Federal Consumer Protection Agency Cracks Down on Debt Settlement Scam

Consumer Protection Bureau Indicts Debt Settlement CompanyIn its first-ever criminal referral, the new Consumer Financial Protection Bureau, the federal consumer watchdog agency mandated by Dodd-Frank, has referred a case for criminal prosecution against a debt settlement company, Mission Settlement Agency. The indictment was filed in the U.S. District Court in Manhattan, charging that the debt settlement company’s manager and three employees “systematically exploited and defrauded” customers who sought to settle their debts. Rather than offering any real debt relief, according to the indictment Mission Settlement Agency, took about $14 million from its customers between mid-2009 and March 2013, keeping the lion share and paying out only $4.4 million to creditors. And of an additional $2.2 million in fees charged to customers, the government’s indictment states that the debt settlement company “never paid a single penny” to creditors. Read more here.

Those of you who have read my blog any amount of time, know that I harbor little love for the debt settlement industry. That’s because I see so many folks who need to file personal bankruptcy after having tried unsuccessfully to settle their credit card and medical debts through debt settlement companies. Frequently our bankruptcy clients come to us after having been sued by one of the credit card companies, or one of the many litigious assignees of delinquent debt, like Cach, LLC; Midland Funding, LLC; Portfolio Recovery Associates; Persolve LLC; the list goes on and on. Despite having paid hundreds or thousands to a debt settlement company, they still got sued by their creditor.

These clients are shocked that their debt settlement company was unable to prevent them from being sued by one of these collectors. They were led to believe that the debt settlement company was doing everything it could to settle their debts so as to prevent such a lawsuit. Now, after wasting thousands of dollars in monthly payments to the debt settlement company, the client finds that it was all for nothing. They often could have obtained real debt relief within the legal structure of our consumer bankruptcy laws, but now they’re worse off than ever. So when I read that the indictment against Mission Settlement Agency alleges that it “falsely and fraudulently” took advantage of its customers, I can’t say that I was surprised that one of these outfits is finally seeing criminal prosecution.

As I’ve also written before, even where debt settlement companies do manage to settle a debt, the customer then gets the unhappy surprise that he or she may now owe taxes on the amount of the debt that was cancelled by such a settlement. This is never true if a debt is discharged in bankruptcy.

As a San Jose bankruptcy attorney, I am constantly trying to educate my clients and my community about the protections offered by our bankruptcy laws as well as to dispel myths about filing for bankruptcy. Many see debt settlement as a somehow more honorable solution than filing bankruptcy, and the debt settlement agencies frequently play up that angle. There is no shame in filing for bankruptcy protection. Nor is it a panacea. If you can afford to pay some of your debts, then Chapter 13 bankruptcy offers a powerful set of protections that let the debtor do just that while being protected from lawsuits.

If you live in the Bay Area, our bankruptcy attorneys offer free one-hour consultations for anyone who wants straight advice about bankruptcy.

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