New York State Attorney General Andrew Cuomo has subpoenaed 14 debt settlement companies and one law firm as part of an investigation into the debt settlement industry, a move that has been labeled a “P.R. stunt” by an industry lawyer, The New York Times reports (“An Inquiry Into Firms That Offer to Cut Debt,” May 8, 2009).

Robby H. Birnbaum, a debt settlement lawyer who is also on the board of an industry trade group, said late last week that the debt settlement companies named in the investigation were placed in an awkward position when they first learned of Cuomo’s inquiry via the media.

“The press release was issued before any of these companies even received subpoenas,” Birnbaum said, so initially the debt settlement organizations would have had nothing to respond to. The companies in question didn’t receive their subpoenas until after Cuomo’s office generated its press release.

Companies’ Services May Not Be Living Up to Their Advertising

According to The Times, Cuomo will be investigating to what extent the subpoenaed debt settlement firms provide the debt relief services described in their advertisements by examining the companies’ fee structures and client base. Debt settlement organizations negotiate with credit card companies to reduce a client’s debt balance and typically charge a fee of about 15 percent of the client’s debt.

“With all of the problems we face in this time of economic distress, it is outrageous that these firms are targeting those who are the most financially vulnerable,” Cuomo said through an aide.

The purpose of the inquiry is to “ensure that people are not victimized when faced with financial hardship,” Cuomo’s office stated (“N.Y. Attorney General Probes Debt Settlement Firms,” Reuters, May 7, 2009).

Cuomo’s new investigation stems from a previous inquiry by the attorney general into two firms, Texas-based Credit Solutions, the nation’s largest alleged debt settlement firm, and Nationwide Asset of Arizona. Credit Solutions was accused of engaging in “false, deceptive, and misleading acts and practices” in a March suit against the company, and Nationwide will soon be named in a suit and be accused of fraud.

Several Firms Welcome Industry Investigation

Cuomo’s current suit targets several debt settlement companies located across the nation and a single law firm:

American Debt Foundation Inc., American Financial Service, Consumer Debt Solutions, Credit Answers L.L.C., Debt Remedy Solutions L.L.C., Debt Settlement America, Debt Settlement USA, Debtmerica Relief, DMB Financial L.L.C., Freedom Debt Relief, New Era Debt Solutions, New Horizons Debt Relief Inc., Preferred Financial Services Inc., U.S. Financial Management Inc. (operating as My Debt Negotiation), and Allegro Law.

Several of the 14 firms named in Cuomo’s investigation have said they would welcome an investigation into the industry, which includes as many as 2,000 debt settlement companies nationwide. Some of these companies even went as far to say they would embrace tougher regulations in their industry, one that critics claim is under-regulated.

“The only companies that will suffer are those that don’t offer genuine value,” said Jeff Takle, a spokesman for a Massachusetts debt settlement firm.

Robert Linderman, general counsel for one of the firms named in the investigation, Freedom Debt Relief of San Mateo, Calif., echoed Takle’s sentiments and said, “We’re delighted the attorney general is seeking information from the industry.”

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