New York AG Investigating Debt Relief Companies

The New York State Attorney General has announced an investigation into the debt settlement industry, issuing subpoenas to 14 debt settlement companies and one law firm with nationwide operations.

The attorney general's office says that such companies often prey upon consumers who are unable to keep up with debt payments in difficult economic times, charging large fees up-front without any guarantee they will be able to follow through on the services promised.

"Today, millions of hardworking Americans are finding themselves imprisoned by debt. In response, a rogue industry has stepped in, offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation," said Attorney General Andres Cuomo in announcing the initiative earlier this month. "Our mission is clear: to hold unscrupulous businesses accountable; to rein in a renegade industry; and to ensure that people are not victimized when faced with financial hardship."

Focus is on credit card debt

The investigation primarily focuses on companies that offer consumers help in obtaining reductions and settlements for credit card debt. However, similar complaints have been made against many companies that offer consumer assistance in renegotiating mortgage debt as well. The subpoenas include requests designed to uncover the companies' fee structures, how many people have benefitted from the companies' services, and what kind of relief the companies are actually providing.

The attorney general's office says that the debt settlement plans offered by these companies are often inherently flawed. Based on upon consumer complaints, it says it appears that many consumers are being misled regarding the nature of the services offered by these companies. It says many companies have falsely claimed they can help consumers reduce their credit card debt by as much as 75 percent, while not following through on services promised despite collecting significant fees up front.

Debt counselor welcomes investigation

At least one of the companies subpoenaed said they are not concerned about the investigation.

"Our doors are wide open. We have nothing to hide," Alex Viecco, vice president and co-founder of California-based New Era Debt Solutions, told MarketWatch news service. "I'm quite pleased to have our records subpoenaed." Viecco said his company collects a fee of only 3 percent of the debt owed up front, followed by another 15 percent payment after the debt is resolved.

Consumers told to stop payments

Debt relief companies often tell customers to stop making payments on unsecured debt, such as credit cards, in an effort to leverage the company into agreeing to settle for a portion of the debt owed. However, this may take years, and consumers are still subjected to collection efforts and possible lawsuits in the meantime. Also, stopping payments on any kind of consumer debt will have a extremely negative effect on a person's credit rating.

The attorney general's office says consumers may benefit more from working directly with their creditors, seeking credit counseling, or consulting an attorney about filing for bankruptcy.

Similar complaints on mortgage relief

Renegotiating a mortgage debt is different from credit card debt in that the former is secured by the mortgaged property, giving the consumer less leverage against the creditor. However, the mortgage debt relief industry has also had numerous complaints about companies that will charge large up-front with no guarantee of results.

Many experts advise that consumers facing mortgage or other debt problems first speak with an attorney or nonprofit debt counselor before engaging the services of a negotiating firm, and to be leery of companies that insist on large upfront payments before services are rendered.