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State, bar officials monitor debt-management companies 

Use of local lawyers may be OK – or may be a sidestep around restrictions

By Sabine Vollmer, Correspondent

Ten months ago, the debt settlement industry suffered a double setback in North Carolina: A lawsuit in Wake County Superior Court challenged its advance fee practices, while the Federal Trade Commission issued a regulation that prohibited client enrollment over the phone.

The result? An ongoing game of cat-and-mouse, as debt settlement companies use local attorneys to test whether they can sidestep those limits.

The new FTC rule seems to have had a deterrent effect on the debt settlement industry, said Lynne Weaver, assistant N.C. attorney general in the consumer protection division. So far, the number of consumer complaints is down this year and most of the ones consumers filed are about deceptive practices that go back a year or more.

But some of the complaints suggest that a handful of debt relief companies, all based outside of the state, are using North Carolina attorneys in an effort to get around a state law that limits debt-adjusting activities, Weaver said. The attorneys are put on retainer and made available to clients. Meanwhile, regulators watch closely to make sure both the spirit and letter of the new FTC rule is observed.

“We don’t want to hinder the bona fide practice of law,” she said. “For us the key question is: If a North Carolina attorney is involved, is there a violation?”

The N.C. State Bar’s authorized practice committee is also looking into complaints it has received from consumers who signed up with debt relief companies or from lawyers some of these consumers hired afterwards, including bankruptcy attorneys, said David Johnson, the state bar’s deputy counsel.

“It is apparent to me, that the out-of-state debt relief companies are trying to get around the North Carolina debt adjusting statute and the state statute prohibiting the unauthorized practice of law,” said Johnson, who works closely with the authorized practice committee and the AG’s consumer protection division.

At issue is the relationship between consumers and attorneys who are licensed to practice in North Carolina and receive retainers from out-of-state debt relief companies.

To determine whether debt relief companies rent local attorneys for deceptive or unauthorized purposes, the AG’s consumer protection division and the state bar keep an eye on whether a consumer meets face-to-face with a local attorney and receives meaningful advice, and what happens to the money that a consumer pays the debt relief company.

“We want to know, are consumers getting legal service, or is it only a sales pitch,” Weaver said.

Debt relief companies, which promise to help consumers reduce and get rid of their debt without bankruptcy, have been around for decades. In 2006, North Carolina was one of the first states to significantly limit their activities. Other states and federal regulators followed as did enforcement actions, particularly since it became clear that Americans are struggling with heavy consumer debt loads.

U.S. consumer debt totals about $2.4 trillion, according to June figures released by the Federal Reserve. More than half of all U.S. households carry more than $3,000 in credit card debt alone.

Debt relief companies solicit clients through advertisements on the Internet and the radio, through Web sites, local telephone book listings, direct mail, e-mails and telemarketers.

According to the Durham-based Center for Responsible Lending, the companies generally require up-front and monthly payments that may exceed 20 percent of the debt. They urge their clients to stop paying creditors and instead pay them to build up funds for a debt settlement. But payments don’t ensure service and debt relief companies usually don’t refund money when they rendered no services.

Since 2004, different states have brought more than 100 enforcement actions against debt relief companies to stop unfair and deceptive trade practices, according to the Center for Responsible Lending.

More than 40 attorneys general supported the ban on phone enrollment adopted by the Federal Trade Commission in October against the vehement opposition of The Association of Settlement Companies. Formed in 2005, TASC represents about 200 debt relief companies.

“TASC members provide an immensely valuable service for many consumers in severe financial distress,” TASC said in a letter to the FTC.  “Critics of the debt settlement industry are clearly mistaken in any assertion that most debt settlement companies actually settle extremely few debts or that the use of debt settlement services harms the vast majority of consumers who sign up for debt settlement programs.”

Based on a survey, TASC estimated its members settled consumer debt of about $700 million in 2008 and about $550 million in the first half of 2009. About one-third of enrolled consumers had completed debt relief plans or were still saving to settle their debt last year, TASC suggested.

A lawsuit the state of North Carolina has pending against the Consumer Law Group in Wake County Superior Court suggests another story.

The Boca Raton, Fla.-based debt relief company allegedly solicited consumers by telling them they may be eligible for state or federal programs, such as the “State of North Carolina Credit Relief Program,” or “President Obama’s Financial Stimulus Plan,” which either didn’t exist or didn’t apply.

Enrollment agents allegedly told callers they would be represented by a law firm with a practicing attorney in North Carolina, who would provide legal protection against creditors and represent them in case they got sued.

From February 2008 to July 2010, the Consumer Law Group and affiliated companies collected about $34 million from consumers nationwide, according to the lawsuit. More than 2,500 North Carolinians contributed more than $2.5 million.

The Consumer Law Group allegedly drafted about $1.6 million in monthly payments directly from the bank accounts of 657 North Carolinians.  According to the lawsuit, about $800,000 of the monthly payments went to the Consumer Law Group and $202,000, or about 12 percent, was disbursed as debt settlement payments.

North Carolina consumers who enrolled in the company’s debt relief program allegedly received no periodic reports. Those who got sued by creditors allegedly received e-mailed pleadings they were supposed to file on their own behalf instead of representation by a local attorney.

“A classic advance fee scam,” the state’s lawsuit claims.

Out-of-state debt relief companies cannot claim they’re exempt from the state limitations on debt adjustment activities by simply getting local counsel under contract, the N.C. State Bar’s Johnson said.

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