial up-front fees" raised significant consumer 
protection concerns and agreed with a consumer group that called it 
"inherently harmful." 

Attorneys general from 40 states and 1 territory submitted the letter, 
saying they supported FTC's proposed rule changes to combat unfair and 
deceptive practices in the industry. They cited similar debt 
settlement activities that prompted their own enforcement actions, 
including the following: 

* collecting advance fees in many instances without providing services; 

* misleading consumers about the likelihood of a settlement; 

* misleading consumers about the settlement process and its adverse 
effect on their credit ratings; 

* making unsubstantiated claims of consumer savings; 

* deceptively representing the length of time necessary to complete 
the program; 

* misleading or failing to adequately inform consumers that they will 
be subject to continued collection efforts, including lawsuits; 

* misleading or failing to adequately inform consumers that their 
account balances will increase due to extended nonpayment under the 
program; and: 

* deceptive disparagement of bankruptcy as an alternative for debtors. 

The state attorneys general expressed concern the industry would grow 
exponentially given the current economic climate and a regulatory 
environment that allows substantial advance fees to be collected. They 
criticized the advance fees as providing minimal incentive for 
companies to perform services because they get paid whether or not 
they take any action on behalf of the consumer. They also noted that 
low set-up costs help in the promotion of debt settlement as a cheap 
business opportunity. They stated that they would continue to take 
enforcement actions against unscrupulous operators in the industry, 
but that they also believed the proposed FTC rule changes would 
substantially aid law enforcement agencies in addressing harms caused 
to consumers. 

We developed case studies from five closed civil or criminal actions 
in which state or federal courts found debt settlement companies 
liable for fraudulent, unfair or deceptive actions that left clients 
in worse financial condition--bankrupt, owing more debt, and with 
lower credit scores and more judgments against them. We also examined 
the experiences of a consumer from each of these cases. Table 3 below 
shows key information from each of these five cases. Further details 
are discussed below. 

Table 3: Select Cases of Debt Settlement Companies Engaged in 
Fraudulent, Abusive, or Deceptive Practices: 

No.: 1; 
Company location: Arizona; 
affiliates in Arizona and Florida; 
Federal/state agency: New York Attorney General; 
Case details: 
* More than 500 New Yorkers withdrew from the debt settlement program 
after paying over $1 million in fees only to receive more debt, 
tarnished credit ratings, and increased collection calls and creditor 
lawsuits; 
* Nearly half of the New York clients that completed the program 
during the Attorney General's investigation, or 27 out of 64, 
ultimately paid more than they originally owed; 
* Only 0.3 % of the New York clients realized the promised savings; 
* A New York court found the company and its affiliates liable for 
statutory fraud and ordered restitution for clients who paid more than 
they owed. 

No.: 2; 
Company location: New York and Vermont; 
Federal/state agency: U.S. Attorney General; 
Case details: 
* An attorney and his law firm associates misappropriated and 
embezzled millions of dollars from 15,000 clients seeking debt 
reduction help over a 6-year period, forcing some customers into 
bankruptcy; 
* The group lured consumers through television and radio 
advertisements by falsely claiming a 50 to 70 % savings off unsecured 
debt, an improvement in credit scores and bankruptcy avoidance; 
* Only 8 % of the group's clients completed the program; 
* Clients paid advance fees for these services and funded escrow 
accounts from which their creditors were supposed to be paid. The fees 
were not considered "earned" until consumer debts were settled; 
* The fees collected were used in part to fund huge payments to the 
attorney and two of his associates before they provided any services 
to clients; 
* The client escrow accounts were drawn upon, in part, to cover 
overdrafts from the law firm's operating account and to make payments 
to the attorney's wife, among other things; 
* The law firm filed for bankruptcy in 2003; 
* A federal jury found the attorney guilty in 2005 on multiple felony 
counts, including fraud. His six associates pled guilty to federal 
charges. 

No.: 3; 
Company location: Florida; 
Federal/state agency: North Carolina Attorney General; 
Case details: 
* Two companies and their owners ran an illegal debt settlement 
business using unfair and deceptive practices, collecting over 
$500,000 from about 220 North Carolinians who rarely obtained the 
services they purchased; 
* North Carolina law prohibits anyone from acting as a for-profit 
intermediary between residents and their creditors for the purpose of 
reducing, settling, or altering debt payments, except in limited 
circumstances. It specifically bans advance fees for these services; 
* The companies and their owners, one of whom was an attorney, 
marketed their services in part using third-party "referral agents" 
who received compensation for directing consumers to the group; 
* Many clients dropped out of the program dissatisfied. Few received 
refunds or obtained settlements with their creditors. Many filed for 
bankruptcy; 
* A North Carolina court found that the group's actions violated state 
law and banned the parties from doing any debt-related business with 
state residents. In a separate action in January 2009, the attorney 
was disbarred for a period of 5 years. 

No.: 4; 
Company location: Maryland; 
Federal/state agency: Maryland Attorney General; 
Case details: 
* A Maryland attorney, his law firm and their marketers used unfair 
and deceptive trade practices to collect $3.4 million from about 6,200 
clients over a 2 year period to settle debt but provided little or no 
services in return, causing harm to consumer credit histories and 
credit scores; 
* The group told clients that its employees were qualified credit 
counselors capable of recommending the most appropriate action, but 
instead it provided virtually the same advice to everyone--enter debt 
settlement plans profitable for the group; 
* The group reached an agreement in 2007 with the Attorney General, 
agreeing to immediately cease and desist selling unlicensed debt 
settlement services, pay restitution to customers, and pay 
investigatory costs and a fine to the state consumer protection office; 
* The Attorney General filed a lawsuit in 2008 against the group for 
violating the terms of their agreement and the state's consumer 
protection act. The court ordered the group to fulfill the terms of 
its previous agreement, pay a fine and costs of $180,000, and pay 
restitution of almost $2.6 million. 

No.: 5; 
Company location: California; 
Federal/state agency: Federal Trade Commission; 
Case details: 
* Four related California companies lured more than 1,000 consumers 
into a debt settlement program through false promises of reducing 
debt, halting collection calls, removing negative credit report 
information, and holding payments in trust to settle accounts--from 
which, the FTC alleged, more than $2 million later went "missing"; 
* FTC filed a complaint against the companies in August 2002, alleging 
that numerous consumers who enrolled in the program saw their 
indebtedness increase after incurring late fees, finance charges, and 
overdraft charges. Many ultimately filed for bankruptcy; 
* The federal court entered default judgments against all four 
companies, banning them from engaging in any debt settlement services 
and ordering them to collectively pay $1.7 million in restitution to 
consumers, among other actions. 

Source: GAO analysis of case studies discussed below. 

[End of table] 

Case Study 1: 

An Arizona company and its affiliates used false advertising and 
deceptive marketing to fraudulently induce more than 500 New Yorkers 
into paying over $1 million in fees for a debt settlement program that 
left them with more debt, tarnished credit ratings, and increased 
collection calls and creditor lawsuits. The group told clients that 
consumers typically saved between 25 percent and 40 percent, including 
all fees and charges. It also promised to substantially reduce credit 
card debt in as little as 24 months. However, according to the New 
York Attorney General, only 0.3 percent of the company's clients 
realized these savings and few ever completed the program. Only 64 of 
the group's New York clients finished the program during the time 
period of the Attorney General's investigation (between January 2005 
and September 2008); another 537 withdrew from the program after 
paying fees. Those who finished the program complained of being 
deceived and harmed by the group. Nearly half of them actually paid 
more than they owed. For example, one said, "I actually paid 87 
percent more than what was originally due." Another said that the 
company "did not settle any of my accounts until I was actually sued 
by my creditors." A state court found the group liable for statutory 
fraud, ordered it to pay restitution to clients who completed the 
program but paid more than they owed, and prohibited it from doing 
business with consumers in New York unless it posted a $500,000 
performance bond. 

The group required clients to authorize electronic debits from their 
personal bank accounts in an amount that typically ranged between $300 
and $1,000 each month, depending on the consumers' cash flow and 
expected settlements. The group told clients that once the funds 
accrued to a sufficient amount, it would negotiate with creditors for 
a settlement. Clients were instructed to stop making credit card 
payments during this time and to cease all communication with their 
creditors. The group did not include most of the program fees it 
charged in its calculation of the "savings" clients would achieve. The 
fees included the following: $399 for "set up"; an amount equal to 
three times the clients monthly payment for "enrollment"; $49 per 
month for administrative and bank fees; and an amount equal to 29 
percent of the difference between the amount originally due and the 
settlement amount for a "final fee." The set-up and enrollment fees 
had to be paid in full before the group would allow money to accrue 
for a settlement. 

The experience of one New York family exemplifies the harm suffered by 
the group's clients. According to a sworn statement the wife gave to 
state attorneys, the couple owed about $21,700 in credit card debt 
accumulated after the husband was laid off. In 2006, the wife received 
a call from a telemarketer saying that the Arizona company had looked 
into her family's credit history and found that it could cut their 
credit card debt in half. She and her husband joined the program and 
began making $325 in monthly payments to settle five accounts, even 
though they were current on their bills. "Who wouldn't want to save 50 
percent on her credit cards?" the wife told state attorneys. The 
couple was advised to stop paying their creditors, which they did 
after being told by the company that no penalties and interest would 
accrue as a result. The couple was soon being harassed by their 
creditors, who called at all times of day, including evenings and 
weekends. Four of the couple's small accounts were settled during this 
time. However, the creditor with the largest balance, which totaled 
about $19,000, took the couple to court. The pair withdrew from the 
program and settled the lawsuit for $28,000, including $9,000 in 
penalties and interest. They subsequently had to pay this creditor 
$300 per month. The wife called this outcome "disastrous for us." 
Nevertheless, the couple received a "congratulations" letter from the 
company, saying the pair had paid only 79.3 percent of what was 
originally owed on the four settled accounts. Documents that the 
couple gave state attorneys, however, show otherwise: after adding the 
$2,506 in fees they were charged, the pair actually paid more than 140 
percent of what was originally owed on the four accounts. The wife 
told state attorneys that the Arizona company "failed our family in 
every respect, and we are counted as one of its success stories!" 

Case Study 2: 

An attorney and his law firm associates defrauded about 15,000 clients 
seeking debt reduction help, causing them to lose millions of dollars 
and forcing legions of them to file for bankruptcy. The group lured 
consumers through television and radio advertisements, falsely 
claiming a 50 to 70 percent savings off unsecured debt, an improvement 
in credit scores and bankruptcy avoidance. The group, with offices 
initially in New York and later in Vermont, further promised that if 
clients did not receive a settlement, they would be entitled to a full 
refund. Clients paid fees for these services and funded escrow 
accounts from which their creditors were supposed to be paid. Under 
the terms of the contract that clients signed, the fees were not 
considered "earned" until consumer debts were settled. The group, 
however, did not reduce debt for most of its clients (only 8 percent 
completed the program, according to a witness cited by the U.S. 
Department of Justice) and failed to pay refunds to many of those who 
withdrew from the program or were forced into bankruptcy. Instead, the 
fees collected were used in part to fund huge payments to the attorney 
and two of his associates before they provided any services to 
clients. The client escrow accounts, meanwhile, were drawn upon to 
cover overdrafts from the law firm's operating account and make 
payments to the attorney's wife, among other things. The law firm 
filed for bankruptcy in 2003. A federal jury found the attorney guilty 
in 2005 on multiple felony counts, including fraud. His six associates 
pled guilty to federal charges. 

To enter the law firm's debt settlement program, clients signed an 
agreement that authorized monthly automatic deductions from their bank 
accounts. The first four payments often went into a retainer account 
to collect advance fees owed to the firm, despite the fact that the 
clients had pressing debt problems. The advance fees equaled about 25 
to 28 percent of the total projected savings from the client's debt 
settlement plan. Thereafter, about half of payments also were 
deposited into an escrow account to settle client debts held by 
creditors until the retainer account was fully funded. Subsequent 
monthly deductions went into escrow account until enough money accrued 
to make a settlement offer on behalf of the client. Although not 
formalized in written contract, many clients were instructed to stop 
making their minimum monthly payments to creditors. They were told 
that continuing to pay creditors would inhibit the firm's ability to 
reach a settlement. 

One of the firm's New York clients who federal authorities interviewed 
enrolled in the debt settlement program after hearing an advertisement 
on the radio. The woman, who owed $60,000, was experiencing marital 
problems and feared becoming a single mother with small children and a 
large amount of debt. She called the toll-free number and arranged for 
a meeting at a New York office. One of the firm's associates, who 
later pleaded guilty to interstate transmittal of stolen money and 
preparing a false tax return, told her that the advance fees she paid 
would be held in trust until all of her debt was settled. She paid 
about $7,000 to $8,000 to the firm to settle her debts until one of 
her creditors obtained a judgment against her, causing her bank 
account to be frozen. When she contacted the firm to withdraw and ask 
for a refund, her calls were not returned. She ultimately filed for 
bankruptcy. The firm never secured a settlement on her behalf. She 
filed a civil lawsuit and won a default judgment against the firm for 
$10,000 including attorney fees, but told us she never recovered any 
money from the court decision. In relating her experiences with the 
debt settlement company, she described the attorney as "a ghoul and a 
vulture… preying on vulnerable consumers." 

Case Study 3: 

Two Florida companies and their owners ran an illegal debt settlement 
business using unfair and deceptive practices, collecting over 
$500,000 from about 220 North Carolinians who rarely obtained the 
services they purchased and found themselves in far worse financial 
positions. North Carolina law prohibits anyone from acting as a for-
profit intermediary between residents and their creditors for the 
purpose of reducing, settling or altering debt payments, except in 
limited circumstances. The state ban specifically includes situations 
where an individual is receiving advance fees to provide these 
services. To enforce these laws, the North Carolina Attorney General 
filed a complaint in February 2008 accusing the group of operating a 
"classic advance-fee scam, designed to extract up-front fees from 
financially strapped consumers whether or not any useful services are 
performed." The companies and their owners, one of whom was an 
attorney, marketed their services in part using numerous third-party 
"referral agents" who received compensation for directing consumers to 
the group. One such referral agent listed a local telephone number 
which, when dialed, actually rang a telemarketing "boiler room" in 
Massachusetts or Florida. The group and its agents told consumers that 
their unsecured debts could be reduced by up to 60 percent in as 
little as 1 to 3 years and thus avoid bankruptcy. The group typically 
charged clients an advance fee of 15 to 25 percent of their total 
debt, paid through monthly debits from their bank accounts. It also 
advised them to cease all communication and payments to creditors, 
stating that it could stop any harassment and provide "legal 
protection." When consumers were sued, however, the group gave them no 
legal assistance. They also experienced difficulty in contacting the 
group and were often put on hold, disconnected, or "given the 
runaround," state prosecutors said. Many clients dropped out of the 
program dissatisfied. Few received refunds or obtained settlements 
with their creditors. Many filed for bankruptcy. A North Carolina 
court found that the group's actions violated state law and banned the 
parties from doing any debt-related business with state residents. 
State prosecutors ultimately secured refunds for some of the group's 
clients. In a separate action in January 2009, the attorney also was 
disbarred for a period of 5 years. 

An example of the service the group's clients received can found in 
the experience of a rural North Carolina couple. According to the 
wife's sworn statement, the pair found it increasingly difficult to 
meet their monthly financial obligations after the husband became ill 
and temporarily lost his income. They searched for ways to reduce 
their unsecured debt on the Internet and found what turned out to be 
one of the group's referral agents. They were told that the initial 
monthly payment of about $1,700 would be deducted from their bank 
account for the first 3 months of the program to cover attorney fees. 
Subsequent monthly payments of about $1,200 were to go towards 
settlements with creditors. The couple joined the program in hopes of 
avoiding bankruptcy and made their first installment in February 2007. 
Seven months later, the wife called the group for a status on her 
account and was told the couple had only accrued about $3,000 in 
savings, despite paying the group over $11,000 to date. She also 
learned that none of their credit accounts had been settled and they 
had been charged additional attorney fees of $499 each month. They 
withdrew from the program and demanded a full refund, since the group 
had done nothing "other than take our money with no accountability." 
The couple started receiving collection notices and threats of 
lawsuits. Their debts had now increased since they were no longer 
making payments to creditors. In an attempt to save their home from 
foreclosure, the couple filed for Chapter 13 bankruptcy. They also 
took second jobs as janitors to help pay off their debts. The wife 
told us that during the day she works as a bank teller and her husband 
is employed as an electrical engineer. One of their creditors 
suggested they call their state Attorney General. "My husband and I 
are worse off than before we entered into an agreement with (the 
group) for debt settlement services," the wife said in her sworn 
statement. The state Attorney General ultimately secured a full refund 
for the couple. 

Case Study 4: 

A Maryland attorney, his law firm, and their marketers used unfair and 
deceptive trade practices to collect $3.4 million from about 6,200 
clients over a 2-year period to settle debt but provided little or no 
services in return, causing harm to consumer credit histories and 
credit scores. The group told its clients that they could settle debts 
with creditors for half of the total amount owed, but either did not 
do so or negotiated agreements that saved significantly less than 
promised. Only $811,136--less than a quarter of the money the group 
collected--was either paid to creditors or refunded to clients. 
Moreover, about $240,000 was taken from client trust accounts to pay 
for the law firm's debt and expenses. The group told clients that its 
employees were qualified credit counselors capable of recommending the 
most appropriate action, but instead it provided virtually the same 
advice to everyone - enter debt settlement plans profitable for the 
group. The Maryland Office of the Attorney General began an 
investigation of the group because it was not licensed to provide debt 
settlement services in the state. The group reached an agreement in 
2007 with the Attorney General, agreeing to immediately cease and 
desist selling unlicensed debt settlement services, pay restitution to 
customers, and pay investigatory costs and a fine to the state 
consumer protection office. However, the Attorney General filed a 
lawsuit in 2008 against the attorney, his law firm, and their 
marketers accusing them of continuing to provide debt settlement 
services, thus violating the terms of their agreement and the state's 
consumer protection act. The court ruled in favor of the Attorney 
General and ordered the group to fulfill the terms of its previous 
agreement, pay a fine and costs of $180,000, and pay restitution of 
almost $2.6 million. As of March 2010, the attorney had only paid 
$20,000. 

Clients made numerous complaints to the Maryland Office of the 
Attorney General, detailing the financial harm they suffered from the 
group. A New Hampshire couple struggling to pay their bills joined the 
debt settlement program in August 2007 and authorized the firm to 
automatically deduct about $650 from their checking account each 
month, according to a letter they sent to the Attorney General. 
Although the couple had approximately $41,000 in credit card debt when 
they joined the program, the wife told us that they had a good credit 
history and had never missed a payment. However, she said that they 
were told they had to stop making payments to their creditors when 
they entered the program. The collection letters and phone calls from 
creditors started "arriving constantly" by the end of September, the 
couple told the Attorney General. Threats of lawsuits followed 2 
months later. The couple withdrew from the program in February 2008, 
after paying the firm $3,895 and receiving no relief from their debts. 
They told the Attorney General they were so far in default on their 
credit cards, with interest and fees added on top, that they 
considered bankruptcy to be the best option available to them. 
According to the wife, their credit score dropped from 720 down to 605 
as a result of their experience with this debt settlement program. She 
added that they ultimately entered into a consumer credit counseling 
program after they learned that state law requires such counseling 
prior to bankruptcy. When asked to compare the two different debt 
relief programs, she said that credit counseling is "legit" and helps 
consumers to get out of debt, but that "debt settlement is a crock." 

Case Study 5: 

Four related California companies lured more than 1,000 consumers into 
a debt settlement program through false promises of reducing debt, 
halting collection calls, removing negative credit-report information, 
and holding payments in trust to settle accounts--from which, FTC 
alleged, more than $2 million later went "missing." The companies' 
telemarketers told consumers that the group could cut their debt by as 
much as 60 percent in exchange for a nonrefundable fee, thus improving 
their financial status. The companies did not disclose that the fees 
typically amounted to hundreds or thousands of dollars. They said that 
the monthly payments withdrawn from consumers' bank accounts would be 
held in trust to settle their debt at a reduced amount. Consumers were 
instructed to immediately stop paying their unsecured creditors so 
that they would be considered a "hardship," putting them in a better 
position to negotiate settlement terms. The companies stated that they 
would contact the creditors and tell them to cease all contact with 
their customers, thus preventing collection calls. They also told 
consumers that any negative information that appeared on their credit 
report would be removed at the conclusion of the program. 

FTC filed a complaint against the companies in August 2002, alleging 
that numerous consumers who enrolled in the program saw their debt 
increase after incurring late fees, finance charges and overdraft 
charges. Negative information often appeared on the consumers' credit 
reports--such as charge-offs, collections and wage garnishments--and 
will stay on their record for a period of up to 7 years. FTC 
determined that in numerous instances, the companies did not contact 
consumers' creditors or collectors, nor did they return calls. FTC 
later determined that more than $2 million the companies collected to 
be held in trust for making settlements was missing. Given their 
worsened financial condition, many consumers ultimately filed for 
bankruptcy. The federal court entered default judgments against all 
four companies, banning them from engaging in any debt settlement 
services and ordering them to collectively pay $1.7 million in 
restitution to consumers, among other actions. FTC brought suit 
against four executives of the companies, but these cases ended in 
settlement agreements without any liability or fault established. As 
part of the settlements, however, the executives agreed to be 
permanently banned from participating in debt settlement services and 
to pay between approximately $220,000 and $2.6 million, depending on 
the amount of consumer injury that stemmed from their activities. The 
monetary judgments were largely suspended, except in two instances 
where the executives surrendered property and other assets to help 
satisfy what they owed, because of their inability to repay consumers. 

The experience of a secretary from Riverside, Calif., illustrates the 
harm that FTC determined the companies to have caused consumers. She 
joined the program after receiving an e-mail in August 2000 and being 
told by a representative from one of the companies that she could be 
completely out of debt in 16 months, according to a written statement 
she gave to FTC under penalty of perjury. At the time, she made about 
$27,000 a year, owed a total of $7,000 in credit card debt and was 
making little progress towards reducing her balances given that her 
salary barely covered rent, food, car payments, and insurance. The 
company also offered a debt management class, which she stated had 
appealed to her because she wanted to learn how to better manage her 
money. She never received the promised training, though, despite 
asking for it several times. Three months after she joined the 
program, letters from creditors started arriving threatening legal 
action if she did not pay. Counselors with her debt settlement company 
told her to ignore them, calling the move a "scare" tactic. She 
started to panic after she received a court summons in late 2000 
stating that a lawsuit had been filed against her. A counselor again 
told her not to worry, that everything would be okay. After a court 
summons arrived from a second credit card company, a counselor told 
her to fax the documents to the company and that staff would deal with 
it. The state courts, however, entered two judgments against her in 
March 2001. She later received notice that her wages would be 
garnished by 25 percent. "I was frantic," she stated. "I was barely 
making ends meet on my salary." By July 2001--less than a year after 
the secretary entered the debt settlement program--her credit card 
debt had more than doubled to about $15,000, because of late charges, 
interest, and other fees. She filed for bankruptcy that same month. 
She later sued the company that enrolled her in the program and 
settled for what she had paid in program fees, about $1,700, plus 
court costs. 

Mr. Chairman, this concludes our statement. We would be pleased to 
answer any questions that you or other members of the committee may 
have at this time. 

[End of section] 

Appendix I: Debt Settlement Companies: 

Table 4 below summarizes examples of fraudulent, deceptive, abusive or 
questionable information provided by the 20 debt settlement companies 
we called. We have referred these cases, as appropriate, to the 
Federal Trade Commission (FTC). 

Table 4: Representations Made by Debt Settlement Companies We Called: 

No.: 1; 
Location of company and affiliates: Florida; 
affiliates in Florida, Massachusetts, California, and New Jersey[B]; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt, with monthly payments 
required throughout program; 
Association membership[B]: The Association of Settlement Companies 
(TASC);[C] affiliates in TASC and United States Organizations for 
Bankruptcy Alternatives (USOBA); 
Case details: 
* Marketing Web site that referred us to two affiliates; 
* Representative from one affiliate (a member of USOBA) stated 
"everyone who enters the program makes the independent decision to 
stop paying their creditors"; 
* Identified through spam e-mail message received by one of our 
investigators; 
* Web site advertised "New Government Programs!" and "If we can't get 
you out of debt in 24 hours we'll pay you $100"; 
* Representatives claimed high success rates--93% and 100%; 
* Representative from USOBA-member affiliate claimed that "worst case 
scenario" for our settlements would be "40 cents on the dollar," and 
that "every single creditor settles." He also promised that hiring his 
company would ensure that calls from creditors would "slow down and 
eventually stop"; 
* Representative from TASC-member affiliate claimed that TASC was 
"like the SEC for stock traders" and serves as the regulating body for 
the industry; 
* Owner of company acknowledged TASC logo featured on Web site despite 
company not being a member of TASC; 
* For further details, see section on "Company 1" in this testimony. 

No.: 2; 
Location of company and affiliates: Unknown; 
affiliates in Arizona, Texas, and California[B]; 
Fees[A]: 
* Advance fees based on 12% of enrolled debt; 
* First three monthly payments go to fees; 
* $25 monthly maintenance fee; 
* Additional contingent fee based on 4% of reduction in debt company 
obtains for clients; 
Association membership[B]: Affiliate in USOBA; 
Case details: 
* Marketing Web site that referred us to at least three affiliates; 
* Representatives from two affiliates told us we would not make our 
monthly payments to creditors while in the program; 
* Representative from one affiliate told us we could not afford debt 
settlement and suggested that we consider bankruptcy as an alternative; 
* Web site advertised "Reduce balances to 40% - 60%," "Eliminate 
excessive Credit Card Debt interest immediately," and "End late 
payment fee's [sic]"; 
* Company's radio advertisements claimed "government approved" and 
"government authorized" debt settlement; 
* Representative from one affiliate stated creditors would send 
letters to us indicating that our settled accounts are considered 
"paid in full"; 
* For further details, see section on "Company 2" in this testimony. 

No.: 3; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 16% of enrolled debt, with monthly payments 
required throughout program; 
* First three monthly payments go to fees; 
* $100 fee for out-of-state clients; 
Association membership[B]: TASC (at the time of our call); 
Case details: 
* Web site targeted at Christian consumers; 
* Multiple representatives told us we would not make payments to our 
creditors once we entered company's program; 
* Representative told us that stopping payments to our creditors would 
"knock [our credit score] down a couple of points," and that our 
credit would only be affected while we were in the program; 
* Representatives claimed that program has 85% success rate, that 
lawsuits from creditors were "just random" and did not require an 
attorney, and that they would negotiate our debt down to 40 to 60% of 
what we owed; 
* Representative told us that creditors would report our accounts 
settled for less than the full balance as "paid in full" or "paid as 
agreed"; 
* Owner told us during our site visit that the company recently 
dropped its TASC membership due to rising costs; 
* For further details, see section on "Company 3" in this testimony. 

No.: 4; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 17% of enrolled debt, with monthly payments 
required throughout program; 
* First three monthly payments go to fees; 
* $840 maintenance fee (total throughout program); 
* $623.50 trust account fee (total throughout program); 
Association membership[B]: TASC; 
Case details: * Company advertised "U.S. National Debt Relief Plan," 
with a logo depicting a shield filled with a U.S. flag; 
* Representative stated that, upon entering the program, we would "no 
longer be making payments to your creditors on a monthly basis"; 
* Representative justified first three monthly payments going only to 
fees as necessary because it covered initial set-up costs and "to show 
that you have the commitment to be in the program"; 
* For further details, see section on "Company 4" in this testimony. 

No.: 5; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt; 
Association membership[B]: TASC (at the time of our call); 
Case details: 
* Representative told us we were too poor for debt settlement and 
advised us to consider bankruptcy as an alternative; 
later described company's debt settlement program; 
* Representative stated that we could not continue paying our 
creditors while in company's program; 
* After our undercover call but prior to release of this testimony, 
company appears to have gone out of business; 
* For further details, see section on "Company 5" in this testimony. 

No.: 6; 
Location of company and affiliates: Texas; 
Fees[A]: * Advance fees based on 15% of enrolled debt, with monthly 
payments required during first 24 months (program length unknown); 
Association membership[B]: Unknown; 
Case details: 
* Representative stated that "One-hundred % of our clients stop making 
those [credit card] payments" in order for program to work; 
later directed us to divert money from paying creditors to account 
from which company withdraws fees; 
* Representative advised us to give company's telephone number to 
creditors as our telephone number, to avoid calls from creditors; 
* Representative stated "basically what we do is…we negotiate with 
your creditors to basically cut your bills in half. So when we go to 
negotiate, we go to negotiate at 50 cents on the dollar. That's what 
we guarantee. Now, we can also get less," and added as an example one 
major bank that he claimed "normally settles" for only 30 cents on the 
dollar; 
* Represented their program could prevent creditors from suing us or 
garnishing our wages. 

No.: 7; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 10% of enrolled debt, with monthly payments 
required during first 12 months (of estimated 38-month program); 
Association membership[B]: Unknown; 
Case details: 
* Advertises "National Debt Relief Stimulus Plan"; 
* Representative told us we would stop paying our creditors, and that 
"the only thing you're going to have to worry about is this payment 
here [company's fees]"; 
* Representative stated that lawsuits were a "scare tactic"; 
* Web site states it can "Prevent Creditor Harassment"; 
* Representative claimed company could reduce our balances so that we 
would pay "anywhere from 30 to 60 % on what you owe". 

No.: 8; 
Location of company and affiliates: Texas; 
Fees[A]: 
* Advance fees based on 12% of enrolled debt, with monthly payments 
required during first 15 months (of estimated 48-month program); 
* First four monthly payments go to fees; 
Association membership[B]: TASC; 
Case details: 
* Regarding payments to our creditors, representative stated "you're 
gonna have to cut them off so that they haven't received anything"; 
* Representative claimed "every account that we work on will be at 
least 40 cents on the dollar". 

No.: 9; 
Location of company and affiliates: Texas; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt, with monthly payments 
required during first 12 months (of estimated 24-month program); 
Association membership[B]: Unknown; 
Case details: 
* Representative stated that "one-hundred % of our clients stop making 
their monthly payments as soon as they enroll into the program"; 
* Representative encouraged us to explore other debt relief options as 
well as debt settlement; 
* Name of company changed during our investigation. 

No.: 10; 
Location of company and affiliates: Texas; 
Fees[A]: 
* Advance fees based on 17% of debt, with monthly payments required 
during first 19 months (of estimated 48-month maximum program); 
Association membership[B]: USOBA; 
Case details: 
* Representative stated that upon enrolling in company's program "you 
would no longer make any of your credit card payments. All of them 
would go late"; 
* Representative claimed to "negotiate your debt down to 50% or less 
of what you owe"; 
* Representative said advance fees paid for attorneys who would "look 
at" our account monthly; 
* Representative was unable to explain refund policy by telephone; 
* Representative suggested we change our address on billing statements 
to address for company's attorneys. 

No.: 11; 
Location of company and affiliates: Florida; 
Fees[A]: 
* Unknown--only received recorded information; 
Association membership[B]: Unknown; 
Case details: 
* Telephone number listed on Web site went to a 7-minute recording; 
* Recording stated that we would stop paying our creditors upon 
entering program; 
* Recording claimed to send letters to credit bureaus that would 
"remove any late marks that you may have received on the account". 

No.: 12; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt; 
Association membership[B]: Unknown; 
Case details: 
* Front-end marketing company, with 28 different Web sites used to 
solicit customers for referral to one debt settlement company; 
* Representative stated that affiliate handling actual settlement 
process would call us back; we did not receive a return call. 

No.: 13; 
Location of company and affiliates: Texas; 
Fees[A]: 
* Advance fees based on 10% of enrolled debt, with monthly payments 
required throughout program; 
Association membership[B]: USOBA; 
Case details: 
* Representative stated that program does not work for everyone, but 
does work for everyone who has a hardship; 
* Representative stated company's services are helpful to consumers 
"because we allow [consumers'] accounts to go delinquent and past due 
and into collections"; 
* An e-mail sent after our call stated that upon enrolling in the 
program, "we will inform your creditors that you will no longer be 
making payments on the accounts". 

No.: 14; 
Location of company and affiliates: Arizona; 
Fees[A]: 
* Advance fees based on 12.9% of enrolled debt, with monthly payments 
required during first 10 to 12 months (of estimated 30-month program); 
Association membership[B]: Unknown; 
Case details: 
* Representative stated that "9 out of 10 of our clients are current," 
but stop making payments when entering program; 
* When asked whether to stop paying accounts that are current, 
representative replied "Absolutely". 

No.: 15; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt; 
* First three monthly payments go to fees; 
* $30 monthly maintenance fee; 
* $14.50 monthly trust account fee; 
Association membership[B]: TASC; 
Case details: 
* Representative stated that she could not interfere with our 
obligation to pay our creditors, and encouraged us to continue making 
payments if we could afford to do so at the same time as saving for 
settling debts; 
* Representative later stated that if we could continue making our 
minimum payments "maybe this [debt settlement] isn't the best solution 
for you". 

No.: 16; 
Location of company and affiliates: Florida; 
Fees[A]: 
* Contingent fees based on 35% of reduction in debt company obtains 
for clients; 
* First monthly payment goes to enrollment fee; 
* $53 monthly maintenance fee; 
Association membership[B]: USOBA; 
Case details: 
* Web site targeted at Christian consumers; 
* Representative stated that "you stop paying everybody. That's what 
makes you qualify. You fall behind"; 
* Company's contract states there is a $1,000 termination fee for 
dropping out of the program; 
* Representative suggested that we could pay our initial fee with a 
credit card; 
* Representative offered to also provide us information on debt 
consolidation loans, to determine which option would be best. 

No.: 17; 
Location of company and affiliates: California; 
Fees[A]: 
* Advance fees based on 18% of enrolled debt, with monthly payments 
required during first 18 to 24 months (of estimated 36-month program); 
Association membership[B]: USOBA; 
Case details: 
* Representative encouraged us to take care of our late mortgage 
payments before worrying about paying off or settling our credit card 
debts. 

No.: 18; 
Location of company and affiliates: Unknown; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt, with monthly payments 
required throughout program; 
* First three monthly payments go to fees; 
Association membership[B]: Unknown; 
Case details: 
* Web site targeted at Christian consumers; 
* Web site describes one of the "blessings" of its program as 
"Immediate increase of spendable cash-flow [sic]"; 
* Representative told us the program is based on our stopping payments 
to creditors. 

No.: 19; 
Location of company and affiliates: Maryland; 
Fees[A]: 
* Advance fees based on 15% of enrolled debt; 
* $9.85 monthly bank fee; 
Association membership[B]: Unknown; 
Case details: 
* Representative stated that it "wouldn't make sense" to continue 
making payments while in a debt settlement program; 
* Representative said that program "works for some" but is "not great 
for others," and that company discourages consumers from debt 
settlement if they plan to buy a house soon, due to credit score 
damage. 

No.: 20; 
Location of company and affiliates: California; 
Fees[A]: 
* Unknown--representative said we did not have enough debt to qualify 
for program; 
Association membership[B]: TASC; 
Case details: 
* Representative stated that we did not have enough debt to qualify 
for the company's debt settlement program. 

Source: GAO analysis of information obtained from debt settlement 
companies. 

[A] Fee information reflects fees disclosed to us; some companies may 
charge additional fees that were not disclosed. Debt settlement 
companies typically charge fees requiring payments either at the 
beginning of the program as an advance fee or after each settlement as 
a contingent fee. Some companies structure the payment of advance fees 
so that they collect a large portion of them--as high as 40 percent-- 
within the first few months regardless of whether any settlements have 
been obtained or any contact has been made with the consumer's 
creditors. Others collect fees throughout the first half of the 
enrollment period in advance of a settlement. Companies that charge a 
contingent fee generally base it on a certain percentage of any 
settlement they actually obtain for consumers. They sometimes charge a 
small, additional fee every month while consumers are busy attempting 
to save funds for settlements. FTC has criticized advance fees, 
stating that consumers often suffer irreparable injury as a result of 
paying them in advance of receiving services. The agency maintains 
that the practice of taking fees before a settlement is obtained 
results in a number of adverse consequences for consumers: late fees 
or other penalty charges, interest charges, delinquencies reported to 
credit bureaus that decrease the consumer's credit score, and 
sometimes legal action to collect the debt. 

[B] Some companies we called referred us to one or more affiliates. It 
was not always clear to us exactly with which company or affiliate we 
were speaking, where the companies or affiliates were located, or what 
the relationships were between the companies and affiliates. In some 
cases, separate affiliates of the same company claimed to be members 
of different industry trade associations. 

[C] While Company 1 claimed to be a member of TASC, it appears this 
was a false representation. 

[End of table] 

[End of section] 

Appendix II: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

For further information about this testimony, please contact Gregory 
D. Kutz at (202) 512-6722 or kutzg@gao.gov. 

Contacts points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this testimony. 

Staff Acknowledgments: 

GAO staff who made major contributions to this testimony include Cindy 
Brown Barnes, Assistant Director; Andy O'Connell, Assistant Director; 
Christopher W. Backley; Amy E. Brown; Eric Charles; Scott Clayton; Ken 
Hill; Jennifer Huffman; Appleton Kamdoum; Jason Kelly; Barbara Lewis; 
Natalie Maddox; Doug Manor; Steven Martin; Vicki McClure; James 
Murphy; Mark Needham; and Ramon Rodriguez. 

[End of section] 

Footnotes: 

[1] Unsecured debts are those debts for which there is no collateral, 
such as most consumer credit card debt. 

[2] Spam is unsolicited "junk" e-mail that usually includes 
advertising for some product. 

[3] Some creditors may sell a consumer's debt to a collection agency 
after the consumer misses payments for a given period of time-- 
typically 6 to 12 months. The collection agency will then attempt to 
collect payments from the consumer. In such cases, debt settlement 
companies will generally negotiate with the collection agency seeking 
the consumer's money. 

[4] FTC's regulatory authority related to false advertising is 
contained in section 5(a) of the Federal Trade Commission Act (15 
U.S.C. § 45(a)), which makes unlawful both "unfair" and "deceptive" 
acts or practices that affect interstate commerce. 

[5] The notice primarily discusses three categories of debt relief 
services--credit counseling, debt settlement, and debt negotiation. 
While some consider debt negotiation to be another term for debt 
settlement, FTC refers to debt negotiation as a separate type of debt 
relief service. In this context, debt negotiation companies are those 
that offer to obtain interest rate reductions and other concessions 
from creditors on behalf of consumers, but do not claim to obtain full 
balance payment plans or lump sum settlements for less than the full 
balance. See 74 Fed. Reg. 41988, 41997 (Aug. 19, 2009). 

[6] 74 Fed. Reg. 41988 (Aug. 19, 2009). 

[7] Under the TSR, advance fees are currently banned for several other 
industries, including credit repair services and advance fee loans. 

[8] Va. Code Ann. §§ 6.1-363.2 - .26. 

[9] Ark. Code Ann. §§ 5-63-301 to -305. 

[10] Wyo. Stat. Ann. § 33-14-101 to -103. 

[11] Of the two companies for which we were unable to obtain fee 
information, one company presented an audio recording of general 
information about its program, and one company's representative told 
us we did not have enough debt to qualify for its program. 

[12] Federal and state agencies have defined success as consumers 
being able to obtain the results that the debt settlement companies 
promised them. 

[13] As stated above, some companies we called referred us to one or 
more affiliates. We were unable to determine the relationship between 
these companies and their affiliates. 

[14] While TASC requires its member companies to make a series of 
disclosures in its discussions with potential clients, the individual 
completion rate for each company's program or the 34.4 percent overall 
completion rate mentioned in TASC's study are not among the required 
disclosures. 

[15] According to data it provided to us, BBB has received thousands 
of complaints about debt settlement companies in recent years, with 
the number of complaints rising from 8 in 2004 to nearly 1,800 in 
2009. This figure may underestimate the total number of complaints 
related to debt settlement, as not all companies providing debt 
settlement services are classified as debt settlement companies by 
BBB. According to BBB, these complaints are related primarily to debt 
settlement companies: (1) charging advance fees without providing 
services as promised to consumers and sometimes without providing any 
services at all; (2) failing to disclose important information to 
consumers, such as unannounced fees; and (3) failing or refusing to 
provide refunds to consumers. 

[16] According to BBB, its rating system uses grades based on a 
proprietary formula that incorporates information known to BBB and its 
experience with the business under assessment. The ratings are 
intended to represent BBB's degree of confidence the business is 
operating in a trustworthy manner and will make a good faith effort to 
resolve any customer concerns. The rating system uses grades from A to 
F, with pluses and minuses, so that A + is the highest grade and F is 
the lowest. Some debt settlement companies may currently have a BBB 
rating higher than a C- because they were misclassified (e.g., 
characterized by BBB as something other than a debt settlement 
company) or because debt settlement does not represent a substantial 
portion of its services. 

[17] We also identified an additional Web site at a different address 
that was nearly identical to the one that referred us to the two 
representatives discussed above, with the same phone number and logos 
for TASC and BBB, but listing what appeared to be a different company 
name entirely. 

[18] TASC's executive director confirmed that Company 1 is not a 
member. 

[19] Prior to our site visit, we found a testimonial from an alleged 
client on Company 1's Web site claiming that Company 1 helped her to 
cut her monthly bills in half in 24 hours. 

[20] A recent report by the Maryland Consumer Rights Coalition stated 
that debt settlement companies "often seem a many-headed Hydra" with 
parent companies split from other divisions that handle the marketing 
and solicitation. The report further states that this division of 
services causes confusion for consumers trying to track the progress 
of their debt settlement, and for agencies attempting to enforce 
compliance. 

[21] IRS Form 990 is a federal information return filed annually by 
tax-exempt public charities. Information reported on this return 
includes assets held, contributions received, and grants paid. 

[22] We did not attempt to verify the facts regarding all of the 
allegations pursued by federal and state agencies that we identified. 

[23] We obtained information from the following agencies: Federal 
Trade Commission, U.S. Department of Justice, and state law 
enforcement agencies in Alabama, Colorado, Delaware, Florida, 
Illinois, North Carolina, New York, Texas, Vermont, and West Virginia. 
They identified clients through company records, individual 
complaints, and restitution paid. We focused on select states with 
enforcement actions listed in a National Association of Attorneys 
General letter. We did not attempt to query all 50 states. 

[24] According to the letter, the 128 enforcement actions listed in 
its attachment do not represent a comprehensive list of all cases 
filed or regulatory actions taken against debt relief companies. We 
did not attempt to verify the facts regarding all of the actions 
listed in the letter. Details regarding 3 of these enforcement actions 
are provided below, as case studies 1, 3, and 4. 

[End of section] 

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