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Tax Debt Relief Firms Get Stay of Execution for Upfront Fees

Shannon Rasberry — Fri, 05 Nov 2010 15:01:14 +0000

Although the Federal Trade Commission made sweeping changes earlier this year to the federal telemarketing sales rule in order to rein in deceptive marketing and fraudulent practices by shady debt help companies that had been taking advantage of struggling consumers, the FTC last week granted an exclusive reprieve that has some debt relief firms breathing a little easier.

A prohibition in the revised telemarketing sales rule preventing companies that sell debt management, debt settlement, debt negotiation, or other debt relief services over the phone from charging consumers upfront fees has been suspended for firms that specifically provide tax debt help.

The suspension of the upfront-fee ban, which went into effect for all other debt relief companies on Oct. 27, comes after several tax debt relief companies hired a lobbying firm, the National Policy Group, to question the meaning of the prohibition and ask whether the law specifically applied to tax debt, according to a statement released by the FTC.

“During the FTC’s education and outreach efforts earlier this month, some tax debt relief companies expressed uncertainty about whether the Rule applied to them. Specifically, they questioned whether tax debts are ‘unsecured,’ which would make them subject to the Rule,” the FTC said (“FTC Issues Enforcement Policy Statement on New Debt Relief Rule,” FTC press release, Oct. 27, 2010).

Unsecured debts are debts that aren’t backed by assets or collateral — debts such as credit card accounts and student loans. Secured debts, on the other hand, such as car loans and home mortgages, are typically tied to some type of collateral that a creditor could seize or repossess if a consumer fails to pay the debt.

Tax debt relief companies are proposing that tax debts may actually be considered secured debts.

“The FTC currently is considering these concerns, and until further notice, will defer enforcing the Rule with respect to … tax debt relief services,” the FTC said.

The FTC clarified that tax debt relief companies are still subject to all other regulations of the telemarketing sale rule, as well as the FTC Act, which bans unfair and deceptive marketing practices.

Read the full amended Telemarketing Sales Rule:
Federal Trade Commission. Telemarketing Sales Rule: Final Rule. Federal Register, 16 CFR Part 310. August 10, 2010.

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U.S. Consumers File for Bankruptcy at Highest Levels Since 2005

Shannon Rasberry — Wed, 13 Oct 2010 15:50:40 +0000

There were 1,165,172 bankruptcy filings by U.S. consumers during the first nine months of 2010, an 11-percent increase from the 1,046,449 consumer filings during the same period a year ago, according to the American Bankruptcy Institute.

The ABI, which relied on data from the National Bankruptcy Research Center, said the total number of consumer bankruptcies from Jan. 1 to Sept. 30 represents the highest three-quarter total since 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in order to try and mitigate the flow of personal bankruptcy filings.

“While the 2005 bankruptcy overhaul law aimed to reduce filings, overall consumer debt and continued financial stress have led to consumer bankruptcies climbing back to pre-BAPCPA levels,” said ABI Executive Director Samuel J. Gerdano (“Consumer Bankruptcy Filings Up 11 Percent Through Nine Months of 2010,” ABI press release, Oct. 4, 2010).

Figures showed that consumers seeking debt relief through bankruptcy submitted 130,329 filings in September, 4.4 percent more than the 124,790 filings recorded in September 2009, and 3.3 percent more than the 127,028 filings recorded in August.

In south Florida, one of the regions hit hardest by the recession, the rate at which consumers filed for bankruptcy in September surged from last year, although the month’s numbers were down 1.6 percent from August.

In Miami-Dade, Broward, and Palm Beach counties, consumer bankruptcies were up an average of 49 percent from September 2009.

Palm Beach County suffered the least, with only a 13-percent increase, followed by Broward County, at 33 percent. But in Miami-Dade County, personal bankruptcy filings rose a staggering 74 percent year-over-year (“S. Fla. Bankruptcies Up 49% in September,” South Florida Business Journal, Oct. 5, 2010).

Gerdano said the poor economy could make things even worse for consumers the last three months of the year, and estimated that total consumer bankruptcy filings would increase by over 430,000, or 37 percent, from current numbers, as even more recession-stung consumers seek debt relief during the holiday season.

“We expect that there will be nearly 1.6 million new bankruptcy filings by year-end,” Gerdano said.

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Felon-Run Debt Collector Shut Down for Bullying Consumers

lhillery — Fri, 26 Jun 2009 23:32:12 +0000

After being accused by New York Attorney General, Andrew Cuomo, of using illegal scare tactics to “terrify” indebted Americans into repaying their debt, a Buffalo, N.Y., debt collection agency run by convicted felons has been shut down by state authorities, The Los Angeles Times reports (“After TV Report, NY Authorities Shut Down Collection Company Run By Convicted Felons,” June 23, 2009).

“This company was run by people who lied, bullied, and preyed on vulnerable Americans struggling to resolve their financial situation,” Cuomo said. “Pretending to be a police officer, threatening to throw consumers in jail — these practices are despicable as they are illegal.”

Operating under the name Final Claims Asset Locators, among several other names, the debt collection agency had its collectors pose as law enforcement officials who told debtors they were being arrested.

In a recorded conversation, a debt collector even told a debtor, “Make sure you have somewhere for your kids to go. Lock up your house. Get some clean clothes, because you’re not coming home anytime soon.”

The debt collection agency was owned by a former drug dealer and convicted felon Tobias Boyland, who also went by the name “Bags of Money” and who served 13 years for armed robbery. Boyland was arrested this week on a weapons charge after authorities found him carrying a loaded, unlicensed pistol and after finding an AK-47 rifle and $34,000 in cash in his house.

Boyland also owns a modeling agency, has released a rap album, has written a self-help book called “Thug Motivation,” and has advertised his business on a billboard using an image of himself in a gladiator outfit.

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Workers Take a Hit From Employers’ Scaled-Back 401(k) Plans

lhillery — Mon, 22 Jun 2009 23:23:17 +0000

A quarter of U.S. employers aren’t able to keep up with the expense of matching employees’ 401(k) contributions, according to the results of a new Charles Schwab survey (“Employers Cutting Back 401(k) Plans, Study Shows,” Reuters, June 22, 2009).

401(k) plans allow workers to defer taxes on part of their income and invest that money in stock and bond mutual funds. Large companies like the ones surveyed by Charles Schwab, ranging in revenues from $100 million to more than $10 million, often match employees’ 401(k) investment contributions.

The constricted economy, however, has forced 23 percent of companies to stop offering 401(k) match opportunities, although many of the companies say this move will be temporary.

“They don’t see that as a long-term approach,” said Steve Anderson, head of Retirement Plan Services at Charles Schwab.

Workers with 401(k) plans, whose savings have taken a huge hit recently, typically pay close attention to their company’s matching program. In fact, 87 percent of employees polled identified 401(k) match as the most important feature of their company’s 401(k) plan. The second most important feature was access to advice on 401(k) investing.

The online survey also found that a quarter of companies are no longer offering open enrollment for 401(k) savings plans, limiting enrollment to certain employees.

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International Monetary Fund Predicts Gradual Economic Recovery

lhillery — Mon, 15 Jun 2009 23:06:23 +0000

The International Monetary Fund has forecasted that the U.S. economy will contract 2.5 percent before the end of this year but will expand 0.75 percent by the end of 2010, according to analysis of the IMF’s World Economic Outlook report from April (“IMF Raises Forecast for U.S. Economy, Risk of Debt,” Bloomberg, June 15, 2009).

The Federal Reserve, the Obama administration, and Congress were all commended by IMF, the Washington-based lender that has helped rescue the economies of Pakistan and Iceland, for their efforts to salvage the economy with a “well-targeted” stimulus package.

In fact, the report showed that the stimulus package will raise the gross domestic product, the value of goods and services produced in the United States, by 1 percent this year and by 0.25 percent in 2010, pointing to the likelihood of a “gradual” recovery.

Despite the IMF predicting a solid upturn in the economy in the next year, it still sees the U.S. unemployment rate topping 10 percent next year and sees a successful exit plan from the financial rescue programs as essential to the country’s recovery.

“The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010,” the staff review of the IMF report stated.

The IMF projects that public debt will nearly double from 2009 to 2011 to 75 percent of the gross domestic product, putting significant pressure on the Treasury bond rates, which are currently low, making it easier for prospective homebuyers to get low mortgage rates.

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Supreme Court to Rule on Bankruptcy Reform Law

lhillery — Fri, 12 Jun 2009 19:11:16 +0000

The Supreme Court has agreed to take on a case that addresses the constitutionality of a provision in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that restricts “debt relief agencies,” including lawyers, from advising their clients to take on additional debt before filing for bankruptcy, InsideARM reports (“Supreme Court Agrees to Hear Challenge to Bankruptcy Reform Law Provision,” June 9, 2009).

The section of the U.S. bankruptcy code in question was ruled to be in violation of the First Amendment by the U.S. appeals court in St. Louis in 2007 because the law “prevented lawyers from fulfilling their duty to clients to give them appropriate and beneficial financial advice.”

The court ruled that the law was passed as an attempt by Congress to stem lawyers’ abuse of the bankruptcy system but that language was too broad.

In fact, the court said, some clients might even benefit from their lawyers’ freedom to advise taking on certain types of debt, including a mortgage refinance, which can free up funds to help a consumer pay off other debt before filing for bankruptcy.

The language “would include advice constituting prudent pre-bankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws,” the court wrote (“U.S. Top Court to Decide Bankruptcy Advice Case,” Reuters, June 8, 2009).

In the Supreme Court case, which will be heard in October, the Obama administration is expected to argue that this provision of the Act can be viewed narrowly enough to allow debt relief agencies to advise their clients in anyway they see fit.

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Missouri Attorney General Sues Texas Debt Relief Company

lhillery — Thu, 11 Jun 2009 20:38:56 +0000

Missouri Attorney General Chris Koster has taken legal action against a Texas debt settlement company, filing a lawsuit against Credit Solutions of America for illegally charging consumers for debt relief services the company never provided, his office announced in a press release last week (“Attorney General Koster Files Suit to Stop Company for Falsely Promising Credit-Card Debt Help,” June 2, 2009).

Credit Solutions of America, based in Richardson, Texas, advertised that it could cut consumers’ credit card payments in half, reduce their other monthly bills, and get them out of debt within three years, Koster says. But although the company collected hefty fees from consumers with the promise of delivering those debt reduction results, Koster charges that Credit Solutions of America never provided the advertised debt relief services, leaving its customers in a worse financial situation than before.

According to the Attorney General, Credit Solutions of America charged its customers fees that amounted to about 15 percent of their total debt, collecting those fees through an initial upfront payment and then through subsequent installment payments that it took directly from customers’ bank accounts.

The state of Missouri prohibits companies from collecting fees for credit services prior to the services being performed in full. Moreover, says Koster, the company wasn’t even legally registered to do business in the state.

“Credit Solutions of America promised real relief to consumers who were in financial straits because of high credit card debt,” Koster said. “We will continue to aggressively pursue the unacceptable business practices of these companies that offer false promises and deliver only harm.”

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Companies Favor Salary Freezes to Avoid Layoffs

ekuhl — Tue, 02 Jun 2009 23:38:54 +0000

Since January, employers have been more likely to scale back employee salaries than to eliminate positions, a recent survey reveals.

This shift away from job-cutting could be a sign that the nation’s 8.9 percent unemployment rate — the highest in 25 years — may be starting to level out, reports the Baltimore Business Journal (“Survey: More Employers Trimming, Freezing Salaries,” June 1, 2009).

The percentage of employers that have cut or frozen employee salaries has nearly doubled since the first month of 2009, from 27 to 52 percent, according to the most recent employer survey conducted by outplacement consultancy firm Challenger, Gray & Christmas.

Largely in response to a weakened economy, 86 percent of the companies surveyed in May said they reduced costs by freezing or cutting salaries, which represents a small decline from the 92 percent of companies who indicated in January that they’d implemented similar cost-cutting measures.

To cut costs, employers have also shortened employee work hours, imposed furloughs, eliminated tuition reimbursement programs, and made temporary layoffs.

John Challenger, CEO of Challenger, Gray & Christmas, suggests that temporary layoffs are a better cost-cutting solution for employers in the long-run than permanently eliminating positions.

“It is a lot easier to restore compensation and benefits,” he said, “than it is to rehire and retrain workers when the economy improves.”

Four Unlicensed N.Y. Debt Collection Companies Sued by West Virginia A.G. A West Vir

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2 Arkansas Women Dodge Credit Repair Fraud Allegations

lhillery — Fri, 29 May 2009 23:22:07 +0000

Two Arkansas women who have been sued for defrauding at least 139 people in a credit-repair scam have refused to respond to a judge’s order to pay $700,000 in penalties and have even started a new credit repair operation, the Arkansas Democrat Gazette reports (“State Wins Credit-Repair Fraud Case,” May 26, 2009).

For four years, Sherrye Mance and Tiffany Morris allegedly defrauded customers seeking the credit repair services of three of their companies. The women, who operated the three unincorporated businesses Financial Services Unlimited, Service Unlimited Inc., and Credit Counseling Service, have reportedly started running a new credit repair operation under the name “Fresh Start Credit Service.”

In a lawsuit, the Arkansas attorney general has accused Mance and Morris — who collectively owe their victims $127,565 — of charging customers for “services purported to improve a customer’s credit history, credit record, and credit ratings,” although these services were likely never “actually performed.”

Mance and Morris have, so far, refused to respond to the lawsuit, missed their court hearing, and failed to respond to a court injunction. Meanwhile, the Arkansas attorney general’s office has already started receiving complaints from California residents about the defendants’ new company.

Arkansas Attorney General Dustin McDaniel believes the two women still live nearby — Mance in a neighboring Arkansas county and Morris in Mississippi. McDaniel says he is exploring all legal options that would force the women to pay the penalty fees and repay the 139 affected customers.

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NY Attorney General Sues 2 Debt Settlement Firms

lhillery — Wed, 20 May 2009 22:44:08 +0000

Two debt settlement companies have been sued by New York Attorney General Andrew Cuomo on behalf of 20,000 New York consumers, as part of Cuomo’s probe into the debt settlement industry. Credit Solutions of America, Inc. in Texas and Nationwide Asset Services, Inc. in Arizona are both facing charges of fraud, deceptive practices, and false advertising, Reuters reports (“New York AG Sues Texas, Arizona Debt Settlement Firms,” May 19, 2009).

CSA is accused of defrauding 18,000 New York customers out of about $17 million in fees over a five-year period from January 2003 to September 2008.

Through marketing and advertising campaigns CSA promised to reduce customers’ debt by 60 percent, but Cuomo’s office found that only an average of 1 percent of CSA customers actually saw these results.

CSA, the self-proclaimed largest debt settlement firm in the country, instructed its customers to make monthly contributions to a savings account instead of making their debt payments and to ignore calls from creditors, which often drove customers further into debt and failed to result in a successful resolution. The New York Times reports that the debt settlement firm even suggested that its customers sell their blood plasma, mow lawns, and borrow from their neighbors to drum up funds for their savings account (“2 Firms Accused of Fraud in Debt Settlement,” May 19, 2009).

Lawyers representing CSA said the debt settlement company “disputes liability over the complaints and supposed practices” because the alleged fraud occurred during a 12-month period when the company was under different ownership. The company has also faced litigation in South Carolina, Idaho, and Texas.

Cuomo has also charged Nationwide Asset Services with falsely advertising that it could reduce customers’ debt by 25 to 40 percent. But of the 18,000 New York customers it enrolled between January 2005 and May 2008, Nationwide settled the debts of less than 2,000 of these customers.

“Today’s lawsuits send a clear message that we are prepared to rein in this unregulated industry and protect New Yorkers who are proactively trying to work their way out of debt,” Cuomo said in a statement released by his office (“Attorney General Cuomo Sues Debt Settlement Companies for Deceiving and Harming Consumers,” May 19, 2009).

Cuomo’s two lawsuits are part of a larger probe of the debt settlement industry announced earlier this month in which he subpoenaed 17 debt settlement companies in addition to Nationwide and CSA.

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