City Bar Calls for Tight Restrictions on Debt Settlement Services

Finding that thousands of New Yorkers have “experienced net financial loss and lasting financial harm due to their involvement with debt settlement service providers,” the New York City Bar Association has issued a white paper calling for New York State to prohibit debt settlement services that charge a fee that is more than nominal, as well as for other restrictions that would protect debtors from debt settlement companies that prey on consumers. The white paper, written by the City Bar’s Civil Court and Consumer Affairs Committees and titled “Profiteering from Financial Distress: An Examination of the Debt Settlement Industry,” states, “An extensive public record details widespread and systematic deceptive and abusive practices. These practices have included deceptive advertising and marketing, exorbitant fees, over-reaching contracts, and, most importantly, an abysmal record with regard to effectiveness and outcomes.” While federal regulatory amendments intended to prohibit such practices as 30-40% advance fees prior to settling any debt were put in place in October 2010, the City Bar found that providers were getting around the prohibitions by taking advantage of loopholes. “In particular, the emergence of the ‘purported attorney model’ of debt settlement is especially troubling,” states the white paper. “After extensive study and analysis of the available record, the Committees conclude that debt settlement for a fee that is more than nominal is inherently flawed and cannot yield a net benefit to consumers. Among the white paper’s recommendations are: New York State should adopt a ban of debt settlement for a fee that is more than nominal. New York State’s Rules of Professional Conduct should be enforced against attorneys involved in debt settlement operations who purport to be acting as attorneys. To the extent attorneys engaged in these enterprises are not acting as attorneys, their conduct would fall outside the scope of the Rules of Professional Conduct and should therefore be included in the statutory scheme. Whatever the statutory framework for governing debt settlement services, New York State should provide for a private right of action for violations of the law and attorney’s fees. New York State consumer protection agencies should undertake statewide campaigns to educate consumers regarding the dangers of unscrupulous debt settlement providers and to inform them of other no-fee alternative options available to them, such as the “Protect Your Money” campaign and the Financial Empowerment Centers of the New York City Department of Consumers Affairs. The federal Consumer Financial Protection Bureau (“CFPB”) should make oversight of the debt settlement industry a priority and should require that debt settlement providers collect and report aggregate data. The CFPB should make that data public. The white paper can be read here: http://bit.ly/K3lqma