[Senate Hearing 111-1017]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 111-1017
 
                     THE DEBT SETTLEMENT INDUSTRY: 
                       THE CONSUMER'S EXPERIENCE

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 22, 2010

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri           JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota             DAVID VITTER, Louisiana
TOM UDALL, New Mexico                SAM BROWNBACK, Kansas
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                   Bruce H. Andrews, General Counsel
                 Ann Begeman, Republican Staff Director
             Brian M. Hendricks, Republican General Counsel
                  Nick Rossi, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 22, 2010...................................     1
Statement of Senator Rockefeller.................................     1
Statement of Senator McCaskill...................................    78

                               Witnesses

Gregory D. Kutz, Managing Director, Forensic Audits and Special 
  Investigations, U.S. Government Accountability Office..........     3
    Prepared statement...........................................     6
Holly A. Haas, Consumer..........................................    28
    Prepared statement...........................................    30
Philip A. Lehman, Assistant Attorney General, North Carolina 
  Department of Justice..........................................    51
    Prepared statement...........................................    54
John Ansbach, Legislative Director, United States Organizations 
  of Bankruptcy Alternatives.....................................    62
    Prepared statement...........................................    66
Hon. Julie Brill, Commissioner, Federal Trade Commission.........    68
    Prepared statement...........................................    70

                                Appendix

Hon. Kay Bailey Hutchison, U.S. Senator from Texas, prepared 
  statement......................................................    91
Hon. Mark Pryor, U.S. Senator from Arkansas, prepared statement..    92
John Mark Spaulding, prepared statement..........................    92
Letter, dated April 20, 2010, to Hon. John D. Rockefeller IV and 
  Hon. Kay Bailey Hutchison from Jean Noonan, Counsel, American 
  Coalition of Companies Organized to Reduce Debt (ACCORD).......    93
Letter, dated October 9, 2009, to the Federal Trade Commission, 
  Office of the Secretary, from Gail Hillebrand, Financial 
  Services Campaign Manager, Consumers Union.....................    95
Response to written questions submitted by Hon. Mark Pryor to:
    Gregory D. Kutz..............................................    99
    William and Holly Haas.......................................   100
    Philip A. Lehman.............................................   101
    John Ansbach.................................................   102
Response to written question submitted by Hon. Kay Bailey 
  Hutchison to John Ansbach......................................   104
Response to written questions submitted by Hon. Mark Pryor to 
  Hon. Julie Brill...............................................   105
Letter, dated October 16, 2009, to Donald S. Clark, Secretary, 
  Federal Trade Commission from Susan Grant, Director of Consumer 
  Protection, Consumer Federation of America on Behalf of 
  Consumer Federation of America, Consumers Union, Consumer 
  Action, the National Consumer Law Center on behalf of its low-
  income clients, the Center for Responsible Lending, the 
  National Association of Consumer Advocates, the National 
  Consumers League, U.S. PIRG, the Privacy Rights Clearinghouse, 
  the Arizona Consumers Council, the Chicago Consumer Coalition, 
  the Consumer Assistance Council, the Community Reinvestment 
  Association of North Carolina, the Consumer Federation of the 
  Southeast, Grass Roots Organizing, Jacksonville Area Legal Aid, 
  Inc., the Maryland Consumer Rights Coalition, Mid-Minnesota 
  Legal Assistance, and the Virginia Citizens Consumer Council...   108
Article, dated August 6, 2009 entitled ``Economic Factors and the 
  Debt Management Industry'' submitted by Richard A. Briesch, 
  Ph.D., Associate Professor, Cox School of Business, Southern 
  Methodist University...........................................   121


                     THE DEBT SETTLEMENT INDUSTRY: 
                       THE CONSUMER'S EXPERIENCE

                              ----------                              


                        THURSDAY, APRIL 22, 2010

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:37 p.m. in room 
SR-253, Russell Senate Office Building, Hon. John D. 
Rockefeller IV, Chairman of the Committee, presiding.

       OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    The Chairman. We will begin this hearing.
    And others are coming. I've been there, you know. I was 
late a lot.
    All right. This is important. This is very important. 
Millions of American families have suffered serious financial 
setbacks during the economic turndown, which promises to go on 
for a while. Sometimes it's because somebody in the family has 
lost a job. Sometimes it's because a family member has gotten 
sick and medical bills are piling up. As we all know, even 
people who think they have good health insurance end up owing 
thousands of dollars out of their own pockets, and that's 
another hearing and another subject.
    For thousands of Americans and West Virginia families, our 
economic downturn has meant falling farther and farther behind. 
It also means struggling every month to pay bills. And it means 
thinking seriously about what happens if they can't make even 
their minimum monthly payments to their creditors.
    One person who found himself in this situation was Mark 
Spaulding, who lives in South Charleston, West Virginia. And 
between the credit card bills and the hospital bills, he and 
his wife owed more than $23,000. That is not unique. He wasn't 
behind on these bills, yet he was worried. He had a job, and he 
believed in paying what he owed. But, he wasn't sure how he was 
going to pay it all off. So, he looked for help. And he found a 
California company called U.S. Debt Settlement that looked 
reputable. That's--it's hard to see from South Charleston to 
California, so he was doing this off the Internet, and had to 
make that judgment.
    He called a toll-free number. He talked to a sales 
representative named Holly Slater. She told him that U.S. Debt 
Settlement could act as his financial representative and could 
negotiate with his creditors to cut his debt by as much as 50 
percent.
    William and Holly Haas, of Concord, New Hampshire, had a 
similar experience with a debt settlement company called 
Consumer Credit Counseling of America. Notice the--sort of the 
integrity of these names. And I'm very pleased that they're 
here with us. And they're going to have something to say.
    What Mr. Spaulding and the Haas family has--and thousands 
of other Americans have learned the hard way, is that these 
debt settlement companies are not what they claim to be. And 
that is what we are talking about today. They promise to reduce 
debts by 40, 50, or even 60 percent, and then collect thousands 
of dollars in fees up front. They promise to settle the debts, 
but collect up front. When you go into a candy store, you buy a 
Baby Ruth candy bar, you get the candy bar, and then you pay 
the fee. But, it's sort of reversed here.
    Today, we will learn that these companies keep the fees, 
but don't keep their promises. In reality, signing up to work 
with these families and these companies usually makes 
struggling consumers financially worse. And that's where that 
is. They fall farther behind on their debts, they see their 
credit scores plunge. And they get sued by their creditors.
    In written testimony, Mr. Spaulding says he followed U.S. 
Debt Settlement's advice for 14 months and paid them more than 
$2,400 in fees--up front. Today he owes, in fact, 40 percent 
more than he did when he began on his debts, and his credit 
score is ruined. He has two court judgments against him, and he 
has been advised he should think about declaring bankruptcy. 
This is outrageous. It is appalling beyond words.
    So, these debt settlement companies are kicking people when 
they are down. That's the way I look at it. I come from West 
Virginia. We see that a lot. And even though they take 
patriotic names, like U.S. Debt Settlement or Consumer Credit 
Counseling of America, and have all kinds of emblems, which I 
will show you in a bit, their actions are, in fact, profoundly 
un-American. This is serious, and it is a growing problem, and 
I'm pleased to report that our States' attorneys general and 
the Federal Trade Commission are fighting these fraudulent 
companies.
    We're going to hear testimony about these companies from 
newly sworn-in FTC Commissioner Julie Brill and from Phil 
Lehman--Have I got that right?--who is Assistant Attorney 
General from North Carolina. And we thank you for coming.
    Much of this committee's work, and my attention as chairman 
over this last year, has focused on consumer protection. It's 
what everybody else gets angry about, but doesn't do anything 
about. So, I've decided that we're going to do something about 
it in this committee, and we are. And the terrible part is that 
it's not really very hard to ferret out and that it's so 
rampant. And that's so wrong.
    We have the authority to conduct independent investigations 
in this committee. And last October, I used this authority to 
ask the GAO Special Investigations Office to conduct, in fact, 
a covert investigation on this problem and the matter of debt 
settlement as an industry. I told them I wanted to know what 
really happens to a consumer who calls one of these 800-
numbers. We will hear the results of that investigation right 
here, today. And I think members of the Committee, should they 
show up, and the American public will find them pretty 
disturbing, alarming, and depressing.
    So, I want to thank today's witnesses. I look forward to 
your testimony as much as I look forward to some of our members 
showing up.
    And we will start with you, sir.

        STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR,

          FORENSIC AUDITS AND SPECIAL INVESTIGATIONS,

             U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Kutz. Mr. Chairman, thank you for the opportunity to 
discuss the debt settlement industry.
    Today's testimony highlights the results of our 
investigation into fraudulent and deceptive marketing and 
business practices.
    My testimony has two parts. First, I will discuss the 
results of our investigation, and then I will discuss the 
results of other investigations.
    First, as you mentioned, posing as fictitious consumers 
with significant credit card debt, we contacted 20 debt 
settlement companies. We attempted to pick companies that, on 
the surface, ranged from credible to egregious in their 
marketing. We did not enter into any agreements with these 
companies. The vast majority of companies that we've contacted 
provided fraudulent, deceptive, and otherwise questionable 
information to our fictitious consumers.
    The monitor shows key themes that we found, including 
advance fees, exaggerated claims of success, telling consumers 
to stop paying their bills, and linking debt settlement to 
Federal programs.
    The basic program setup was for consumers to make a monthly 
payment into a bank account. Once that account had accumulated 
enough funds, the companies promised to settle debt with 
creditors for pennies on the dollar. For 17 companies, advance 
fees were collected from consumers before any debt was actually 
settled. Companies told us that their service fees ranged from 
10 to 18 percent of the outstanding debt. These fees were 
usually taken directly from the bank account during the first 
12 months of what were typically multiyear programs. In the 
most egregious cases, 100 percent of the consumer's first 3 or 
4 monthly payments were used for fees.
    Other fees charged by these companies included monthly 
maintenance, trust, and bank fees. Exaggerated claims----
    The Chairman. If I could interrupt, for a moment.
    Mr. Kutz. Yes, sir.
    The Chairman. I failed to identify you.
    Mr. Kutz. That's fine.
    The Chairman. No, it isn't.
    [Laughter.]
    Mr. Kutz. I'm undercover at this hearing, so--just kidding.
    [Laughter.]
    The Chairman. I know. I know. But, the folks listening in, 
et cetera, or the folks behind you, don't know. And that's my 
fault, and I apologize.
    You are, in fact, the Managing Director, Forensic Audits 
and Special Investigations, U.S. Government Accountability 
Office, GAO.
    Please proceed.
    Mr. Kutz. Thank you. Now everyone knows who I am.
    The Chairman. I've blown your cover, yes.
    [Laughter.]
    Mr. Kutz. You've blown my cover. All right, I can't use 
that one again.
    Exaggerated claims of success provided our fictitious 
consumers with false hope of program completion. Examples 
included claims that 85 percent, 93 percent, and even 100 
percent of clients successfully completed these programs. The 
reality, according to Federal and State investigations is a 
success rate of less than 10 percent.
    One industry association represented that their members 
have a 34 percent success rate. Whether single digits or 34 
percent, this low success rate shows the negative impact of 
advance fees on financially distressed consumers.
    We also found that 17 of these 20 companies advised our 
fictitious consumers to stop paying their creditors. Although 
industry associations say their members don't do this, 9 of the 
17 were, in fact, their members. I have no doubt that for these 
programs to work, consumers must stop paying their bills. 
However, our fictitious consumers were told to stop paying 
their bills even when they were current, which would have a 
significant negative impact on their credit scores.
    Several companies advertised that their debt settlement 
programs were part of a Federal Government program. My favorite 
is the company that advertised that its program was, and I 
quote, ``a national debt-relief stimulus plan,'' end of quote. 
These companies made it appear as if government agencies and 
stimulus dollars were linked to their programs. Although I find 
this to be ridiculous, and I'm sure you do, too, many consumers 
likely fall prey to these fraudulent marketing tactics. At the 
end of my presentation, I will play excerpts from several of 
these undercover calls.
    Although the vast majority of companies provided fraudulent 
and deceptive information, several did provide sound advice. 
For example, one company told us to take care of our late 
mortgage payments before worrying about our delinquent credit 
cards. In another case, our fictitious consumer was told that 
if we could make our monthly payments, then perhaps debt 
settlement was not a good solution.
    Moving on to my second point, the experience of our fake 
consumers is similar to many real consumers, like the ones 
sitting to my left. Cases from 12 Federal and State agencies 
reveal allegations of fraudulent and deceptive practices 
involving over 200,000 consumers across the country. This 
information is taken from Federal and State, open and closed, 
civil and criminal cases.
    In addition--and you'll hear from FTC--they are taking 
actions to enhance consumer protection, including a proposed 
ban on the type of advanced fees that I just described.
    The Better Business Bureau recently designated debt 
settlement as an inherently problematic type of business. Other 
businesses with this designation include payday loan centers 
and wealth-building seminars. I'm sure you understand, that's 
not good company.
    In conclusion, I can't tell you that all companies in this 
industry are bad actors. However, it wasn't very hard for us to 
find the rotten apples of this basket. My advice to consumers, 
Senator, is, buyer beware.
    As I mentioned, I'm now going to play for you some of the 
undercover calls we made to debt settlement companies. You will 
see the transcription of the conversations on the monitors as 
you listen.
    [Video presentation.]

    Transcript of Undercover GAO Calls to Debt Settlement Companies
    Telling consumers to stop paving their creditors. (Industry trade 
groups say their members do not do this.):

    Clip 1: Call from GAO to A New Beginning Financial (TASC Member)
    Debt Settlement Company: You don't actually have to be delinquent 
to be in our, into our program, but once you do enter the program you 
don't make credit, you don't make your payments to the creditors.
    Clip 2: Call from GAO to Freedomdebt.com (USOBA)
    Debt Settlement Company: Once you enroll in the program, you will 
no longer make any of your credit card payments.
    Fictitious Consumer: OK, so . . .
    Debt Settlement Company: That's correct.
    Fictitious Consumer: So then, what's, what's gonna happen with my, 
uh, creditors? I mean . . .
    Debt Settlement Company: They're, they, they're, uh, they're . . . 
you're not gonna pay `em!
    Fictitious Consumer: I shouldn't, I shouldn't pay a few of these 
cards at all?
    Debt Settlement Company: You're not. . .when you are in our program 
you will not pay any of your creditors anymore . . .
    Fictitious Consumer: [cross-chatter]
    Debt Settlement Company: . . . throughout the whole program.
    Clip 3: Call from GAO to Credit Solutions of America
    Debt Settlement Company: I'm, I'm saying I don't, don't tell 
anybody not to pay their bills. I say 100 percent of the clients who 
have been successful have stopped paying their bills.
    Fictitious Consumer: OK. Alright . . . right . . . so now, so . . . 
so now I'm caught between a rock and a hard place. Do I put money away 
in my savings account or do I use that money to pay my bills, if I'm in 
your program?
    Debt Settlement Company: If you're in our program, umm, put that 
money into your savings account.
    Fictitious Consumer: OK.

    Claims of high success rates: (Federal and state investigators have 
generally found single-digit success rates.)

    Clip 4: Call from GAO to Web Credit Advisors via Free Debt 
Settlement Now (USOBA Member)
    Debt Settlement Company: OK, great. So, it's important for you to 
know we have thousands of clients. We're also an accredited business 
with the Better Business Bureau with an A rating. Umm, and, uh, we have 
zero unresolved customer complaints. And that's because we do exactly 
what we say. And we help 100 percent of the people who enter this 
program eliminate their debt, uh, in less than 3 years.
    Clip 5: Call from GAO to ProCorp Debt Solutions (TASC Member) via 
Free Debt Settlement Now
    Debt Settlement Company: Now, our fallout ratio in the program is 
probably the lowest in the country. Fallout ratio meaning people that 
sign up and then don't complete the program.
    (cross-chatter)
    Fictitious Consumer: Do you know what it is, roughly? Debt 
Settlement Company: Yes, it's less than 7 percent. Fictitious Consumer: 
Wow, that's tremendous.
    Debt Settlement Company: It's my job to know those numbers. It's my 
job to know those numbers.

    Fraudulent claims of links to government programs:

    Clip 6: Call from GAO to Freedom Fidelity Management (CA) via The 
Bailout Group
    Fictitious Consumer: With the government the way it is, does this 
government approved thing, does that have anything to do with the 
stimulus package?
    Debt Settlement Company: No, no. It's just, it's just government 
approved. They allow for us to do this.
    Fictitious Consumer: OK.
    Debt Settlement Company: Um, you know the banks received, you know, 
bailout money last year--I'm sure you saw it on the news. There has to 
be some type of assistance for people on a consumer level also.

    Other Fraudulent, Deceptive or Questionable Representations:

    Clip 7: Call from GAO to ProCorp Debt Solutions (TASC Member) via 
Free Debt Settlement Now
    Debt Settlement Company: And there are actually 12,000 companies in 
the U.S. that do what we do. Only 200 of them are licensed and 
regulated. Uh, they're regulated by TASC, which is The Association of 
Settlement Companies. . . . They are the regulating body for this 
industry.
    Fictitious Consumer: So TASC . . .
    Debt Settlement Company: They're like the SEC for stock traders. T-
A-S-C.
    Fictitious Consumer: So, for you all, that would be kind of like, 
in your industry, the Good Housekeeping Seal of Approval?
    Debt Settlement Company: Correct. That's exactly what the story is.
    Clip 8: Call from GAO to ProCorp Debt Solutions (TASC Member) via 
Free Debt Settlement Now
    Debt Settlement Company: The companies that operate like ours are 
the ones that are safe, stay around forever. We've never been inquired 
on by the Attorney General, ever. You find me a debt settlement company 
that can say that, and I'll move over there and work for them. Every 
debt settlement company that I've ever come across has had 
investigations or inquiries by an attorney, the Attorney General for 
their state. The Attorney General doesn't even, doesn't even look our 
way.

    Mr. Kutz. Mr. Chairman, I applaud your efforts today to 
protect consumers from the kinds of fraud and abuse we're 
talking about here.
    That ends my statement, and I look forward to your 
questions.
    [The prepared statement of Mr. Kutz follows:]

  Prepared Statement of Gregory D. Kutz, Managing Director, Forensic 
   Audits and Special Investigations, U.S. Government Accountability 
                                 Office

    Mr. Chairman and members of the Committee:
    Thank you for the opportunity to discuss our investigation into 
fraudulent, abusive, and deceptive practices in the debt settlement 
industry. As historic levels of consumer debt have dramatically 
increased the demand for debt relief services, a growing number of for-
profit companies have appeared, offering to settle consumers' credit 
card and other unsecured debt for a fee as an alternative to 
bankruptcy.\1\ The companies say they will negotiate with creditors to 
accept a lump sum settlement less than the amount owed--purported to be 
as low as pennies on the dollar in many cases. In addition, these 
companies often say their programs can result in lower monthly payments 
for consumers than what they had been paying their creditors, and that 
their programs will help consumers get out of debt sooner than going 
through bankruptcy or making only minimum payments on their credit 
cards. They commonly use radio, television, and Internet advertising to 
solicit consumers. The marketing claims appeal to consumers who may be 
vulnerable, given the stress of their financial situations.
---------------------------------------------------------------------------
    \1\ Unsecured debts are those debts for which there is no 
collateral, such as most consumer credit card debt.
---------------------------------------------------------------------------
    Some consumers who have hired these companies have complained that 
they did not obtain relief from their debts and ended up in worse 
financial circumstances. For example, according to a sworn statement 
given to state attorneys, a 75-year-old New York woman ended up paying 
more than $5,100 to a company to settle only $3,900 of debt on one 
account. The company failed to settle a second one, which she 
ultimately paid off for about $1,000 more than what she originally 
owed. At the time she signed up for the debt settlement program, she 
had been a widow for several years and was working as a pharmacy clerk 
to help pay her bills and mortgage. She stated that she often neglected 
her own needs and accrued more debt trying to help her adult daughter 
care for two children and a sick spouse. She also stated that she was 
desperate for help and was easily sold on entering a debt settlement 
program through an unsolicited telephone call and an offer to reduce 
her debts by 24 to 40 percent. Even though the debt settlement company 
cost her more than she originally owed, it still counted her as a 
success story.
    Federal and state agencies have made allegations that some debt 
settlement companies engage in fraudulent, abusive, and deceptive 
practices. You asked us to conduct an investigation of these issues. As 
a result, we attempted to: (1) determine through covert testing whether 
these allegations are accurate; and, if so, (2) determine whether these 
allegations are widespread, citing specific closed cases. To achieve 
these objectives, we conducted covert testing by calling 20 companies 
while posing as fictitious consumers with large amounts of debt; made 
overt, unannounced site visits to several companies called; conducted 
interviews with industry stakeholders, such as industry trade 
associations and the Better Business Bureau (BBB); and reviewed 
information on Federal and state legal actions against debt settlement 
companies and consumer complaints. We did not actually use the services 
of any of the companies we called.
    For our first objective, we identified debt settlement companies by 
searching online using search terms likely to be used by actual 
consumers, and by observing television, radio, and newspaper 
advertisements. We selected companies from across the Nation to call as 
part of our covert testing by using several criteria, such as: (1) 
types of marketing claims or pitches, such as refund offers, service 
guarantees, or targeting of specific groups of consumers; (2) presence, 
if any, of consumer complaints through BBB and other resources; (3) 
represented size of businesses, to include both small and large 
companies; (4) availability of consumer-friendly information on 
companies' websites, such as financial education resources, comparisons 
to other types of debt relief, or advice on handling credit card debt; 
(5) membership in various industry trade organizations, which requires 
adherence to specified standards of conduct; and (6) claims of 
advertising presence on television or radio. In one case, we identified 
a company through a spam e-mail message received by one of our staff 
members, which provided a link to the company's website.\2\ The 20 
cases that we selected incorporated a range of debt settlement 
companies, including some that appeared to make egregious claims and 
others that appeared more reputable. We found that some of the 20 
companies we called are marketing companies that refer potential 
clients to other--sometimes multiple--affiliated companies. In most 
cases, we were unable to determine the exact business relationship 
between these entities. For the purposes of this testimony, our 20 
cases represent the original company we called, plus any related 
marketers and any other affiliated companies with which we spoke. In 
addition, we called some companies more than once, depending on the 
circumstances. The findings for these 20 cases cannot be projected to 
all debt settlement companies. For our second objective, we identified 
allegations against debt settlement companies from review of closed and 
open civil and criminal investigations pursued by Federal and state 
enforcement agencies over the last decade. We did not attempt to verify 
the facts regarding all of the allegations and complaints we reviewed. 
We also identified five closed civil and criminal cases where courts 
found the debt settlement companies liable for their actions and 
interviewed affected consumers.
---------------------------------------------------------------------------
    \2\ Spam is unsolicited ``junk'' e-mail that usually includes 
advertising for some product.
---------------------------------------------------------------------------
    We briefed Federal Trade Commission (FTC) officials on the results 
of our investigation. In addition, we referred cases of fraudulent, 
deceptive, abusive or questionable information provided by the 20 debt 
settlement companies we called to FTC as appropriate. We conducted our 
investigation from November 2009 through April 2010 in accordance with 
standards prescribed by the Council of the Inspectors General on 
Integrity and Efficiency.

Background
    For-profit debt settlement emerged as a business model as other, 
decades-old forms of consumer debt relief came under increased 
regulation. Traditionally, consumers with large amounts of debt turned 
to nonprofit credit counseling agencies (CCA) for debt relief. CCAs 
work with consumers and creditors to negotiate debt management plans 
(DMP), which enable consumers to pay back unsecured debts to their 
creditors in full, but under terms that make it easier for them to pay 
off the debts--such as reduced interest rates or elimination of late 
payment fees. In addition, CCAs often provide consumers with financial 
education and assist them in developing budgets. In order to qualify 
for a DMP, consumers must prove they have sufficient income to pay back 
the full balances owed to creditors under the terms of the potential 
DMP. As part of a DMP, CCAs contact each of a consumer's creditors to 
obtain information about what repayment options the creditors may be 
willing to offer to the consumer. The CCA then creates the final DMP 
and a repayment schedule, with payments typically spread over 3 to 5 
years. Throughout the length of the DMP, the CCA distributes funds to 
each of a consumer's creditors after the consumer makes each monthly 
payment to the CCA. Nonprofit CCAs typically receive funding from 
consumers and from creditors.
    Many for-profit CCAs emerged as the level of consumer debt rose 
over the last decade, leading to new consumer protection concerns. FTC 
and state attorneys general took legal action against unscrupulous CCAs 
that engaged in deceptive, abusive, and unfair practices. For example, 
some CCAs charged excessive fees, abused their nonprofit status, 
misrepresented the benefits and likelihood of success of their 
programs, and committed other deceptive and unfair acts. The Internal 
Revenue Service (IRS) also undertook a broad examination effort of CCAs 
for compliance with the Internal Revenue Code and revoked or terminated 
the Federal tax-exempt status of some agencies. As Federal and state 
actions cracked down on these consumer protection abuses, a growing 
number of consumers became unable to afford traditional DMPs. As a 
result, many companies began offering for-profit debt settlement 
services for consumers.
    Debt settlement companies offer to negotiate with consumers' 
creditors to accept lump sum settlements for less than the full balance 
on the consumers' accounts. The process typically requires consumers to 
make monthly payments to a bank account from which a debt settlement 
company will withdraw funds to cover its fees. Some companies require 
consumers to set up accounts at specific banks, while others allow 
consumers to use their existing bank accounts. These monthly payments 
must accumulate until the consumer has saved enough money for the debt 
settlement company to attempt to negotiate with the consumer's 
creditors for a reduced balance settlement.\3\
---------------------------------------------------------------------------
    \3\ Some creditors may sell a consumer's debt to a collection 
agency after the consumer misses payments for a given period of time--
typically 6 to 12 months. The collection agency will then attempt to 
collect payments from the consumer. In such cases, debt settlement 
companies will generally negotiate with the collection agency seeking 
the consumer's money.
---------------------------------------------------------------------------
    Debt settlement companies typically charge a fee for their services 
and require payments either at the beginning of the program as an 
advance fee or after settlement as a contingent fee. Some companies 
structure the payment of advance fees so that they collect a large 
portion of them--as high as 40 percent--within the first few months 
regardless of whether any settlements have been obtained or any contact 
has been made with the consumer's creditors. Others collect fees 
throughout the first half of the enrollment period in advance of a 
settlement. Companies that charge a contingent, or ``back-end,'' fee 
generally base it on a certain percentage of any settlement they obtain 
for consumers. They sometimes charge a small, additional fee every 
month while consumers are attempting to save funds for settlements. In 
addition, some debt settlement companies handle only one part of the 
overall settlement process, such as the front-end marketing or the 
negotiation with creditors, while other debt settlement companies 
conduct every part of the process themselves.
    Currently, there has been only limited Federal action taken against 
debt settlement companies. Since 2001, FTC has brought at least seven 
lawsuits against debt settlement companies for engaging in unfair or 
deceptive marketing.\4\ In August 2009, FTC issued a Notice of Proposed 
Rulemaking to amend the Telemarketing Sales Rule (TSR) to enhance 
consumer protections related to the sale of debt relief services,\5\ 
including debt settlement services.\6\ In its notice, FTC offers 
multiple criticisms of the debt settlement industry and states that its 
``concerns begin with the marketing and advertising of the services, 
but also extend to whether such plans are fundamentally sound for 
consumers.'' The proposed rule would amend the TSR to do the following, 
among other things:
---------------------------------------------------------------------------
    \4\ FTC's regulatory authority related to false advertising is 
contained in section 5(a) of the Federal Trade Commission Act (15 
U.S.C.  45(a)), which makes unlawful both ``unfair'' and ``deceptive'' 
acts or practices that affect interstate commerce.
    \5\ The notice primarily discusses three categories of debt relief 
services--credit counseling, debt settlement, and debt negotiation. 
While some consider debt negotiation to be another term for debt 
settlement, FTC refers to debt negotiation as a separate type of debt 
relief service. In this context, debt negotiation companies are those 
that offer to obtain interest rate reductions and other concessions 
from creditors on behalf of consumers, but do not claim to obtain full 
balance payment plans or lump sum settlements for less than the full 
balance. See 74 Fed. Reg. 41988, 41997 (Aug. 19, 2009).
    \6\ 74 Fed. Reg. 41988 (Aug. 19, 2009).

   prohibit companies from charging fees until they have 
        provided debt relief services to consumers;\7\
---------------------------------------------------------------------------
    \7\ Under the TSR, advance fees are currently banned for several 
other industries, including credit repair services and advance fee 
loans.

   require companies to disclose certain information about the 
        debt relief services they offer, including how long it will 
        take for consumers to obtain debt relief and how much the 
---------------------------------------------------------------------------
        services will cost; and,

   prohibit specific misrepresentations about material aspects 
        of debt relief services, including success rates and whether a 
        debt relief company is a nonprofit.

    In its notice, FTC demonstrates that the requesting or receiving 
payment of advance fees before debts are settled meets its criteria for 
unfairness, and therefore designates advance fees for debt settlement 
services as an abusive practice. FTC considers advance fees an abusive 
practice due to the following:

   the substantial injury to consumers caused by advance fees, 
        based on the low likelihood of success for debt settlement 
        programs and the significant burden on consumers paying advance 
        fees--especially fees charged at the front end of a debt 
        settlement program, which FTC states ultimately impede the goal 
        of relieving consumers' debts;

   the injury to consumers caused by advance fees outweighing 
        any countervailing benefits; and,

   the business practices prevalent among debt settlement 
        companies making the injury to consumers reasonably 
        unavoidable, such as representations in advertisements 
        obscuring the generally low success rates of debt settlement. 
        FTC also states in its notice that many consumers entering debt 
        settlement programs are counseled to stop making payments to 
        their creditors in order to facilitate settlements, which has a 
        harmful effect on these consumers' credit scores.

    Given the absence of specific Federal law, some states have taken 
the initiative and enacted their own legislation regulating the debt 
settlement industry. The regulations vary widely from state to state, 
however. For example, Virginia's detailed legal framework requires debt 
settlement companies to apply and pay for an operating license, to 
enter into written agreements with potential customers that describe 
all services to be performed and provide the customer a right to cancel 
at any time, and to charge only a maximum $75 set-up fee and $60 
monthly fee, among other restrictions.\8\ Other states, such as 
Arkansas \9\ and Wyoming,\10\ have chosen to simply ban most types of 
for-profit debt settlement companies from operating in their states at 
all. Individuals who violate those states' bans are guilty of a 
misdemeanor and could face up to 1 year imprisonment in Arkansas and up 
to 6 months imprisonment in Wyoming. On the other hand, New York and 
Oklahoma, among others, have not yet enacted any laws specifically 
targeting this industry, thus leaving the public to rely on generally 
applicable consumer protection laws.
---------------------------------------------------------------------------
    \8\ Va. Code Ann.  6.1-363.2-.26.
    \9\ Ark. Code Ann.  5-63-301 to -305.
    \10\ Wyo. Stat. Ann.  33-14-101 to -103.
---------------------------------------------------------------------------
Covert Testing Shows That Some Debt Settlement Companies Engage in 
        Fraudulent, Abusive, and Deceptive Practices
    Our investigation found that some debt settlement companies engage 
in fraudulent, deceptive, and abusive practices that pose a risk to 
consumers already in difficult financial situations. The debt 
settlement companies and affiliates we called while posing as 
fictitious consumers with large amounts of debt generally follow a 
business model that calls for advance fees and stopping payments to 
creditors--practices that have been identified as abusive and harmful. 
While we determined that some companies gave consumers sound advice, 
most of those we contacted provided information that was deceptive, 
abusive, or, in some cases, fraudulent. Representatives of several 
companies claimed that their programs had unusually high success rates, 
made guarantees about the extent to which they could reduce our debts, 
or offered other information that we found to be fraudulent, deceptive, 
or otherwise questionable. We did not actually use the services of any 
of the companies we called. A link to selected audio clips from these 
calls is available at: http://www.gao.gov/products/GAO-10-593T.

Advance Fees
    The debt settlement companies we called generally represented that 
they would collect fees before settling our debts--a practice FTC has 
proposed banning due to the harm caused to consumers. We were able to 
obtain information about fee structures from 18 of the 20 companies we 
called while posing as fictitious consumers with large amounts of 
debt,\11\ and found that their fee structures generally recall the 
concerns expressed by FTC. Specifically, we found that 17 of the 20 
companies represented that they collected advance fees before debts 
were settled. Company representatives told us that the advance fees are 
calculated based on a percentage of the consumer's debts to be settled, 
citing figures that ranged from 10 to 18 percent. Moreover, 
representatives from several companies told us that our monthly 
payments would go entirely to fees for up to 4 months before any money 
would be reserved for settlements with our creditors. Only 1 of the 20 
companies we called represented that it followed a contingent fee model 
based on a percentage of the reduction of debt it says it obtains for 
consumers. Representatives from this company said a fee equal to 35 
percent of each client's reduced debt was charged. Some companies also 
represented that they assessed monthly maintenance and other additional 
fees. One of the 17 advance-fee companies also revealed that it charged 
a contingent fee after each debt is settled based on a percentage of 
the debt reduction.
---------------------------------------------------------------------------
    \11\ Of the two companies for which we were unable to obtain fee 
information, one company presented an audio recording of general 
information about its program, and one company's representative told us 
we did not have enough debt to qualify for its program.
---------------------------------------------------------------------------
    FTC has banned advance fees in several industries, such as credit 
repair, based on analyses that determined these practices to be unfair 
because sellers often do not provide the services for which they 
charge. The agency has proposed a similar ban for debt settlement, 
stating that the advance fees cause substantial injury to consumers. 
FTC justified this stance toward debt settlement, in part, based on the 
following findings: advance fees induce financially strapped consumers 
to stop making payments to their creditors; and consumers are unlikely 
to succeed in debt settlement programs, given evidence from Federal and 
state agencies that generally shows single-digit success rates.\12\ 
Moreover, FTC stated concerns in its notice that advance fees for debt 
settlement may actually impede the process of saving money to settle 
debts, especially substantial fees collected at the beginning of a 
program. This business model may be especially risky for consumers who 
are already in financially stressed conditions, given that interest, 
late fees, and penalties often continue to accrue on the consumers' 
accounts as they work to save money toward settlements. In addition, 
consumers with already limited financial resources may be unable to 
direct adequate funds toward saving for settlements if their resources 
are being devoted to paying fees.
---------------------------------------------------------------------------
    \12\ Federal and state agencies have defined success as consumers 
being able to obtain the results that the debt settlement companies 
promised them.
---------------------------------------------------------------------------
    We asked representatives of some companies what services we would 
receive as we paid advance fees while saving money for settlements. 
These representatives generally stated that our advance fees would pay 
for financial education, updates from attorneys, and communications 
with our creditors--such as cease and desist letters, to attempt to 
prevent harassing telephone calls. One representative, however, was 
unable to provide an explanation of what services we would receive for 
our advance fees beyond the fact that her company's attorneys would 
``look at'' our accounts every month. Several companies we called had 
basic financial education resources on their websites or provided links 
to such resources by e-mail. Industry representatives have stated that 
advance fees are needed to cover essential operating costs, such as 
overhead and providing the types of services mentioned above for their 
existing clients. However, FTC found that marketing and acquiring new 
customers make up a large portion of the operating costs for debt 
settlement companies. We were unable to verify whether any companies we 
called provide ongoing services for clients they enroll in their 
programs, given that we did not enter into business relationships with 
them.

Directing Consumers to Stop Paying Creditors
    We also found that the companies we called generally follow a 
business model that poses a risk to consumers by encouraging them to 
stop making payments to their creditors, a practice that harms 
consumers because of the damage it typically causes to their credit 
scores. Representatives of nearly all the companies we called--17 out 
of 20--advised us to stop paying our creditors, by either telling us 
that we would have to stop making payments upon entering their programs 
or by informing us that stopping payments was necessary for their 
programs to work, even for accounts on which we said we were still 
current. The following quotes demonstrate some of the statements made 
by representatives of the companies we called regarding our payments to 
creditors:

   ``You stop paying, uh, those payments out to those 
        creditors. The only thing you're going to have to worry about 
        is this payment here [to company].''

   ``One-hundred percent of our clients stop making their 
        monthly payments as soon as they enroll into the program.''

   ``I won't tell anybody not to pay their bills; I said one-
        hundred percent of the clients who have been successful have 
        stopped paying their bills.''

   ``Say you enrolled in the program. At that point you would 
        no longer make any of your credit card payments. All of them 
        would go late.''

    Among the 17 companies encouraging us to stop paying our creditors 
or representing that stopping payments is a condition of their 
program,\13\ 5 were members of an industry trade group called The 
Association of Settlement Companies (TASC) at the time we made our 
calls. TASC's written standards, adherence to which is required of all 
member companies, explicitly state ``No Member shall direct a potential 
or current client to stop making monthly payments to their creditors.'' 
A representative of 1 of these 5 TASC member companies told us that she 
could not direct us to stop paying our creditors, but later stated that 
if we could afford to make our payments then her program was not ``the 
best solution'' for us. In addition, a representative of 1 of these 5 
TASC member companies appropriately screened us out by telling us that 
we had too low of income to afford that company's program under the 
scenario we presented; he later described his company's program as 
requiring clients to stop making their payments. In addition to these 5 
TASC member companies, we spoke to a representative from another TASC 
member company who told us that we did not have enough debt to qualify 
for that company's program. In addition, 4 of the companies that told 
us to stop paying our creditors or represented that stopping payments 
was a condition of their program were members of a different industry 
trade group called the United States Organizations for Bankruptcy 
Alternatives (USOBA) at the time of our calls. According to USOBA 
representatives whom we interviewed, its member companies do not tell 
potential clients to stop paying their creditors. We received 
particularly good advice from a representative of 1 additional USOBA 
member company--not among the 4 listed above--whose representative told 
us that we should worry about taking care of our late mortgage payments 
before we worried about settling our credit card debts.
---------------------------------------------------------------------------
    \13\ As stated above, some companies we called referred us to one 
or more affiliates. We were unable to determine the relationship 
between these companies and their affiliates.
---------------------------------------------------------------------------
    Stopping payments to creditors results in damage to consumers' 
credit scores. According to FICO (formerly the Fair Isaac Corporation), 
the developer of the statistically based scoring system used to 
generate most consumer credit scores, payment history makes up about 35 
percent of a consumer's credit score. Moreover, the damage to credit 
scores resulting from stopping payments is generally worse for 
consumers who have better credit histories--such as consumers who 
maintained good payment histories prior to entering a debt settlement 
program that required them to stop making payments. In its notice, FTC 
also discussed the harmful effect that stopping payments has on 
consumers' credit scores.

Success Rates
    In several cases, representatives of companies we called claimed 
success rates for their programs that we found to be suspiciously 
high--85 percent, 93 percent, even 100 percent. In its notice, FTC 
cites claims of high likelihood of success as a frequent representation 
in the debt settlement industry. The success rates we heard are 
significantly higher than is suggested by evidence obtained by Federal 
and state agencies. When these agencies have obtained documentation on 
debt settlement success rates, the figures have often been in the 
single digits. For example, as part of an annual registration process 
in Colorado, the state's Attorney General compiled data on success 
rates for all debt settlement companies statewide. The data show that, 
from 2006 to 2008, less than 10 percent of Colorado consumers 
successfully completed their debt settlement programs. Our case studies 
discussed below provide additional evidence of similarly low success 
rates.
    Industry-reported data have claimed a higher success rate for debt 
settlement programs. According to TASC, data gathered from a survey of 
some of its largest member companies in 2009 shows that 34.4 percent of 
consumers participating in a debt settlement program offered by a TASC 
member company completed their debt settlement programs by settling at 
least 75 percent of their enrolled debts.\14\ A previous study released 
by TASC in 2008 claimed overall completion rates between 35 and 60 
percent. However, Federal and state agencies have raised concerns with 
the methodology behind TASC's data. For example, these agencies have 
argued that: (1) TASC's data were self-reported by its member 
companies, and may not reflect all member companies; (2) not every TASC 
member company that submitted data defined completion in the same way; 
and (3) the fact that consumers complete a debt settlement program does 
not necessarily imply that these consumers successfully obtained the 
debt relief services for which they paid. We did not attempt to 
validate success or completion data from TASC or Federal or state 
agencies.
---------------------------------------------------------------------------
    \14\ While TASC requires its member companies to make a series of 
disclosures in its discussions with potential clients, the individual 
completion rate for each company's program or the 34.4 percent overall 
completion rate mentioned in TASC's study are not among the required 
disclosures.
---------------------------------------------------------------------------
    TASC and USOBA have cited several factors that might contribute to 
consumers' success rates in debt settlement programs, such as that most 
consumers entering debt settlement programs are in extreme financial 
hardship and may choose to quit their program after settling some debts 
and improving their financial situations. However, FTC stated in its 
notice that the prevalent fee structure in the debt settlement 
industry--substantial up-front fees--may be a major factor in the 
generally low consumer success rates as well. TASC and USOBA have both 
offered suggestions for ways to boost consumer success rates, such as 
improved processes for determining consumers' suitability for debt 
settlement programs.
    Debt settlement success rates also play a key role in the BBB 
rating system for companies in the industry. Due to the volume and 
nature of consumer complaints,\15\ among other factors, BBB recently 
designated debt settlement as an ``inherently problematic'' type of 
business and, in September 2009, implemented new rating criteria for 
debt settlement companies to reflect this designation. Under this 
designation, no debt settlement company may earn a BBB rating higher 
than a C-.\16\ While BBB has designated other types of businesses as 
inherently problematic--such as pay-day loan centers, businesses that 
charge fees for publicly available information on government jobs, 
scientifically unproven medical devices and products, advance fee 
modeling agencies, and wealth-building or real estate seminars--debt 
settlement companies are the only type of business currently allowed by 
BBB to escape the inherently problematic designation if they provide 
evidence to BBB that they meet a series of criteria. These criteria 
require a debt settlement company to prove, among other things, that:
---------------------------------------------------------------------------
    \15\ According to data it provided to us, BBB has received 
thousands of complaints about debt settlement companies in recent 
years, with the number of complaints rising from 8 in 2004 to nearly 
1,800 in 2009. This figure may underestimate the total number of 
complaints related to debt settlement, as not all companies providing 
debt settlement services are classified as debt settlement companies by 
BBB. According to BBB, these complaints are related primarily to debt 
settlement companies: (1) charging advance fees without providing 
services as promised to consumers and sometimes without providing any 
services at all; (2) failing to disclose important information to 
consumers, such as unannounced fees; and (3) failing or refusing to 
provide refunds to consumers.
    \16\ According to BBB, its rating system uses grades based on a 
proprietary formula that incorporates information known to BBB and its 
experience with the business under assessment. The ratings are intended 
to represent BBB's degree of confidence the business is operating in a 
trustworthy manner and will make a good faith effort to resolve any 
customer concerns. The rating system uses grades from A to F, with 
plusses and minuses, so that A+ is the highest grade and F is the 
lowest. Some debt settlement companies may currently have a BBB rating 
higher than a C- because they were misclassified (e.g., characterized 
by BBB as something other than a debt settlement company) or because 
debt settlement does not represent a substantial portion of its 
services.

   It has substantiated all advertising claims, including 
---------------------------------------------------------------------------
        claims relating to the benefits or efficacy of debt settlement;

   It makes certain disclosures to consumers, including clear 
        and conspicuous disclosure of program fees and the risks of 
        debt settlement;

   It has adequate procedures for screening out consumers who 
        are not appropriate candidates for debt settlement; and

   A majority (at least 50 percent) of its clients successfully 
        complete its program and obtain a reduction in debt that is 
        significant and exceeds the fees charged by the company.

    According to a BBB official, he was unaware of any debt settlement 
company that had yet successfully demonstrated that it met these 
criteria, as of March 2010. Officials from TASC and USOBA told us they 
strongly disagree with BBB's new rating system for debt settlement 
companies. According to these officials, the new rating system 
minimizes the importance of resolved consumer complaints, requires an 
unrealistic measure of programs' success rate--50 percent--and inhibits 
consumers' ability to differentiate between reputable and disreputable 
debt settlement companies.

Guaranteed Reductions in Debt
    Representatives from some companies also guaranteed or promised 
that they could obtain minimum reductions in our debts if we signed up 
for their services. For example, some representatives stated that they 
would save us 40 to 50 cents on the dollar once they negotiated 
settlements with our creditors. In its notice, FTC cites claims of 
specific reductions in debt as an example of a consumer protection 
abuse in the debt settlement industry.

Fraudulent or Other Deceptive Representations
    We found examples of companies offering fraudulent or other 
deceptive information, such as using names and imagery for their 
services that indicates that their program is linked to the government. 
Table 1 below shows examples of fraudulent or deceptive information 
from companies we called.



------------------------------------------------------------------------



  Table 1: Examples of Fraudulent or Deceptive Information Provided by
                   Debt Settlement Companies We Called
------------------------------------------------------------------------
     No.             Representation                   Comments
------------------------------------------------------------------------
1             Debt settlement companies     TASC is a nonprofit trade
               are ``licensed and            association that lobbies
               regulated'' by TASC, which    lawmakers on behalf of the
               is ``like the SEC [United     debt settlement industry.
               States Securities and         It is not a licensing or
               Exchange Commission] for      regulatory authority.
               stock traders.''
------------------------------------------------------------------------
2             Stopping payments will        According to FICO, stopping
               ``knock [credit score] down   payments to creditors as
               a couple of points . . .      part of a debt settlement
               However, unlike bankruptcy    can drop credit scores
               or any other credit           anywhere between 65 to 125
               counseling program, this      points. In addition, missed
               only affects your credit      payments leading up to a
               while you're in the           debt settlement can remain
               program.''                    on a consumer's credit
                                             report for 7 years even
                                             after a debt is settled.
------------------------------------------------------------------------
3             Debt settlements will be      According to FICO,
               noted on consumers' credit    settlements are typically
               reports as ``paid in full''   listed on consumers' credit
               or ``paid as agreed.''        reports as ``settlement
                                             accepted on the account''
                                             or ``settled for less than
                                             full balance.''
------------------------------------------------------------------------
4             Company advertises a          The company's services are
               ``National Debt Relief        not affiliated with a
               Stimulus Plan.''              government program or part
                                             of the American Recovery
                                             and Reinvestment Act of
                                             2009 (the ``stimulus'').
------------------------------------------------------------------------
5             Company promised that calls   Debt settlement companies
               from creditors seeking        cannot prevent creditors
               money will ``slow down and    from contacting consumers.
               eventually stop'' if we       Companies often advise
               just told our creditors we    consumers to terminate all
               had hired the company.        communication with their
                                             creditors, ask consumers to
                                             assign power of attorney to
                                             them, and send cease and
                                             desist letters to creditors
                                             in an attempt to cutoff
                                             further communications.
------------------------------------------------------------------------
Source: GAO.

    Five of our cases are highlighted below. The companies in these 
cases made multiple fraudulent or deceptive representations either to 
our fictitious consumers by telephone, on their websites and through 
company documents or to our staff during unannounced, overt site 
visits. Table 2 below shows basic information represented by these 
companies, including the location, fees, and industry trade association 
membership of each of these companies and their affiliates, if any. 
(Table 4 in appendix I provides summary information on all 20 companies 
we called.)



------------------------------------------------------------------------



  Table 2: Representations Made by Select Debt Settlement Companies We
                                 Called
------------------------------------------------------------------------
                Location of
    No.         company and            Fees a             Association
                affiliates                               membership b
------------------------------------------------------------------------
1            Florida;           Advance fees  TASC; c affiliates
              affiliates in     based on 15 percent    in TASC and USOBA
              Florida,          of enrolled debt,
              Massachusetts,    with monthly
              California, and   payments required
              New Jersey b      throughout program.
------------------------------------------------------------------------
2            Unknown;           Advance fees  Affiliate in USOBA
              affiliates in     based on 12 percent
             Arizona, Texas,    of enrolled debt.
              and               First 3
             California b       monthly payments go
                                to fees.
                                $25 monthly
                                maintenance fee.
                                Additional
                                contingent fee based
                                on 4 percent of
                                reduction in debt
                                company obtains for
                                clients.
------------------------------------------------------------------------
3            California         Advance fees  TASC (at the time
                                based on 16 percent    of our call)
                                of enrolled debt,
                                with monthly
                                payments required
                                throughout program.
                                First 3
                                monthly payments go
                                to fees.
                                $100 fee for
                                out-of-state
                                clients.
------------------------------------------------------------------------
4            California         Advance fees  TASC
                                based on 17 percent
                                of enrolled debt,
                                with monthly
                                payments required
                                throughout program.
                                First 3
                                monthly payments go
                                to fees.
                                $840
                                maintenance fee
                                (total throughout
                                program).
                                $623.50
                                trust account fee
                                (total throughout
                                program).
------------------------------------------------------------------------
5            California         Advance fees  TASC (at the time
                                based on 15 percent    of our call)
                                of enrolled debt.
------------------------------------------------------------------------
Source: GAO analysis of information obtained from debt settlement
  companies.
a Fee information reflects fees disclosed to us; some companies may
  charge additional fees that were not disclosed. Debt settlement
  companies typically charge fees requiring payments either at the
  beginning of the program as an advance fee or after each settlement as
  a contingent fee. Some companies structure the payment of advance fees
  so that they collect a large portion of them--as high as 40 percent--
  within the first few months regardless of whether any settlements have
  been obtained or any contact has been made with the consumer's
  creditors. Others collect fees throughout the first half of the
  enrollment period in advance of a settlement. Companies that charge a
  contingent fee generally base it on a certain percentage of any
  settlement they actually obtain for consumers. They sometimes charge a
  small, additional fee every month while consumers are attempting to
  save funds for settlements.
b Some companies we called referred us to one or more affiliates. It was
  not always clear to us exactly with which company or affiliate we were
  speaking, where the companies or affiliates were located, or what the
  relationships were between the companies and affiliates. In some
  cases, separate affiliates of the same company claimed to be members
  of different industry trade associations.
c While Company 1 claimed to be a member of TASC, it appears this was a
  false representation.

Company 1
    Company 1 made several fraudulent and deceptive representations. We 
identified Company 1 when one of our investigators received an 
unsolicited spam message through his private e-mail account advertising 
debt settlement services, with a mailing address in the country of 
Lebanon listed at the bottom. A link in the message brought us to a 
website advertising ``New Government Programs! New free and easy 
programs are available for those who are in debt right now! Take 
advantage while they're still available
    [sic].'' (See figure 1 below.) The website also featured logos for 
TASC and BBB, along with other insignias declaring ``Satisfaction 
Guaranteed'' and ``Privacy 100 percent Guaranteed.'' When we called the 
number listed on the website, a representative answered using the name 
of an affiliate different than the company name listed on the website. 
He explained that the website was a ``generic advertisement'' to spread 
information about his company. Throughout our conversation, he made 
multiple statements that we found to be deceptive or questionable. 
According to the representative, the ``worst case scenario'' for 
settlement of our debts would be ``40 cents on the dollar.'' He stated 
that his company has helped 100 percent of its clients get out of debt 
in 3 years or less, and that ``every single creditor settles. There's 
not one creditor we haven't been able to reach a settlement with.'' 
When asked about the government programs advertised on the website, he 
replied ``What we're offering is not part of any government program 
whatsoever. . . . It's just that the government is allowing this to 
take place at this time. . . . The government is putting pressure on 
banks to allow things like this so that, you know, there are no more 
bankruptcies or things along those lines.'' Even though the website 
displayed a TASC logo, we were unable to find either Company 1 or this 
affiliate on TASC's member directory. The Executive Director of TASC 
confirmed to us later that neither Company 1--as it listed itself on 
its website--nor this affiliate is a member of the organization. The 
affiliate's website displays a logo for USOBA, and we confirmed its 
membership with that organization.



    Shortly after we called Company 1 the first time, we noticed that 
the website contained some changes--when we attempted to leave the 
website on later visits, a pop-up message appeared declaring ``If we 
can't get you out of debt in 24 hours we'll pay you $100!'' (See figure 
1 above.) We called Company 1 again and a representative said that he 
was with Company 1. He later stated that he was actually with an 
affiliate of Company 1--a different affiliate than the first 
representative with whom we spoke. He described the website for Company 
1 as a ``landing page'' used to attract business to his company. This 
second representative also offered deceptive or questionable 
information, such as a 93 percent success rate for his program. When 
asked about the government programs advertised on Company 1's website, 
he replied that the government program was related to creditors' 
ability to obtain tax credits from the IRS for the debts they sell to 
collection agencies. Regarding the offer to get consumers out of debt 
within 24 hours, he said that this was for clients who have the 
financial resources to make a large lump sum payment at the very 
beginning of the program. However, he added that ``ninety-nine point 9 
percent of the people that come to us do not have the ability to do 
that.'' When we asked about the risk of being sued by our creditors, he 
told us that ``a judgment is nothing more than a fancy I.O.U.'' We were 
able to find this second affiliate on TASC's member directory, and the 
Executive Director of TASC later confirmed that this affiliate is a 
member of TASC.\17\
---------------------------------------------------------------------------
    \17\ We also identified an additional website at a different 
address that was nearly identical to the one that referred us to the 
two representatives discussed above, with the same phone number and 
logos for TASC and BBB, but listing what appeared to be a different 
company name entirely.
---------------------------------------------------------------------------
    We made a site visit to Company 1 in Florida. The owner of Company 
1 admitted that the company does not really exist and is really just a 
marketing website, and told us he actually owns a different company 
that offers both debt settlement and mortgage modification services. He 
claimed that he did not know that Company 1's website contained 
information about an alleged government program, and logos for TASC and 
BBB. However, he acknowledged that neither Company 1 nor his real 
company is a member of TASC despite the logo featured on the 
website.\18\ When asked about the offer to get consumers out of debt 
within 24 hours, he replied that this was a ``typo'' and that the offer 
should say 24 months rather than 24 hours.\19\ Our investigators 
observed employees at the location listed for Company 1 representing on 
the telephone that they were employees of the second affiliate 
mentioned above. Moreover, when the owner of Company 1 gave our 
investigators a copy of the script his employees use when speaking with 
potential clients, the text of the script implied that they were 
representatives of the second affiliate. We were unable to determine 
the actual relationship, if any, between Company 1, its affiliates, or 
the other company the owner claimed he runs.
---------------------------------------------------------------------------
    \18\ TASC's executive director confirmed that Company 1 is not a 
member.
    \19\ Prior to our site visit, we found a testimonial from an 
alleged client on Company 1's website claiming that Company 1 helped 
her to cut her monthly bills in half in 24 hours.
---------------------------------------------------------------------------
Company 2
    Company 2's online and radio advertisements feature multiple 
fraudulent or deceptive claims. The company's website advertises that 
its services will ``Reduce balances to 40 percent--60 percent,'' 
``Eliminate excessive Credit Card Debt interest immediately,'' and 
``End late payment fee's [sic].'' When we called Company 2, it referred 
us to at least 3 different affiliates. It was not always clear exactly 
with which company's representatives we were speaking.\20\ 
Representatives from these affiliates described Company 2 as a 
marketing group that referred potential clients to them. We also 
identified radio advertisements placed in several major cities 
purporting to be from Company 2, in which it claimed to offer a 
``government authorized'' and ``government approved'' debt settlement 
program. When we called the telephone number listed in one of the radio 
advertisements, a representative answered from one of the affiliates of 
Company 2 that we had spoken to earlier. When asked about the 
government-approved debt settlement program, the representative 
acknowledged the radio advertisement and replied ``it is government 
approved. . . . They allow for us to do this. You know, the banks 
received, you know, bailout money last year. I'm sure you saw it on the 
news. There has to be some type of assistance for people on a consumer 
level also.'' According to this representative, Company 2 runs similar 
advertisements on television and radio stations nationwide.
---------------------------------------------------------------------------
    \20\ A recent report by the Maryland Consumer Rights Coalition 
stated that debt settlement companies ``often seem a many-headed 
Hydra'' with parent companies split from other divisions that handle 
the marketing and solicitation. The report further states that this 
division of services causes confusion for consumers trying to track the 
progress of their debt settlement, and for agencies attempting to 
enforce compliance.
---------------------------------------------------------------------------
    We were unable to visit Company 2 because we could not determine 
its physical location. However, we visited the affiliate whose 
representative discussed the radio advertisement with us, which is 
located in California. Officials from this affiliate told us that their 
company is ``the most legitimate debt settlement company,'' and that 
their employees receive commission based on the number of clients they 
enroll in the company's program. They also claimed that their company 
was not associated with Company 2, and refused to disclose to us the 
number of clients in their program or the total amount of consumer debt 
their company is currently handling. On two separate covert telephone 
calls we made to Company 2, representatives of this affiliate stated 
they were with Company 2 at the beginning of each call but later 
informed us that they actually were with the affiliate and that Company 
2 handled their marketing. When asked during our site visit if we could 
see their call center, officials refused.

Company 3
    Company 3 targets Christians for its debt settlement services by 
employing a Biblical marketing theme, both on its website and over the 
phone. Representatives of Company 3 told our fictitious consumers that 
they run a nonprofit ministry affiliated with their for-profit debt 
settlement company, with funds from debt settlement feeding into the 
ministry and missionary trips overseas. In addition, representatives 
told us that their program has an 85 percent success rate and that they 
would negotiate our debt down to 40 or 60 percent of what we currently 
owed. About the risk of being sued by our creditors, a representative 
remarked to us that ``It's just a computer thing. I mean, sometimes 
there's a handful of them that they'll have reserved to go after and 
it's just random. But even if they were to do that in your case, it's 
just a small percentage; we'd be able to advise you at that time, too. 
You don't need an attorney in the matter or anything like that. It's 
just a civil thing.''
    We visited Company 3 in California, where we found it located in a 
strip mall near a grocery store. The owner of Company 3 told us that he 
owned a mortgage company and sold cars prior to entering the debt 
settlement industry. Company 3 handles the front end of the debt 
settlement process by signing up clients, and uses a third-party 
company and law firm for the rest of the process. Most of the employees 
of Company 3 are contractors who earn $200 commission for each client 
enrolled, with bonuses for employees who enroll a high number of 
clients. According to Company 3 officials, they enrolled approximately 
1,200 to 1,300 new clients in the first 2\1/2\ months of 2010. When 
asked if we could see a copy of their IRS Form 990 for the nonprofit 
side of their operation, the owner replied, ``The Bible says you should 
never let the left hand know what the right hand is doing.'' \21\ 
Company officials provided us with a sample of its contract, which 
states that ``In the event Client comes into a lump sum of money and 
wishes to settle an account before original designated completion date, 
Client must first pay [Company 3] Fee. The remainder of the lump sum 
will be utilized in settling Client's unresolved program debt.'' The 
contract also states that Company 3 does not provide legal 
representation or any legal advice to its clients.
---------------------------------------------------------------------------
    \21\ IRS Form 990 is a Federal information return filed annually by 
tax-exempt public charities. Information reported on this return 
includes assets held, contributions received, and grants paid.
---------------------------------------------------------------------------
Company 4
    We became interested in calling Company 4 when we noticed on its 
website that it advertised a ``U.S. National Debt Relief Plan,'' with a 
logo depicting a shield filled with a U.S. flag. When asked about this 
plan, a representative stated that it was ``a consumer advocacy program 
entitled [sic] to help consumers get out of debt'' but that ``it's not 
a government agency. We just take advantage of the fact that the 
government are [sic] giving money to the banks to get out of debt and 
we just show you and go through the route of settling out your 
accounts.'' The representative also told us that our first 3 monthly 
payments would go entirely to paying fees with no money set aside for 
savings. He said that Company 4 uses this advance fee structure 
because, during the first few months of the program, the company would 
be setting up our account and mailing cease and desist letters to our 
creditors, and ``to show that you have the commitment to be in the 
program.''
    When we visited Company 4 in California, officials told us that the 
company only handles the front-end marketing of the debt settlement 
process, and that it had enrolled approximately 1,000 clients in the 
first 2\1/2\ months of 2010. In early March 2010, TASC issued a 
statement on its website noting a recent increase in companies 
practicing deceptive marketing, including companies sending letters to 
potential clients resembling government documents and using terms like 
``U.S. National Debt Relief Plan.'' Company 4 marketed the ``U.S. 
National Debt Relief Plan,'' and is a member of TASC.

Company 5
    A representative of Company 5 advised us that we could not afford 
its debt settlement program because our fictitious consumer's income 
was too low and his expenses were too high. He suggested that we 
consider credit counseling or bankruptcy as options if we were unable 
to make substantial improvements in our budget. However, when we 
indicated that we may obtain a new job soon that would boost our 
income, he provided details on how Company 5's debt settlement program 
works. He told us that it generally takes about 7 to 8 months to save 
up enough money to begin negotiating settlements. When we asked what 
services we would be paying for during those first 7 to 8 months, he 
replied that our fees would pay for the ability to get out of debt 
within 36 months, and monthly education and updates from the company's 
attorneys. Company 5's website advertised that it can help consumers 
who are experiencing stress, anxiety, and depression associated with 
being in debt. When we asked about these services, the representative 
laughed and said these services are arranged through debt negotiators 
who will hold monthly strategy calls with us.
    We attempted to visit Company 5 in California, but found that it 
was no longer at the location listed on its website. Employees of 
several other companies in neighboring office suites told us that 
Company 5 had moved to another office down the hall, which was listed 
under a different company name. An official from this company denied 
knowing anything about Company 5, and claimed that his company did not 
provide debt settlement services. However, records we obtained indicate 
that the name of Company 5's owner is the same as the name on this 
official's driver's license. In addition, the website for this other 
company indicates that it does, in fact, provide debt settlement 
services. After we returned from our site visit, the website for 
Company 5 was down for maintenance.

Allegations of Fraud, Abuse, and Deception in the Debt Settlement 
        Industry Are Widespread
    We found the experience of our fictitious consumers to be 
consistent with the widespread complaints and charges made by Federal 
and state investigators on behalf of real consumers against debt 
settlement companies. We identified allegations of fraud, deception and 
other questionable activities that involve hundreds of thousands of 
consumers.\22\ We drew this figure from closed and open civil and 
criminal cases governments have pursued against these companies over 
the last decade. Our calculation likely underestimates the total number 
of consumers affected, since we obtained information from only 12 
Federal and state agencies about the clients within their jurisdiction 
that they identified in some of the cases they pursued.\23\ Federal and 
state agencies have reported taking a growing number of legal actions 
against companies that offer these services in recent years. As 
mentioned above, since 2001, FTC has brought at least seven lawsuits 
against debt settlement companies for engaging in unfair or deceptive 
marketing. The National Association of Attorneys General (NAAG) said in 
an October 2009 letter to FTC that 21 states brought at least 128 
enforcement actions against 84 debt relief companies, including debt 
settlement companies, over the previous 5 years.\24\ The group stated 
that the number of complaints received by the states about debt relief 
companies--especially debt settlement companies--had more than doubled 
since 2007. Last, the group noted that any business model requiring 
``cash-strapped consumers to pay substantial up-front fees'' raised 
significant consumer protection concerns and agreed with a consumer 
group that called it ``inherently harmful.''
---------------------------------------------------------------------------
    \22\ We did not attempt to verify the facts regarding all of the 
allegations pursued by Federal and state agencies that we identified.
    \23\ We obtained information from the following agencies: Federal 
Trade Commission, U.S. Department of Justice, and state law enforcement 
agencies in Alabama, Colorado, Delaware, Florida, Illinois, North 
Carolina, New York, Texas, Vermont, and West Virginia. They identified 
clients through company records, individual complaints, and restitution 
paid. We focused on select states with enforcement actions listed in a 
National Association of Attorneys General letter. We did not attempt to 
query all 50 states.
    \24\ According to the letter, the 128 enforcement actions listed in 
its attachment do not represent a comprehensive list of all cases filed 
or regulatory actions taken against debt relief companies. We did not 
attempt to verify the facts regarding all of the actions listed in the 
letter. Details regarding 3 of these enforcement actions are provided 
below, as case studies 1, 3, and 4.
---------------------------------------------------------------------------
    Attorneys general from 40 states and 1 territory submitted the 
letter, saying they supported FTC's proposed rule changes to combat 
unfair and deceptive practices in the industry. They cited similar debt 
settlement activities that prompted their own enforcement actions, 
including the following:

   collecting advance fees in many instances without providing 
        services;

   misleading consumers about the likelihood of a settlement;

   misleading consumers about the settlement process and its 
        adverse effect on their credit ratings;

   making unsubstantiated claims of consumer savings;

   deceptively representing the length of time necessary to 
        complete the program;

   misleading or failing to adequately inform consumers that 
        they will be subject to continued collection efforts, including 
        lawsuits;

   misleading or failing to adequately inform consumers that 
        their account balances will increase due to extended nonpayment 
        under the program; and

   deceptive disparagement of bankruptcy as an alternative for 
        debtors.

    The state attorneys general expressed concern the industry would 
grow exponentially given the current economic climate and a regulatory 
environment that allows substantial advance fees to be collected. They 
criticized the advance fees as providing minimal incentive for 
companies to perform services because they get paid whether or not they 
take any action on behalf of the consumer. They also noted that low 
set-up costs help in the promotion of debt settlement as a cheap 
business opportunity. They stated that they would continue to take 
enforcement actions against unscrupulous operators in the industry, but 
that they also believed the proposed FTC rule changes would 
substantially aid law enforcement agencies in addressing harms caused 
to consumers.
    We developed case studies from five closed civil or criminal 
actions in which state or Federal courts found debt settlement 
companies liable for fraudulent, unfair or deceptive actions that left 
clients in worse financial condition--bankrupt, owing more debt, and 
with lower credit scores and more judgments against them. We also 
examined the experiences of a consumer from each of these cases. Table 
3 below shows key information from each of these five cases. Further 
details are discussed below.



------------------------------------------------------------------------



      Table 3: Select Cases of Debt Settlement Companies Engaged in
               Fraudulent, Abusive, or Deceptive Practices
------------------------------------------------------------------------
              Company location    Federal/state
     No.                             agency            Case details
------------------------------------------------------------------------
1             Arizona;          New York           More than 500
               affiliates in     Attorney          New Yorkers withdrew
               Arizona and       General           from the debt
               Florida                             settlement program
                                                   after paying over $1
                                                   million in fees only
                                                   to receive more debt,
                                                   tarnished credit
                                                   ratings, and
                                                   increased collection
                                                   calls and creditor
                                                   lawsuits.
                                                   Nearly half
                                                   of the New York
                                                   clients that
                                                   completed the program
                                                   during the Attorney
                                                   General's
                                                   investigation, or 27
                                                   out of 64, ultimately
                                                   paid more than they
                                                   originally owed.
                                                   Only 0.3
                                                   percent of the New
                                                   York clients realized
                                                   the promised savings.
                                                   A New York
                                                   court found the
                                                   company and its
                                                   affiliates liable for
                                                   statutory fraud and
                                                   ordered restitution
                                                   for clients who paid
                                                   more than they owed.
------------------------------------------------------------------------
2             New York and      U.S. Attorney      An attorney
               Vermont          General            and his law firm
                                                   associates
                                                   misappropriated and
                                                   embezzled millions of
                                                   dollars from 15,000
                                                   clients seeking debt
                                                   reduction help over a
                                                   6-year period,
                                                   forcing some
                                                   customers into
                                                   bankruptcy.
                                                   The group
                                                   lured consumers
                                                   through television
                                                   and radio
                                                   advertisements by
                                                   falsely claiming a 50
                                                   to 70 percent savings
                                                   off unsecured debt,
                                                   an improvement in
                                                   credit scores and
                                                   bankruptcy avoidance.
                                                   Only 8
                                                   percent of the
                                                   group's clients
                                                   completed the
                                                   program.
                                                   Clients paid
                                                   advance fees for
                                                   these services and
                                                   funded escrow
                                                   accounts from which
                                                   their creditors were
                                                   supposed to be paid.
                                                   The fees were not
                                                   considered ``earned''
                                                   until consumer debts
                                                   were settled.
                                                   The fees
                                                   collected were used
                                                   in part to fund huge
                                                   payments to the
                                                   attorney and two of
                                                   his associates before
                                                   they provided any
                                                   services to clients.
                                                   The client
                                                   escrow accounts were
                                                   drawn upon, in part,
                                                   to cover overdrafts
                                                   from the law firm's
                                                   operating account and
                                                   to make payments to
                                                   the attorney's wife,
                                                   among other things.
                                                   The law firm
                                                   filed for bankruptcy
                                                   in 2003.
                                                   A Federal
                                                   jury found the
                                                   attorney guilty in
                                                   2005 on multiple
                                                   felony counts,
                                                   including fraud. His
                                                   six associates pled
                                                   guilty to Federal
                                                   charges.
------------------------------------------------------------------------
3             Florida           North Carolina     Two companies
                                Attorney General   and their owners ran
                                                   an illegal debt
                                                   settlement business
                                                   using unfair and
                                                   deceptive practices,
                                                   collecting over
                                                   $500,000 from about
                                                   220 North Carolinians
                                                   who rarely obtained
                                                   the services they
                                                   purchased.
                                                   North
                                                   Carolina law
                                                   prohibits anyone from
                                                   acting as a for-
                                                   profit intermediary
                                                   between residents and
                                                   their creditors for
                                                   the purpose of
                                                   reducing, settling,
                                                   or altering debt
                                                   payments, except in
                                                   limited
                                                   circumstances. It
                                                   specifically bans
                                                   advance fees for
                                                   these services.
                                                   The companies
                                                   and their owners, one
                                                   of whom was an
                                                   attorney, marketed
                                                   their services in
                                                   part using third-
                                                   party ``referral
                                                   agents'' who received
                                                   compensation for
                                                   directing consumers
                                                   to the group.
                                                   Many clients
                                                   dropped out of the
                                                   program dissatisfied.
                                                   Few received refunds
                                                   or obtained
                                                   settlements with
                                                   their creditors. Many
                                                   filed for bankruptcy.
                                                   A North
                                                   Carolina court found
                                                   that the group's
                                                   actions violated
                                                   state law and banned
                                                   the parties from
                                                   doing any debt-
                                                   related business with
                                                   state residents. In a
                                                   separate action in
                                                   January 2009, the
                                                   attorney was
                                                   disbarred for a
                                                   period of 5 years.
------------------------------------------------------------------------
4             Maryland          Maryland           A Maryland
                                 Attorney          attorney, his law
                                 General           firm and their
                                                   marketers used unfair
                                                   and deceptive trade
                                                   practices to collect
                                                   $3.4 million from
                                                   about 6,200 clients
                                                   over a 2 year period
                                                   to settle debt but
                                                   provided little or no
                                                   services in return,
                                                   causing harm to
                                                   consumer credit
                                                   histories and credit
                                                   scores.
                                                   The group
                                                   told clients that its
                                                   employees were
                                                   qualified credit
                                                   counselors capable of
                                                   recommending the most
                                                   appropriate action,
                                                   but instead it
                                                   provided virtually
                                                   the same advice to
                                                   everyone--enter debt
                                                   settlement plans
                                                   profitable for the
                                                   group.
                                                   The group
                                                   reached an agreement
                                                   in 2007 with the
                                                   Attorney General,
                                                   agreeing to
                                                   immediately cease and
                                                   desist selling
                                                   unlicensed debt
                                                   settlement services,
                                                   pay restitution to
                                                   customers, and pay
                                                   investigatory costs
                                                   and a fine to the
                                                   state consumer
                                                   protection office.
                                                   The Attorney
                                                   General filed a
                                                   lawsuit in 2008
                                                   against the group for
                                                   violating the terms
                                                   of their agreement
                                                   and the state's
                                                   consumer protection
                                                   act. The court
                                                   ordered the group to
                                                   fulfill the terms of
                                                   its previous
                                                   agreement, pay a fine
                                                   and costs of
                                                   $180,000, and pay
                                                   restitution of almost
                                                   $2.6 million.
------------------------------------------------------------------------
5             California        Federal Trade      Four related
                                Commission         California companies
                                                   lured more than 1,000
                                                   consumers into a debt
                                                   settlement program
                                                   through false
                                                   promises of reducing
                                                   debt, halting
                                                   collection calls,
                                                   removing negative
                                                   credit report
                                                   information, and
                                                   holding payments in
                                                   trust to settle
                                                   accounts--from which,
                                                   the FTC alleged, more
                                                   than $2 million later
                                                   went ``missing.''
                                                   FTC filed a
                                                   complaint against the
                                                   companies in August
                                                   2002, alleging that
                                                   numerous consumers
                                                   who enrolled in the
                                                   program saw their
                                                   indebtedness increase
                                                   after incurring late
                                                   fees, finance
                                                   charges, and
                                                   overdraft charges.
                                                   Many ultimately filed
                                                   for bankruptcy.
                                                   The Federal
                                                   court entered default
                                                   judgments against all
                                                   four companies,
                                                   banning them from
                                                   engaging in any debt
                                                   settlement services
                                                   and ordering them to
                                                   collectively pay $1.7
                                                   million in
                                                   restitution to
                                                   consumers, among
                                                   other actions.
------------------------------------------------------------------------
Source: GAO analysis of case studies discussed below.

Case Study 1
    An Arizona company and its affiliates used false advertising and 
deceptive marketing to fraudulently induce more than 500 New Yorkers 
into paying over $1 million in fees for a debt settlement program that 
left them with more debt, tarnished credit ratings, and increased 
collection calls and creditor lawsuits. The group told clients that 
consumers typically saved between 25 percent and 40 percent, including 
all fees and charges. It also promised to substantially reduce credit 
card debt in as little as 24 months. However, according to the New York 
Attorney General, only 0.3 percent of the company's clients realized 
these savings and few ever completed the program. Only 64 of the 
group's New York clients finished the program during the time period of 
the Attorney General's investigation (between January 2005 and 
September 2008); another 537 withdrew from the program after paying 
fees. Those who finished the program complained of being deceived and 
harmed by the group. Nearly half of them actually paid more than they 
owed. For example, one said, ``I actually paid 87 percent more than 
what was originally due.'' Another said that the company ``did not 
settle any of my accounts until I was actually sued by my creditors.'' 
A state court found the group liable for statutory fraud, ordered it to 
pay restitution to clients who completed the program but paid more than 
they owed, and prohibited it from doing business with consumers in New 
York unless it posted a $500,000 performance bond.
    The group required clients to authorize electronic debits from 
their personal bank accounts in an amount that typically ranged between 
$300 and $1,000 each month, depending on the consumers' cash-flow and 
expected settlements. The group told clients that once the funds 
accrued to a sufficient amount, it would negotiate with creditors for a 
settlement. Clients were instructed to stop making credit card payments 
during this time and to cease all communication with their creditors. 
The group did not include most of the program fees it charged in its 
calculation of the ``savings'' clients would achieve. The fees included 
the following: $399 for ``set up''; an amount equal to three times the 
clients monthly payment for ``enrollment''; $49 per month for 
administrative and bank fees; and an amount equal to 29 percent of the 
difference between the amount originally due and the settlement amount 
for a ``final fee.'' The set-up and enrollment fees had to be paid in 
full before the group would allow money to accrue for a settlement.
    The experience of one New York family exemplifies the harm suffered 
by the group's clients. According to a sworn statement the wife gave to 
state attorneys, the couple owed about $21,700 in credit card debt 
accumulated after the husband was laid off. In 2006, the wife received 
a call from a telemarketer saying that the Arizona company had looked 
into her family's credit history and found that it could cut their 
credit card debt in half. She and her husband joined the program and 
began making $325 in monthly payments to settle five accounts, even 
though they were current on their bills. ``Who wouldn't want to save 50 
percent on her credit cards?'' the wife told state attorneys. The 
couple was advised to stop paying their creditors, which they did after 
being told by the company that no penalties and interest would accrue 
as a result. The couple was soon being harassed by their creditors, who 
called at all times of day, including evenings and weekends. Four of 
the couple's small accounts were settled during this time. However, the 
creditor with the largest balance, which totaled about $19,000, took 
the couple to court. The pair withdrew from the program and settled the 
lawsuit for $28,000, including $9,000 in penalties and interest. They 
subsequently had to pay this creditor $300 per month. The wife called 
this outcome ``disastrous for us.'' Nevertheless, the couple received a 
``congratulations'' letter from the company, saying the pair had paid 
only 79.3 percent of what was originally owed on the four settled 
accounts.
    Documents that the couple gave state attorneys, however, show 
otherwise: after adding the $2,506 in fees they were charged, the pair 
actually paid more than 140 percent of what was originally owed on the 
four accounts. The wife told state attorneys that the Arizona company 
``failed our family in every respect, and we are counted as one of its 
success stories!''

Case Study 2
    An attorney and his law firm associates defrauded about 15,000 
clients seeking debt reduction help, causing them to lose millions of 
dollars and forcing legions of them to file for bankruptcy. The group 
lured consumers through television and radio advertisements, falsely 
claiming a 50 to 70 percent savings off unsecured debt, an improvement 
in credit scores and bankruptcy avoidance. The group, with offices 
initially in New York and later in Vermont, further promised that if 
clients did not receive a settlement, they would be entitled to a full 
refund. Clients paid fees for these services and funded escrow accounts 
from which their creditors were supposed to be paid. Under the terms of 
the contract that clients signed, the fees were not considered 
``earned'' until consumer debts were settled. The group, however, did 
not reduce debt for most of its clients (only 8 percent completed the 
program, according to a witness cited by the U.S. Department of 
Justice) and failed to pay refunds to many of those who withdrew from 
the program or were forced into bankruptcy. Instead, the fees collected 
were used in part to fund huge payments to the attorney and two of his 
associates before they provided any services to clients. The client 
escrow accounts, meanwhile, were drawn upon to cover overdrafts from 
the law firm's operating account and make payments to the attorney's 
wife, among other things. The law firm filed for bankruptcy in 2003. A 
Federal jury found the attorney guilty in 2005 on multiple felony 
counts, including fraud. His six associates pled guilty to Federal 
charges.
    To enter the law firm's debt settlement program, clients signed an 
agreement that authorized monthly automatic deductions from their bank 
accounts. The first four payments often went into a retainer account to 
collect advance fees owed to the firm, despite the fact that the 
clients had pressing debt problems. The advance fees equaled about 25 
to 28 percent of the total projected savings from the client's debt 
settlement plan. Thereafter, about half of payments also were deposited 
into an escrow account to settle client debts held by creditors until 
the retainer account was fully funded. Subsequent monthly deductions 
went into escrow account until enough money accrued to make a 
settlement offer on behalf of the client. Although not formalized in 
written contract, many clients were instructed to stop making their 
minimum monthly payments to creditors. They were told that continuing 
to pay creditors would inhibit the firm's ability to reach a 
settlement.
    One of the firm's New York clients who Federal authorities 
interviewed enrolled in the debt settlement program after hearing an 
advertisement on the radio. The woman, who owed $60,000, was 
experiencing marital problems and feared becoming a single mother with 
small children and a large amount of debt. She called the toll-free 
number and arranged for a meeting at a New York office. One of the 
firm's associates, who later pleaded guilty to interstate transmittal 
of stolen money and preparing a false tax return, told her that the 
advance fees she paid would be held in trust until all of her debt was 
settled. She paid about $7,000 to $8,000 to the firm to settle her 
debts until one of her creditors obtained a judgment against her, 
causing her bank account to be frozen. When she contacted the firm to 
withdraw and ask for a refund, her calls were not returned. She 
ultimately filed for bankruptcy. The firm never secured a settlement on 
her behalf. She filed a civil lawsuit and won a default judgment 
against the firm for $10,000 including attorney fees, but told us she 
never recovered any money from the court decision. In relating her 
experiences with the debt settlement company, she described the 
attorney as ``a ghoul and a vulture . . . preying on vulnerable 
consumers.''

Case Study 3
    Two Florida companies and their owners ran an illegal debt 
settlement business using unfair and deceptive practices, collecting 
over $500,000 from about 220 North Carolinians who rarely obtained the 
services they purchased and found themselves in far worse financial 
positions. North Carolina law prohibits anyone from acting as a for-
profit intermediary between residents and their creditors for the 
purpose of reducing, settling or altering debt payments, except in 
limited circumstances. The state ban specifically includes situations 
where an individual is receiving advance fees to provide these 
services. To enforce these laws, the North Carolina Attorney General 
filed a complaint in February 2008 accusing the group of operating a 
``classic advance-fee scam, designed to extract up-front fees from 
financially strapped consumers whether or not any useful services are 
performed.'' The companies and their owners, one of whom was an 
attorney, marketed their services in part using numerous third-party 
``referral agents'' who received compensation for directing consumers 
to the group. One such referral agent listed a local telephone number 
which, when dialed, actually rang a telemarketing ``boiler room'' in 
Massachusetts or Florida. The group and its agents told consumers that 
their unsecured debts could be reduced by up to 60 percent in as little 
as 1 to 3 years and thus avoid bankruptcy. The group typically charged 
clients an advance fee of 15 to 25 percent of their total debt, paid 
through monthly debits from their bank accounts. It also advised them 
to cease all communication and payments to creditors, stating that it 
could stop any harassment and provide ``legal protection.'' When 
consumers were sued, however, the group gave them no legal assistance. 
They also experienced difficulty in contacting the group and were often 
put on hold, disconnected, or ``given the runaround,'' state 
prosecutors said. Many clients dropped out of the program dissatisfied. 
Few received refunds or obtained settlements with their creditors. Many 
filed for bankruptcy. A North Carolina court found that the group's 
actions violated state law and banned the parties from doing any debt-
related business with state residents. State prosecutors ultimately 
secured refunds for some of the group's clients. In a separate action 
in January 2009, the attorney also was disbarred for a period of 5 
years.
    An example of the service the group's clients received can be found 
in the experience of a rural North Carolina couple. According to the 
wife's sworn statement, the pair found it increasingly difficult to 
meet their monthly financial obligations after the husband became ill 
and temporarily lost his income. They searched for ways to reduce their 
unsecured debt on the Internet and found what turned out to be one of 
the group's referral agents. They were told that the initial monthly 
payment of about $1,700 would be deducted from their bank account for 
the first 3 months of the program to cover attorney fees. Subsequent 
monthly payments of about $1,200 were to go toward settlements with 
creditors. The couple joined the program in hopes of avoiding 
bankruptcy and made their first installment in February 2007. Seven 
months later, the wife called the group for a status on her account and 
was told the couple had only accrued about $3,000 in savings, despite 
paying the group over $11,000 to date. She also learned that none of 
their credit accounts had been settled and they had been charged 
additional attorney fees of $499 each month. They withdrew from the 
program and demanded a full refund, since the group had done nothing 
``other than take our money with no accountability.'' The couple 
started receiving collection notices and threats of lawsuits. Their 
debts had now increased since they were no longer making payments to 
creditors. In an attempt to save their home from foreclosure, the 
couple filed for Chapter 13 bankruptcy. They also took second jobs as 
janitors to help pay off their debts. The wife told us that during the 
day she works as a bank teller and her husband is employed as an 
electrical engineer. One of their creditors suggested they call their 
state Attorney General. ``My husband and I are worse off than before we 
entered into an agreement with (the group) for debt settlement 
services,'' the wife said in her sworn statement. The state Attorney 
General ultimately secured a full refund for the couple.

Case Study 4
    A Maryland attorney, his law firm, and their marketers used unfair 
and deceptive trade practices to collect $3.4 million from about 6,200 
clients over a 2-year period to settle debt but provided little or no 
services in return, causing harm to consumer credit histories and 
credit scores. The group told its clients that they could settle debts 
with creditors for half of the total amount owed, but either did not do 
so or negotiated agreements that saved significantly less than 
promised. Only $811,136--less than a quarter of the money the group 
collected--was either paid to creditors or refunded to clients. 
Moreover, about $240,000 was taken from client trust accounts to pay 
for the law firm's debt and expenses. The group told clients that its 
employees were qualified credit counselors capable of recommending the 
most appropriate action, but instead it provided virtually the same 
advice to everyone--enter debt settlement plans profitable for the 
group. The Maryland Office of the Attorney General began an 
investigation of the group because it was not licensed to provide debt 
settlement services in the state. The group reached an agreement in 
2007 with the Attorney General, agreeing to immediately cease and 
desist selling unlicensed debt settlement services, pay restitution to 
customers, and pay investigatory costs and a fine to the state consumer 
protection office. However, the Attorney General filed a lawsuit in 
2008 against the attorney, his law firm, and their marketers accusing 
them of continuing to provide debt settlement services, thus violating 
the terms of their agreement and the state's consumer protection act. 
The court ruled in favor of the Attorney General and ordered the group 
to fulfill the terms of its previous agreement, pay a fine and costs of 
$180,000, and pay restitution of almost $2.6 million. As of March 2010, 
the attorney had only paid $20,000.
    Clients made numerous complaints to the Maryland Office of the 
Attorney General, detailing the financial harm they suffered from the 
group. A New Hampshire couple struggling to pay their bills joined the 
debt settlement program in August 2007 and authorized the firm to 
automatically deduct about $650 from their checking account each month, 
according to a letter they sent to the Attorney General. Although the 
couple had approximately $41,000 in credit card debt when they joined 
the program, the wife told us that they had a good credit history and 
had never missed a payment. However, she said that they were told they 
had to stop making payments to their creditors when they entered the 
program. The collection letters and phone calls from creditors started 
``arriving constantly'' by the end of September, the couple told the 
Attorney General. Threats of lawsuits followed 2 months later. The 
couple withdrew from the program in February 2008, after paying the 
firm $3,895 and receiving no relief from their debts. They told the 
Attorney General they were so far in default on their credit cards, 
with interest and fees added on top, that they considered bankruptcy to 
be the best option available to them. According to the wife, their 
credit score dropped from 720 down to 605 as a result of their 
experience with this debt settlement program. She added that they 
ultimately entered into a consumer credit counseling program after they 
learned that state law requires such counseling prior to bankruptcy. 
When asked to compare the two different debt relief programs, she said 
that credit counseling is ``legit'' and helps consumers to get out of 
debt, but that ``debt settlement is a crock.''

Case Study 5
    Four related California companies lured more than 1,000 consumers 
into a debt settlement program through false promises of reducing debt, 
halting collection calls, removing negative credit-report information, 
and holding payments in trust to settle accounts--from which, FTC 
alleged, more than $2 million later went ``missing.'' The companies' 
telemarketers told consumers that the group could cut their debt by as 
much as 60 percent in exchange for a nonrefundable fee, thus improving 
their financial status. The companies did not disclose that the fees 
typically amounted to hundreds or thousands of dollars. They said that 
the monthly payments withdrawn from consumers' bank accounts would be 
held in trust to settle their debt at a reduced amount. Consumers were 
instructed to immediately stop paying their unsecured creditors so that 
they would be considered a ``hardship,'' putting them in a better 
position to negotiate settlement terms. The companies stated that they 
would contact the creditors and tell them to cease all contact with 
their customers, thus preventing collection calls. They also told 
consumers that any negative information that appeared on their credit 
report would be removed at the conclusion of the program.
    FTC filed a complaint against the companies in August 2002, 
alleging that numerous consumers who enrolled in the program saw their 
debt increase after incurring late fees, finance charges and overdraft 
charges. Negative information often appeared on the consumers' credit 
reports--such as charge-offs, collections and wage garnishments--and 
will stay on their record for a period of up to 7 years. FTC determined 
that in numerous instances, the companies did not contact consumers' 
creditors or collectors, nor did they return calls. FTC later 
determined that more than $2 million the companies collected to be held 
in trust for making settlements was missing. Given their worsened 
financial condition, many consumers ultimately filed for bankruptcy. 
The Federal court entered default judgments against all four companies, 
banning them from engaging in any debt settlement services and ordering 
them to collectively pay $1.7 million in restitution to consumers, 
among other actions. FTC brought suit against four executives of the 
companies, but these cases ended in settlement agreements without any 
liability or fault established. As part of the settlements, however, 
the executives agreed to be permanently banned from participating in 
debt settlement services and to pay between approximately $220,000 and 
$2.6 million, depending on the amount of consumer injury that stemmed 
from their activities. The monetary judgments were largely suspended, 
except in two instances where the executives surrendered property and 
other assets to help satisfy what they owed, because of their inability 
to repay consumers.
    The experience of a secretary from Riverside, Calif., illustrates 
the harm that FTC determined the companies to have caused consumers. 
She joined the program after receiving an e-mail in August 2000 and 
being told by a representative from one of the companies that she could 
be completely out of debt in 16 months, according to a written 
statement she gave to FTC under penalty of perjury. At the time, she 
made about $27,000 a year, owed a total of $7,000 in credit card debt 
and was making little progress toward reducing her balances given that 
her salary barely covered rent, food, car payments, and insurance. The 
company also offered a debt management class, which she stated had 
appealed to her because she wanted to learn how to better manage her 
money. She never received the promised training, though, despite asking 
for it several times. Three months after she joined the program, 
letters from creditors started arriving threatening legal action if she 
did not pay. Counselors with her debt settlement company told her to 
ignore them, calling the move a ``scare'' tactic. She started to panic 
after she received a court summons in late 2000 stating that a lawsuit 
had been filed against her. A counselor again told her not to worry, 
that everything would be OK. After a court summons arrived from a 
second credit card company, a counselor told her to fax the documents 
to the company and that staff would deal with it. The state courts, 
however, entered two judgments against her in March 2001. She later 
received notice that her wages would be garnished by 25 percent. ``I 
was frantic,'' she stated. ``I was barely making ends meet on my 
salary.'' By July 2001--less than a year after the secretary entered 
the debt settlement program--her credit card debt had more than doubled 
to about $15,000, because of late charges, interest, and other fees. 
She filed for bankruptcy that same month. She later sued the company 
that enrolled her in the program and settled for what she had paid in 
program fees, about $1,700, plus court costs.
    Mr. Chairman, this concludes our statement. We would be pleased to 
answer any questions that you or other members of the Committee may 
have at this time.

                 Appendix I: Debt Settlement Companies

    Table 4 below summarizes examples of fraudulent, deceptive, abusive 
or questionable information provided by the 20 debt settlement 
companies we called. We have referred these cases, as appropriate, to 
the Federal Trade Commission (FTC).



----------------------------------------------------------------------------------------------------------------



  Table 4: Representations Made by Debt Settlement Companies We Called
------------------------------------------------------------------------
         Location of
  No.    company and        Fees a        Association     Case details
         affiliates                       membership b
------------------------------------------------------------------------
1       Florida;       Advance   The             Marketi
         affiliates    fees based on 15   Association    ng website that
         in Florida,   percent of         of             referred us to
         Massachuset   enrolled debt,     Settlement     two affiliates
         ts,           with monthly       Companies      Represe
         California,   payments           (TASC);c       ntative from
         and New       required           affiliates     one affiliate
         Jersey b      throughout         in TASC and    (a member of
                       program.           United         USOBA) stated
                                          States         ``everyone who
                                          Organization   enters the
                                          s for          program makes
                                          Bankruptcy     the independent
                                          Alternatives   decision to
                                          (USOBA)        stop paying
                                                         their
                                                         creditors''
                                                         Identif
                                                         ied through
                                                         spam e-mail
                                                         message
                                                         received by one
                                                         of our
                                                         investigators
                                                         website
                                                         advertised
                                                         ``New
                                                         Government
                                                         Programs!'' and
                                                         ``If we can't
                                                         get you out of
                                                         debt in 24
                                                         hours we'll pay
                                                         you $100''
                                                         Represe
                                                         ntatives
                                                         claimed high
                                                         success rates--
                                                         93 percent and
                                                         100 percent
                                                         Represe
                                                         ntative from
                                                         USOBA-member
                                                         affiliate
                                                         claimed that
                                                         ``worst case
                                                         scenario'' for
                                                         our settlements
                                                         would be ``40
                                                         cents on the
                                                         dollar,'' and
                                                         that ``every
                                                         single creditor
                                                         settles.'' He
                                                         also promised
                                                         that hiring his
                                                         company would
                                                         ensure that
                                                         calls from
                                                         creditors would
                                                         ``slow down and
                                                         eventually
                                                         stop''
                                                         Represe
                                                         ntative from
                                                         TASC-member
                                                         affiliate
                                                         claimed that
                                                         TASC was ``like
                                                         the SEC for
                                                         stock traders''
                                                         and serves as
                                                         the regulating
                                                         body for the
                                                         industry
                                                         Owner
                                                         of company
                                                         acknowledged
                                                         TASC logo
                                                         featured on
                                                         website despite
                                                         company not
                                                         being a member
                                                         of TASC
                                                         For
                                                         further
                                                         details, see
                                                         section on
                                                         ``Company 1''
                                                         in this
                                                         testimony
------------------------------------------------------------------------
2       Unknown;       Advance   Affiliate in    Marketi
         affiliates    fees based on 12   USOBA          ng website that
         in Arizona,   percent of                        referred us to
         Texas, and    enrolled debt.                    at least three
         Californiab   First 3                   affiliates
                       monthly payments                  Represe
                       go to fees.                       ntatives from
                       $25                       two affiliates
                       monthly                           told us we
                       maintenance fee.                  would not make
                       Addition                  our monthly
                       al contingent                     payments to
                       fee based on 4                    creditors while
                       percent of                        in the program
                       reduction in                      Represe
                       debt company                      ntative from
                       obtains for                       one affiliate
                       clients.                          told us we
                                                         could not
                                                         afford debt
                                                         settlement and
                                                         suggested that
                                                         we consider
                                                         bankruptcy as
                                                         an alternative
                                                         website
                                                         advertised
                                                         ``Reduce
                                                         balances to 40
                                                         percent--60
                                                         percent,''
                                                         ``Eliminate
                                                         excessive
                                                         Credit Card
                                                         Debt interest
                                                         immediately,''
                                                         and ``End late
                                                         payment fee's
                                                         [sic]''
                                                         Company
                                                         's radio
                                                         advertisements
                                                         claimed
                                                         ``government
                                                         approved'' and
                                                         ``government
                                                         authorized''
                                                         debt settlement
                                                         Represe
                                                         ntative from
                                                         one affiliate
                                                         stated
                                                         creditors would
                                                         send letters to
                                                         us indicating
                                                         that our
                                                         settled
                                                         accounts are
                                                         considered
                                                         ``paid in
                                                         full''
                                                         For
                                                         further
                                                         details, see
                                                         section on
                                                         ``Company 2''
                                                         in this
                                                         testimony
------------------------------------------------------------------------
3       California     Advance   TASC (at the    website
                       fees based on 16   time of our    targeted at
                       percent of         call)          Christian
                       enrolled debt,                    consumers
                       with monthly                      Multipl
                       payments                          e
                       required                          representatives
                       throughout                        told us we
                       program.                          would not make
                       First 3                   payments to our
                       monthly payments                  creditors once
                       go to fees.                       we entered
                       $100 fee                  company's
                       for out-of-state                  program
                       clients.                          Represe
                                                         ntative told us
                                                         that stopping
                                                         payments to our
                                                         creditors would
                                                         ``knock [our
                                                         credit score]
                                                         down a couple
                                                         of points,''
                                                         and that our
                                                         credit would
                                                         only be
                                                         affected while
                                                         we were in the
                                                         program
                                                         Represe
                                                         ntatives
                                                         claimed that
                                                         program has 85
                                                         percent success
                                                         rate, that
                                                         lawsuits from
                                                         creditors were
                                                         ``just random''
                                                         and did not
                                                         require an
                                                         attorney, and
                                                         that they would
                                                         negotiate our
                                                         debt down to 40
                                                         to 60 percent
                                                         of what we owed
                                                         Represe
                                                         ntative told us
                                                         that creditors
                                                         would report
                                                         our accounts
                                                         settled for
                                                         less than the
                                                         full balance as
                                                         ``paid in
                                                         full'' or
                                                         ``paid as
                                                         agreed''
                                                         Owner
                                                         told us during
                                                         our site visit
                                                         that the
                                                         company
                                                         recently
                                                         dropped its
                                                         TASC membership
                                                         due to rising
                                                         costs
                                                         For
                                                         further
                                                         details, see
                                                         section on
                                                         ``Company 3''
                                                         in this
                                                         testimony
------------------------------------------------------------------------
4       California     Advance   TASC            Company
                       fees based on 17                  advertised
                       percent of                        ``U.S. National
                       enrolled debt,                    Debt Relief
                       with monthly                      Plan,'' with a
                       payments                          logo depicting
                       required                          a shield filled
                       throughout                        with a U.S.
                       program.                          flag
                       First 3                   Represe
                       monthly payments                  ntative stated
                       go to fees.                       that, upon
                       $840                      entering the
                       maintenance fee                   program, we
                       (total                            would ``no
                       throughout                        longer be
                       program).                         making payments
                       $623.50                   to your
                       trust account                     creditors on a
                       fee (total                        monthly basis''
                       throughout                        Represe
                       program).                         ntative
                                                         justified first
                                                         3 monthly
                                                         payments going
                                                         only to fees as
                                                         necessary
                                                         because it
                                                         covered initial
                                                         set-up costs
                                                         and ``to show
                                                         that you have
                                                         the commitment
                                                         to be in the
                                                         program''
                                                         For
                                                         further
                                                         details, see
                                                         section on
                                                         ``Company 4''
                                                         in this
                                                         testimony
------------------------------------------------------------------------
5       California     Advance   TASC (at the    Represe
                       fees based on 15   time of our    ntative told us
                       percent of         call)          we were too
                       enrolled debt.                    poor for debt
                                                         settlement and
                                                         advised us to
                                                         consider
                                                         bankruptcy as
                                                         an alternative;
                                                         later described
                                                         company's debt
                                                         settlement
                                                         program
                                                         Represe
                                                         ntative stated
                                                         that we could
                                                         not continue
                                                         paying our
                                                         creditors while
                                                         in company's
                                                         program
                                                         After
                                                         our undercover
                                                         call but prior
                                                         to release of
                                                         this testimony,
                                                         company appears
                                                         to have gone
                                                         out of business
                                                         For
                                                         further
                                                         details, see
                                                         section on
                                                         ``Company 5''
                                                         in this
                                                         testimony
------------------------------------------------------------------------
6       Texas          Advance   Unknown         Represe
                       fees based on 15                  ntative stated
                       percent of                        that ``One-
                       enrolled debt,                    hundred percent
                       with monthly                      of our clients
                       payments                          stop making
                       required during                   those [credit
                       first 24 months                   card]
                       (program length                   payments'' in
                       unknown).                         order for
                                                         program to
                                                         work; later
                                                         directed us to
                                                         divert money
                                                         from paying
                                                         creditors to
                                                         account from
                                                         which company
                                                         withdraws fees
                                                         Represe
                                                         ntative advised
                                                         us to give
                                                         company's
                                                         telephone
                                                         number to
                                                         creditors as
                                                         our telephone
                                                         number, to
                                                         avoid calls
                                                         from creditors
                                                         Represe
                                                         ntative stated
                                                         ``basically
                                                         what we do is .
                                                         . . we
                                                         negotiate with
                                                         your creditors
                                                         to basically
                                                         cut your bills
                                                         in half. So
                                                         when we go to
                                                         negotiate, we
                                                         go to negotiate
                                                         at 50 cents on
                                                         the dollar.
                                                         That's what we
                                                         guarantee. Now,
                                                         we can also get
                                                         less,'' and
                                                         added as an
                                                         example one
                                                         major bank that
                                                         he claimed
                                                         ``normally
                                                         settles'' for
                                                         only 30 cents
                                                         on the dollar.
                                                         Represe
                                                         nted their
                                                         program could
                                                         prevent
                                                         creditors from
                                                         suing us or
                                                         garnishing our
                                                         wages
------------------------------------------------------------------------
7       California     Advance   Unknown         Adverti
                       fees based on 10                  ses ``National
                       percent of                        Debt Relief
                       enrolled debt,                    Stimulus Plan''
                       with monthly                      Represe
                       payments                          ntative told us
                       required during                   we would stop
                       first 12 months                   paying our
                       (of estimated 38-                 creditors, and
                       month program).                   that ``the only
                                                         thing you're
                                                         going to have
                                                         to worry about
                                                         is this payment
                                                         here [company's
                                                         fees]''
                                                         Represe
                                                         ntative stated
                                                         that lawsuits
                                                         were a ``scare
                                                         tactic''
                                                         website
                                                         states it can
                                                         ``Prevent
                                                         Creditor
                                                         Harassment''
                                                         Represe
                                                         ntative claimed
                                                         company could
                                                         reduce our
                                                         balances so
                                                         that we would
                                                         pay ``anywhere
                                                         from 30 to 60
                                                         percent on what
                                                         you owe''
------------------------------------------------------------------------
8       Texas          Advance   TASC            Regardi
                       fees based on 12                  ng payments to
                       percent of                        our creditors,
                       enrolled debt,                    representative
                       with monthly                      stated ``you're
                       payments                          gonna have to
                       required during                   cut them off so
                       first 15 months                   that they
                       (of estimated 48-                 haven't
                       month program).                   received
                       First 4                   anything''
                       monthly payments                  Represe
                       go to fees.                       ntative claimed
                                                         ``every account
                                                         that we work on
                                                         will be at
                                                         least 40 cents
                                                         on the dollar''
------------------------------------------------------------------------
9       Texas          Advance   Unknown         Represe
                       fees based on 15                  ntative stated
                       percent of                        that ``one-
                       enrolled debt,                    hundred percent
                       with monthly                      of our clients
                       payments                          stop making
                       required during                   their monthly
                       first 12 months                   payments as
                       (of estimated 24-                 soon as they
                       month program).                   enroll into the
                                                         program''
                                                         Represe
                                                         ntative
                                                         encouraged us
                                                         to explore
                                                         other debt
                                                         relief options
                                                         as well as debt
                                                         settlement
                                                         Name of
                                                         company changed
                                                         during our
                                                         investigation
------------------------------------------------------------------------
10      Texas          Advance   USOBA           Represe
                       fees based on 17                  ntative stated
                       percent of debt,                  that upon
                       with monthly                      enrolling in
                       payments                          company's
                       required during                   program ``you
                       first 19 months                   would no longer
                       (of estimated 48-                 make any of
                       month maximum                     your credit
                       program).                         card payments.
                                                         All of them
                                                         would go late''
                                                         Represe
                                                         ntative claimed
                                                         to ``negotiate
                                                         your debt down
                                                         to 50 percent
                                                         or less of what
                                                         you owe''
                                                         Represe
                                                         ntative said
                                                         advance fees
                                                         paid for
                                                         attorneys who
                                                         would ``look
                                                         at'' our
                                                         account monthly
                                                         Represe
                                                         ntative was
                                                         unable to
                                                         explain refund
                                                         policy by
                                                         telephone
                                                         Represe
                                                         ntative
                                                         suggested we
                                                         change our
                                                         address on
                                                         billing
                                                         statements to
                                                         address for
                                                         company's
                                                         attorneys
------------------------------------------------------------------------
11      Florida        Unknown-  Unknown         Telepho
                       -only received                    ne number
                       recorded                          listed on
                       information.                      website went to
                                                         a 7-minute
                                                         recording
                                                         Recordi
                                                         ng stated that
                                                         we would stop
                                                         paying our
                                                         creditors upon
                                                         entering
                                                         program
                                                         Recordi
                                                         ng claimed to
                                                         send letters to
                                                         credit bureaus
                                                         that would
                                                         ``remove any
                                                         late marks that
                                                         you may have
                                                         received on the
                                                         account''
------------------------------------------------------------------------
12      California     Advance   Unknown         Front-
                       fees based on 15                  end marketing
                       percent of                        company, with
                       enrolled debt.                    28 different
                                                         websites used
                                                         to solicit
                                                         customers for
                                                         referral to one
                                                         debt settlement
                                                         company
                                                         Represe
                                                         ntative stated
                                                         that affiliate
                                                         handling actual
                                                         settlement
                                                         process would
                                                         call us back;
                                                         we did not
                                                         receive a
                                                         return call
------------------------------------------------------------------------
13      Texas          Advance   USOBA           Represe
                       fees based on 10                  ntative stated
                       percent of                        that program
                       enrolled debt,                    does not work
                       with monthly                      for everyone,
                       payments                          but does work
                       required                          for everyone
                       throughout                        who has a
                       program.                          hardship
                                                         Represe
                                                         ntative stated
                                                         company's
                                                         services are
                                                         helpful to
                                                         consumers
                                                         ``because we
                                                         allow
                                                         [consumers']
                                                         accounts to go
                                                         delinquent and
                                                         past due and
                                                         into
                                                         collections''
                                                         An e-
                                                         mail sent after
                                                         our call stated
                                                         that upon
                                                         enrolling in
                                                         the program,
                                                         ``we will
                                                         inform your
                                                         creditors that
                                                         you will no
                                                         longer be
                                                         making payments
                                                         on the
                                                         accounts''
------------------------------------------------------------------------
14      Arizona        Advance   Unknown         Represe
                       fees based on                     ntative stated
                       12.9 percent of                   that ``9 out of
                       enrolled debt,                    10 of our
                       with monthly                      clients are
                       payments                          current,'' but
                       required during                   stop making
                       first 10 to 12                    payments when
                       months (of                        entering
                       estimated 30-                     program
                       month program).                   When
                                                         asked whether
                                                         to stop paying
                                                         accounts that
                                                         are current,
                                                         representative
                                                         replied
                                                         ``Absolutely''
------------------------------------------------------------------------
15      California     Advance   TASC            Represe
                       fees based on 15                  ntative stated
                       percent of                        that she could
                       enrolled debt.                    not interfere
                       First 3                   with our
                       monthly payments                  obligation to
                       go to fees.                       pay our
                       $30                       creditors, and
                       monthly                           encouraged us
                       maintenance fee.                  to continue
                       $14.50                    making payments
                       monthly trust                     if we could
                       account fee.                      afford to do so
                                                         at the same
                                                         time as saving
                                                         for settling
                                                         debts
                                                         Represe
                                                         ntative later
                                                         stated that if
                                                         we could
                                                         continue making
                                                         our minimum
                                                         payments
                                                         ``maybe this
                                                         [debt
                                                         settlement]
                                                         isn't the best
                                                         solution for
                                                         you''
------------------------------------------------------------------------
16      Florida        Continge  USOBA           website
                       nt fees based on                  targeted at
                       35 percent of                     Christian
                       reduction in                      consumers
                       debt company                      Represe
                       obtains for                       ntative stated
                       clients.                          that ``you stop
                       First                     paying
                       monthly payment                   everybody.
                       goes to                           That's what
                       enrollment fee.                   makes you
                       $53                       qualify. You
                       monthly                           fall behind.''
                       maintenance fee.                  Company
                                                         's contract
                                                         states there is
                                                         a $1,000
                                                         termination fee
                                                         for dropping
                                                         out of the
                                                         program
                                                         Represe
                                                         ntative
                                                         suggested that
                                                         we could pay
                                                         our initial fee
                                                         with a credit
                                                         card
                                                         Represe
                                                         ntative offered
                                                         to also provide
                                                         us information
                                                         on debt
                                                         consolidation
                                                         loans, to
                                                         determine which
                                                         option would be
                                                         best
------------------------------------------------------------------------
17      California     Advance   USOBA           Represe
                       fees based on 18                  ntative
                       percent of                        encouraged us
                       enrolled debt,                    to take care of
                       with monthly                      our late
                       payments                          mortgage
                       required during                   payments before
                       first 18 to 24                    worrying about
                       months (of                        paying off or
                       estimated 36-                     settling our
                       month program).                   credit card
                                                         debts
------------------------------------------------------------------------
18      Unknown        Advance   Unknown         website
                       fees based on 15                  targeted at
                       percent of                        Christian
                       enrolled debt,                    consumers
                       with monthly                      website
                       payments                          describes one
                       required                          of the
                       throughout                        ``blessings''
                       program.                          of its program
                       First 3                   as ``Immediate
                       monthly payments                  increase of
                       go to fees.                       spendable cash-
                                                         flow [sic]''
                                                         Represe
                                                         ntative told us
                                                         the program is
                                                         based on our
                                                         stopping
                                                         payments to
                                                         creditors
------------------------------------------------------------------------
19      Maryland       Advance   Unknown         Represe
                       fees based on 15                  ntative stated
                       percent of                        that it
                       enrolled debt.                    ``wouldn't make
                       $9.85                     sense'' to
                       monthly bank fee.                 continue making
                                                         payments while
                                                         in a debt
                                                         settlement
                                                         program
                                                         Represe
                                                         ntative said
                                                         that program
                                                         ``works for
                                                         some'' but is
                                                         ``not great for
                                                         others,'' and
                                                         that company
                                                         discourages
                                                         consumers from
                                                         debt settlement
                                                         if they plan to
                                                         buy a house
                                                         soon, due to
                                                         credit score
                                                         damage
------------------------------------------------------------------------
20      California     Unknown-  TASC            Represe
                       -representative                   ntative stated
                       said we did not                   that we did not
                       have enough debt                  have enough
                       to qualify for                    debt to qualify
                       program.                          for the
                                                         company's debt
                                                         settlement
                                                         program
------------------------------------------------------------------------
Source: GAO analysis of information obtained from debt settlement
  companies.
a Fee information reflects fees disclosed to us; some companies may
  charge additional fees that were not disclosed. Debt settlement
  companies typically charge fees requiring payments either at the
  beginning of the program as an advance fee or after each settlement as
  a contingent fee. Some companies structure the payment of advance fees
  so that they collect a large portion of them--as high as 40 percent--
  within the first few months regardless of whether any settlements have
  been obtained or any contact has been made with the consumer's
  creditors. Others collect fees throughout the first half of the
  enrollment period in advance of a settlement. Companies that charge a
  contingent fee generally base it on a certain percentage of any
  settlement they actually obtain for consumers. They sometimes charge a
  small, additional fee every month while consumers are busy attempting
  to save funds for settlements. FTC has criticized advance fees,
  stating that consumers often suffer irreparable injury as a result of
  paying them in advance of receiving services. The agency maintains
  that the practice of taking fees before a settlement is obtained
  results in a number of adverse consequences for consumers: late fees
  or other penalty charges, interest charges, delinquencies reported to
  credit bureaus that decrease the consumer's credit score, and
  sometimes legal action to collect the debt.
b Some companies we called referred us to one or more affiliates. It was
  not always clear to us exactly with which company or affiliate we were
  speaking, where the companies or affiliates were located, or what the
  relationships were between the companies and affiliates. In some
  cases, separate affiliates of the same company claimed to be members
  of different industry trade associations.
c While Company 1 claimed to be a member of TASC, it appears this was a
  false representation.


    The Chairman. Do you have, incidentally--there are several 
of those comments which I couldn't understand. Do you have text 
which is available?
    Mr. Kutz. Yes, we do.
    The Chairman. We have text.
    Mr. Kutz. Yes.
    The Chairman. OK. I just--I want to have that.
    Mr. Kutz. OK.
    The Chairman. I thank you very much.
    And now, we will turn to The Honorable Julie Brill.
    Well, I--I'm just doing it in order of what I see here. I'm 
not going to be stage-managed, OK?
    [Laughter.]
    The Chairman. I will be stage-managed.
    [Laughter.]
    The Chairman. Mrs. Haas--Mr. and Mrs. Haas. You're of 
Concord, New Hampshire.
    Mrs. Haas. Yes, I am.
    The Chairman. And please proceed.

              STATEMENT OF HOLLY A. HAAS, CONSUMER

    Mrs. Haas. Thank you, Chairman Rockefeller and Ranking 
Member Hutchison, for inviting me to speak with you today about 
my experience with debt settlement.
    I live in New Hampshire with my husband of 17 years. I have 
three sons and one grandson. My son served proudly with the 
U.S. Navy until 2009.
    In June 2007, our credit card interest rates were 
increased. The credit card company told us our debt-to-income 
ratio was too high, and that justified an increase, even though 
we were current. These increases made it difficult to meet our 
monthly budget, due to dramatic increases of our monthly 
payments. We were never late on our payments, but we needed 
help to reduce them.
    In July 2007, after watching TV commercials on credit 
counseling, we started researching credit counseling companies 
on the Internet. We found one, in particular, that was close to 
home in Massachusetts: Consumer Credit Counseling of America; 
and because it had ``America'' in it, we thought we couldn't go 
wrong.
    We called CCCA and spoke with a man named Tom Roy, who 
talked to us about credit counseling, but, because of our 
credit card balances, he persuaded us to do a debt settlement. 
For a fee, they could get us an attorney, that they selected, 
who would work to settle our debts. In the end, we would pay 46 
percent of our debt and a retainer of $7,500. This would cut 
our credit card payments in half. Forty-eight payments would go 
into an account and would be used to pay the attorney and the 
settlements. After trying to work with our creditors, to no 
avail, this sounded like a better option for us.
    On August 4, 2007, we received the contract and sent it 
back, signed, along with the checking info for the 
installments. We were instructed by the CCCA not to pay our 
credit card bills, because the credit card companies would not 
negotiate settlements with current accounts. By September, the 
collection letters and calls started. Money was going into our 
holding account, and the attorney that Consumer Credit 
Counseling of America put us in touch with started taking his 
fees.
    The attorney's name was Richard A. Brennan. We heard 
nothing from him, so we researched our attorney on the 
Internet. To our dismay, we found numerous serious complaints 
about him.
    Afraid that we were being scammed, we called Brennan's 
client services number, as instructed on the contract, for 
questions, which we thought was Brennan's office staff. But, it 
turned out to be a totally separate entity in Boca Raton, 
Florida. The person assured us that our case was being handled 
properly, so we continued with Brennan to help us with our 
debt.
    In November 2007, we called client services, due to 
collection threats. They no longer handled Brennan's cases, and 
referred us to a number in Maryland that no one answered; the 
voice-mails were always full. We called client services again, 
who said the creditors agreed to settle our credit card debt at 
80 percent. In reality, nothing was being done on our case and 
the attorney was still taking our money from our account.
    In February 2008, we got a call from Howard Lee Schiff, a 
law office hired by Sears credit. They were going to sue us. We 
told them that we had a lawyer and that they needed to contact 
him. We again called client services, and the woman told us 
they no longer instructed clients of Richard A. Brennan, again 
giving us the contact number that gets you nowhere.
    We decided to Google his name. The complaints were worse. 
The Better Business Bureau rated him an ``F,'' and the AG of 
Maryland had reached a settlement with him to discontinue debt 
settlement practices, but the attorney was still practicing 
debt settlements. After learning this, we realized we had to 
stop working with him immediately. We then faxed a letter to 
the bank that had the holding account, and told them to stop 
all payments to Brennan, and to stop all transfers. We 
immediately closed our checking account, for fear that they 
would still take the money out anyway. The next day, we sent a 
letter to the attorney's office, terminating his services.
    On February 25, 2008, we consulted with an attorney in New 
Hampshire, to see if we could undo the damage that Brennan 
caused. We were now so far in default that we thought our only 
option was bankruptcy. At our consultation, we found that 
neither Consumer Credit Counseling of America nor Brennan was 
licensed for debt adjustment in New Hampshire, making our 
contracts with them illegal. He said we should formally 
complain to the AGs' offices in New Hampshire and in Maryland, 
and the New Hampshire Banking Commission, which we did.
    There is now an order to cease and desist in New Hampshire, 
and the AG's office in Maryland had Brennan disbarred from 
their State.
    Our New Hampshire attorney told us about Consumer Credit 
Counseling Service of New Hampshire and Vermont, a licensed, 
nonprofit company that is affiliated with the credit card 
companies to help manage debt. We joined the program on March 
10, 2008. In 6 months' time, we were about $13,000 behind from 
where we started. Our credit scores had gone from excellent to 
poor. All credit extended to us now is at a higher rate, if at 
all, and banks who once gladly financed our cars won't look at 
us. Insurance companies have given us a higher quote, due to 
their--our credit history.
    Debt settlement companies are very misleading. They have no 
regard for State or local laws. Debt settlement is much 
different than debt management. As we now know, a debt 
settlement plan does extreme damage to your credit. And in our 
opinion, they don't work and shouldn't exist.
    In 2 years, we have paid about $32,000 toward our credit 
cards, and we now owe approximately $34,000. If we started with 
a legitimate company first, our current debt would be about 
$13,000. We would have paid off our credit cards in April 2011. 
With our current payment plan, we will be debt-free October 
2012.
    Now, we don't spend beyond our means. If we want to buy 
something, we save up first and we do not use credit cards at 
all.
    Thank you.
    [The prepared statement of Mrs. Haas follows:]

             Prepared Statement of Holly A. Haas, Consumer

    After numerous years of unrequested credit limit increases from our 
credit card companies and them sending us checks with our monthly 
statements to use for credit, in June 2007, we noticed an increase in 
our interest rates on our monthly statements. After calling the credit 
card company, we were told that our ``debt to income ratio was too 
high'' and that justified an increase in rates. This was in spite of 
the fact that we were making payments on time. Increased rates made our 
payments higher and this is what made it difficult to pay these cards 
off.
    My husband and I, realizing our ever increasing financial debt with 
credit cards, were paying more than what we could afford in credit card 
payments and needed some advice in how to reduce them in some way to 
make it easier to pay our necessary bills without struggling each 
month. We were never late on any of our credit card payments at this 
time.
    In late July 2007, after researching debt management companies on 
the Internet, we called Consumer Credit Counseling of America, (CCCofA) 
1060 Osgood Street, North Andover, MA to get more information on debt 
reduction. We chose this company because it was the closest we could 
find from our home in Concord, NH and we thought they were credit 
councilors to help manage our debt. The representative, Tom Roy, asked 
us about our credit card balances and assured us that there were 
options for us, either reduction or settlement. First he talked about 
``credit counseling'' where they would set up a payment plan with the 
creditors and help reduce the interest rates. However, he thought that 
it would be better for us to do a debt settlement plan. For a small 
referral fee to fill out the paperwork they could get us an Attorney 
who would work for us to settle our debts with the credit card 
companies. For our total debt of $48,648 we would be paying forty-six 
percent (46 percent) or $23,821 and an attorney fee of $7,500 for a 
total sum of $31,321. This would reduce our monthly payments from 
$1,327 a month to $653 (estimate) for a period of 4 years. The monthly 
payments would go into a bank account which they would set up for us. 
The money in that account would collect over time and be used to pay 
the attorney and the settlements for each of the creditors we had. They 
told us that their attorney (unknown at the time) would pay them off as 
he got word that the credit card companies agreed to settlement with 
the money accrued in the account. After trying to work with all of our 
creditors beforehand about reducing the interest rate and being denied, 
this sounded like a better option for us at the time.
    Once we agreed to go with the debt settlement and Consumer Credit 
Counseling of America sent out our contract in the mail, this was the 
last time we ever could get a hold of Tom Roy. They gladly took $400 
electronically from our checking account for their referral fee. It 
took about 2 weeks to get the contract.
    Finally, on August 4, 2007, we received the contract in the mail, 
read and signed it and sent it by fax back to Consumer Credit 
Counseling of America, along with our checking account information for 
the monthly installments and a hardship letter to our creditors, as 
instructed. During that time, we were verbally instructed not to pay 
our credit card bills--which were not overdue at that time, because the 
credit card companies would not negotiate settlements with current 
accounts. If the credit card companies or collection companies called, 
we were told to say ``We are not neglecting our debts, we have hired an 
attorney. Please call (the number) for more information.'' We were 
instructed to fax all collection letters to our attorney, which we did. 

(Exhibit A)

                               Exhibit A

























    By the end of September 2007, the collection letters and phone 
calls started arriving, money was going into our ``Global Client 
Solution Banking Services at Rocky Mountain Bank and Trust'' (Exhibit 
B) account thru electronic transfer and the Attorney's office was 
surprisingly now taking our money out of our holding account 
automatically for his fees ($649.13 each month for August and 
September). We still had not spoken to or heard from our Attorney. 
After calling the ``client'' phone number provided to us in the 
beginning to no avail and finding out who he was from our contract's 
business heading, we decided to research about him on the Internet to 
get more information about him. To our dismay, we found numerous 
serious complaints about our attorney.

                               Exhibit B



    Shocked to think that we were being scammed and afraid that we'd 
lose everything we owned, we called the ``client number'' at the Client 
Services Department. The person on the other end in Boca Raton, FL, 
assured us that our case was being handled properly. We had requested 
at that time, that we get a copy of all correspondence to and from the 
creditors and the attorney from the date of the agreement until now. 
They agreed and said they would. About a week after that, the only 
copies we got were the ``Cease and Desist Communications'' and the POA 
for the companies we carried credit cards with. They were dated 9-25-
07. Wanting to believe in the good of people, we continued with this 
Attorney to help us with our ever growing financial mess.
    In November 2007, we again called our Attorney's Client Services 
Department due to threatening collection letters, calls and threats of 
lawsuits. The Client Services representative told us that they no 
longer handle Richard A. Brennan' s cases and referred us to a number 
in Maryland that when called it just rang and rang. No one ever 
answered the call. When we tried to leave a message for the paralegal, 
the voice mailbox always said it was full. We were just like the 1000 
or so other people who wrote complaints about the attorney on the 
websites. We again called the Client Services representative in Boca 
Raton, FL and told them that no one was answering the phone and that we 
were really concerned and he asked what our questions were. We told him 
that we didn't think anyone was working on our debt settlement case and 
he said that they got information from all creditors reducing our debt 
to 80 percent. (We feel that he just told us that to appease us.) 
Relieved, we asked him to send copies of those letters as we had 
already requested all copies of correspondence. He said he would. To 
this date, we never got those letters. At this time, nothing was done 
on our case and they were still withdrawing money from our account each 
month and the attorney was still taking money from our holding account. 

(Exhibit C)

                               Exhibit C







    In January 2008, we continued to get collection letters from 
creditors and we were still faxing them to the number they provided us 
in the contractual agreement. We continued to try to call the Frederick 
Law Group, LLC, now in Maryland, to get some information on our file to 
no avail, but continued to not pay any credit card bills as instructed. 
By now, our credit cards were over limit (with fees), overdue (with 
fees) and interest charges sky-rocketed and the Attorney was still 
taking our money.
    On February 19, 2008, we got a call from a Law Firm representing a 
creditor. They were going to sue us. We told them that we had a lawyer 
representing us and that they needed to contact them. The lady 
commented that the file doesn't show that we have an attorney and took 
the information and hung up. Immediately, we called the number our 
contractual statement first provided us. The woman told us the same 
thing. They no longer instruct clients of Richard A. Brennan, again 
giving us the contact information that gets you nowhere.
    Upon trying to call this Attorney, we once again decided to Google 
his name. The complaints were worse, the Better Business Bureau's 
rating of this business is an F, and we found where the Attorney 
General of Maryland had reached a settlement with him but the Attorney 
is still fraudulently scamming hundreds of debt-stricken people. 
(Exhibit D) This settlement occurred unbeknownst to us, a month or so 
after we signed our contract with him. According to an on-line report 
the attorney's company we were working with in Boca Raton, was ``out of 
business'' as of October 2007. We never received any notice of this and 
he still took our money each month.

                               Exhibit D



    On February 19, 2008, my husband faxed a letter to the company that 
is in charge of taking out our money and told them to terminate our 
account and stop all direct payments to the account. We immediately 
closed our checking account for fear he would still take the money out 
anyway. (Exhibit E)

                               Exhibit E



    On February 20, 2008, we faxed a letter to the Attorney's new 
office in Frederick, MD, terminating his POA over our creditors and 
terminating his (lack of) services due to breach of contract. (Exhibit 
F) To this date, Attorney Brennan' s office has sent us two more blank 
contracts to fill out to continue the debt settlement with him that we 
started back in August 2007, even after he was fired. We still can't 
believe how bold this rip off artist is.

                               Exhibit F



    On February 25, 2008, we had consulted with an Attorney here in 
Concord, NH to see if we could undo the damage that this scamming 
Attorney caused us. We were now so far in default that we thought our 
only option was bankruptcy. (Exhibit G) It was at this time that we 
found out that any company doing debt adjustments must be licensed with 
the State of NH. Neither Consumer Credit Counseling of America nor 
Richard A. Brennan was licensed in NH. Thereby making our contract with 
either of them illegal and making the fee Consumer Credit Counseling of 
America retained also illegal. He told us that we should write letters 
to the Attorney Generals Offices in NH and MD and the NH Banking 
Commission, which we did 2 days later. (Exhibit H) There is now an 
order to ``Cease and Desist'' here in NH along with paying back 
Consumer A, which is us. (Exhibit I) The Attorney General's Office in 
MD has managed to Disbar Richard A. Brennan from ever practicing law in 
the State of Maryland. (Exhibit J)
    This Concord, NH Attorney also told us about a program in town that 
is a licensed, legitimate non-profit company and is affiliated with the 
credit card companies. Anyone who filed for bankruptcy in NH must use 
this program for 6 months before filing anyway so we joined the program 
in hopes that we didn't have to file bankruptcy. On March 10, we signed 
an agreement with Consumer Credit Counseling Service of NH and VT to 
have them help manage our credit card debt. (Exhibit K) At that time, 
our credit card debt had increased from $48,648 to $57,236 a difference 
of $8,588. This was not including the $3,895.08 we paid Attorney 
Brennan, so now we were $12,483 behind from where we started. Our 
credit card companies refused to take off the interest charges and fees 
due to our issue with Richard Brennan and to date we are still working 
with Consumer Credit Counseling Service of NH and VT to pay off our 
credit cards balances.
    The far reaching affects from what this debt settlement lawyer did 
to us; is our credit scores have gone from excellent to poor; All 
credit extended to us now is in the higher interest rate bracket--if at 
all. Banks who financed our cars and we had in good standing with, 
won't look at us to finance another if we ever needed too. We can't 
refinance anything at lower rates, including our mortgage. Auto 
insurance companies have given us higher quotes due to our credit 
history.
    What we have learned from our experience is; Debt Settlement 
companies have business names very similar to the ``real'' ones, so 
it's hard to tell who is legitimate and who isn't. Debt ``management'' 
is much different then debt settlements; these debt settlement 
companies will tell you the key words that you want to hear, like 
``reduce debt/payments in half'', ``first step toward building 
wealth'', ``build a bank account with liquid assets you never thought 
possible'', ``pay off your debt in 4 years''. They are in business to 
make money, they are not in business to help consumers with financial 
debt problems, they have no regard for State or local Laws and in our 
opinion they don't work.
    We have read the book by Dave Ramsey, ``Total Money Make Over'' and 
have followed his debt free living to the letter. We've learned that in 
order to get our heads above water and stay above water, we don't spend 
beyond our means; if we want to buy something, we must save a little 
each pay period and pay with cash when we have saved enough. We try to 
put more toward our credit card debt to get them paid off faster but 
that doesn't always happen each month. Since we started with CCCS of 
NH, we have not used credit cards even for Christmas or birthdays. When 
we first started with CCCS of NH we had $57,236 in debt. In 2 years we 
have paid $31,895 toward our credit cards and now owe approximately 
$34,037.
    If we had started with a legitimate debt management company first, 
put what we paid Atty. Richard A. Brennan toward our debt, our current 
debt would be approximately $12,858. This means we would be completely 
credit card debt free in April 2011. With our current payment plan we 
will be debt free October 2012.

    The Chairman. Thank you very much. That's a stunning, 
stunning experience.
    Mr. Phil Lehman, Assistant Attorney General in the Office 
of North Carolina's Attorney General, Consumer Protection 
Division, Raleigh, North Carolina.
    We welcome you.

  STATEMENT OF PHILIP A. LEHMAN, ASSISTANT ATTORNEY GENERAL, 
              NORTH CAROLINA DEPARTMENT OF JUSTICE

    Mr. Lehman. Thank you, Mr. Chairman. I appreciate the 
opportunity to appear before the Committee.
    And, as you said, Mr. Chairman, this is a very important 
and timely consumer protection issue, and one that is a very 
high priority for the attorneys general around the country, 
particularly in these very difficult economic times, when 
consumers are overwhelmed with debt and looking for ways out 
that are legitimate and that work.
    Before I continue with my remarks, I'd like to follow up on 
what Mr. Kutz and what Mrs. Haas testified to. And I can tell 
you, as someone working in an attorney general's office, that 
the stories they told are not isolated examples. I, along with 
my colleagues around the country, hear these kind of stories 
every day. It's a very serious problem, and what they talked 
about, again, is not uncommon.
    Unfair and deceptive practices in the marketing and 
delivery of debt settlement services continue to be a major 
problem for consumers and for law enforcement. Financially 
distressed consumers are looking for help in managing their 
debt burdens. Unfortunately, too many of them have fallen prey 
to unscrupulous debt settlement companies. These companies 
advertise heavily on television and on the Internet. They make 
grandiose promises that they can cut consumers' debt burdens in 
half and leave the consumer completely debt-free in 12 to 36 
months.
    The reality is far different from the rosy view that's 
painted in these commercials. In the view of the attorneys 
general, deceptive conduct in the sale of debt settlement 
services is widespread. In our view, this is not a case of a 
reputable and beneficial industry that is marred by a few bad 
apples.
    Last October, 41 State attorneys general joined in comments 
in support of the Federal Trade Commission's proposed rule on 
the sale of debt relief services. The comments noted that 
complaints to AGs' offices had more than doubled since 2007 and 
that the States had brought more than 128 enforcement actions 
against debt relief companies. The attorneys general reported 
that too many consumers have paid substantial fees for debt 
settlement services that were often not provided.
    We identified a number of very specific, serious problem 
areas that regularly occur in the debt settlement industry. 
These are, first, as we have just heard, there are widespread 
deceptive representations in the sale of debt settlement 
services. In our experience, consumers are regularly misled 
about the likelihood of getting all their debts settled, the 
length of time it takes to get any debt settled, and the amount 
of money it will cost them as fees.
    Second, another major problem is the failure of debt 
settlement companies to inform consumers about the negative 
consequences of the debt settlement process. Based on what 
consumers have told us, there are many pitfalls with debt 
settlement programs. Consumers are directed not to communicate 
with or make payments to their creditors. When that happens, 
collection efforts intensify. Debt balances balloon due to 
default interest rates and late fees. The consumer's credit 
standing will continue to deteriorate. Collection lawsuits and 
wage garnishment actions may follow.
    And we have heard from the banking industry that they do 
have, and would like to offer, options to consumers who are 
overwhelmed with debt, but they can't, because consumers are 
told not to talk to their creditors and not to make payments.
    The third problem, and a very significant one, is the 
charging of significant advance fees before any real services 
are delivered and before any results are obtained. By the 
industry's own admission, the majority of consumers drop out 
before debt settlements are completed. Since these fees are 
front-loaded, the debt settler gets paid whether or not it 
completes any settlements. There is little incentive to perform 
with this advance-fee model. If the debt settler does not 
perform and the consumer drops out after 6 months, the debt 
settler keeps the fees that it has collected, even though the 
consumer has obtained no benefit.
    This is why the attorneys general that supported the FTC 
comments support a prohibition on the collection of advance 
fees for debt settlement services. We believe that the 
elimination of advance fees is the key to cleaning up this 
industry.
    My State, North Carolina, has already taken that step. In 
2005, our General Assembly enacted an advance-fee ban for debt 
settlement services. It has worked well, both for enforcement 
purposes and to limit debt settlement abuses.
    Debt settlement companies can, and do, operate without 
charging very large advance fees. We've been informed by two 
major national companies that they can do business in North 
Carolina and that they can continue to do business by 
collecting fees only after successful settlement of debts. I 
know the debt settlement industry strongly opposes any 
prohibition or serious limitation on advance fees, but it is 
not, as they claim, a death sentence for the industry.
    One other thing I would like to mention is that, despite 
our North--very strict North Carolina law--a problem that was 
highlighted by Mrs. Haas is that attorneys are now getting into 
this field, and we have seen a number of examples where 
attorneys are used as fronts by debt settlement companies to 
get around State regulatory laws. In many States, including 
ours, licensed attorneys are exempt from both the debt 
settlement laws and, generally, from our unfair and deceptive 
practices laws.
    The Chairman. Can you further explain that, sir?
    Mr. Lehman. Yes, I'd be happy to. The debt settlement 
industry--the services are--I would describe them as very 
segmented. As Mrs. Haas testified to--she responded to an ad by 
Consumer Credit Counseling of America. That is not a debt 
settlement company, it is a lead-generator. And the lead-
generators then refer the consumer to somebody. In our case, in 
North Carolina, since debt settlement with advance fees is 
illegal, lead-generators may refer the consumer to a law firm, 
an out-of-state law firm. The law firm is there in name only. 
When the consumer signs the agreement, it's in the name of a 
law firm. It's a law firm retainer. So, the consumer thinks 
they're getting a law firm to represent them, which also would 
mean representation in the event of a lawsuit. And so, it gives 
the consumer an added comfort zone that they wouldn't get from 
a commercial debt settlement company.
    The fact of the matter is, the law firm does none of the 
work. All of the customer service, negotiation, accounting, and 
management, is handled by an outsourced debt settlement 
provider. So, the law firm is there in name only, and they then 
contend they're not subject to State laws. They do not want to 
respond to subpoenas, because of attorney-client privilege, and 
so on. But, that is a fairly new problem, and I think it's done 
as a way to get around State laws.
    In our State, we've had two litigated cases against law 
firms and a settlement in another case where a law firm was 
involved. So, yes, it is a problem.
    Those are my remarks, Mr. Chairman. I'd be happy to answer 
any questions. And I can speak on behalf of other attorneys 
general offices, that we greatly appreciate the attention that 
you and your committee are giving to this very important issue.
    Thank you.
    [The prepared statement of Mr. Lehman follows:]

  Prepared Statement of Philip A. Lehman, Assistant Attorney General, 
                  North Carolina Department of Justice

    Chairman Rockefeller, Senator Hutchison, and members of the 
Committee, my name is Phil Lehman. I am an Assistant Attorney General 
in the Consumer Protection Division of the North Carolina Department of 
Justice. I have served in that capacity for 22 years and have 
specialized in litigation and legislation relating to consumer credit 
and credit fraud. I appreciate the opportunity to appear before the 
Committee and to share my experience about consumer protection issues 
relating to the business of debt settlement.

I. Unfair and Deceptive Practices in the Offering and Performance of 
        Debt Settlement Services are Widespread and are a Major 
        Consumer 
        Protection Problem for State Attorneys General
    Consumer abuses in the marketing and delivery of debt settlement 
services have been a major consumer protection problem for state 
attorneys general. The problem is particularly acute in the current 
economic downturn when many consumers are overwhelmed with debt, are 
delinquent in credit card payments, and are looking for legitimate ways 
to cope with their debt burden. Unfortunately, too many of these 
consumers fall prey to unscrupulous debt settlement businesses that 
make grandiose offers of debt reduction but deliver little relief. In 
our experience, most consumers are worse off after enrolling in debt 
settlement programs. Typically, consumers' debt balances increase with 
added interest, their payments are diverted to the debt settlement 
company instead of the creditor, and collection efforts, including 
legal action, are stepped up against the consumer.
    Last October, the National Association of Attorneys General (NAAG) 
submitted comments on behalf of 41 attorneys general to the Federal 
Trade Commission in support of the FTC's proposed Rule on Debt Relief 
Services.\1\ The attorneys general noted that unfair and deceptive 
activity in the debt settlement industry was widespread. Citing the 
fact that consumer complaints had substantially increased and that 
attorneys general had filed over 128 enforcement actions against debt 
relief companies, the comments welcomed the comprehensive regulatory 
initiative proposed by the FTC:
---------------------------------------------------------------------------
    \1\ FTC Notice of Proposed Rulemaking to amend the Telemarketing 
Sales Rule to address the sale of debt relief services, 74 Fed. Reg. 
41988 (Aug. 19, 2009). The comments submitted by NAAG are available at 
http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00192.pdf.

        The States view the eradication of unfair and deceptive 
        practices in the debt relief industry--and the harm caused to 
        consumers and the marketplace by these practices--as a consumer 
        protection priority . . . [The States] submit that the 
        comprehensive bright line approach reflected in the proposed 
        rules would substantially aid law enforcement agencies in 
        addressing the harms that have been caused to consumers by 
---------------------------------------------------------------------------
        unscrupulous practices in the debt relief industry.

    In the comments, the attorneys general described some of the 
prevailing problematic debt settlement practices based on information 
obtained from cases and numerous consumer complaints:

        1. Deceptive solicitations, including unsubstantiated claims of 
        consumer savings and the length of time required to complete 
        the program. (See sample solicitations attached as Exhibit 1.)

        2. Failing to adequately inform consumers that collection 
        efforts, including lawsuits, will continue against them due to 
        the extended nonpayment of consumers' accounts while in the 
        debt settlement program and that the consumer's credit standing 
        will deteriorate. (Sample solicitation: ``You'll avoid 
        bankruptcy, put an end to harassing phone calls from creditors, 
        and allow your credit score to dramatically improve.'')

        3. Failing to adequately inform consumers that before debts are 
        settled, the balances on their credit accounts will increase 
        significantly due to accumulating interest and late charges. 
        (Default rates on credit card accounts can be as high as 30 
        percent, so a consumer's $10,000 debt could rise to $13,000 
        after 1 year of nonpayment.)

        4. Lack of adequate screening and individual budget analysis to 
        determine whether a debt settlement program is suited for the 
        consumer.

        5. Deceptive disparagement of consumer credit counseling 
        services and bankruptcy, which are often more effective 
        alternatives for the consumer.

        6. The collection of substantial advance fees before any 
        meaningful services are rendered, so that the debt settlement 
        company profits even if the consumer receives no benefits. 
        (Fees typically range from 15 percent to 18 percent of the 
        consumer's debt, and are collected in the earlier months of the 
        program before settlements are concluded.)

        7. Advising consumers to cease payments on their credit 
        accounts and to cease communications with their creditors.

        8. Failing to provide regular information to consumers about 
        collection of fees, status of debt settlement accounts, and 
        communications with creditors.

    The consumer protection problems in the area of debt relief 
services are not limited to a few bad actors; they are pervasive 
throughout the industry. The whole premise of debt settlement is based 
on consumers not paying their debts and not communicating with 
creditors, i.e., essentially encouraging breach of contract. The theory 
is that the older and more delinquent the debt, the easier it will be 
to negotiate. Only after sufficient funds are accumulated in the 
consumer's settlement account (after deduction of fees), which can take 
a year or more, the debt settler may initiate some settlement 
negotiation activity. Consumers are taking a big risk, while interest 
charges mount and the debt settler's fees are being collected, that 
they will eventually get relief from all their debts.
    During the extended period of time while consumers are making 
payments to their debt settlement accounts, problems are likely to 
arise. Creditors have not agreed to any debt relief plan, they are not 
receiving any payments, and they are blocked from offering debt 
resolution options directly to their customers. These months of 
nonpayment and non-communication lead not only to increased debt, but 
also to increased collection efforts and legal action.
    Further, a significant portion of the consumer's initial payments 
is diverted to the settlement company's fees.\2\ If the consumer drops 
out before the settlement process is concluded, as is usually the case, 
he or she will lose the fee payments, while facing increased debt 
account balances.\3\ The debt settler therefore profits whether or not 
it accomplishes anything for its client.
---------------------------------------------------------------------------
    \2\ Attached is a copy of a payment schedule offered to a North 
Carolina consumer by Heritage Debt Relief in December 2009. It calls 
for the payment by the consumer of $6,906 in fees to Heritage. The 
consumer has to make monthly payments of $575 for an unspecified period 
of time. The consumer's first 5 monthly payments of $575 are allocated 
entirely for Heritage's fees, followed by half ($287.74) of the next 14 
months payments.
    \3\ A study published by the Colorado Attorney General's Office 
based on annual reports submitted by debt settlement companies from 
2006 through 2008 revealed that only 7.8 percent of consumers who began 
debt settlement programs in 2006 had completed them by the end of 2008. 
53.3 percent of consumers had dropped out of the programs. The Colorado 
information came from licensed debt settlement providers, not outlaws 
or ``bad apples.'' See Comments of the Colorado Attorney General on the 
FTC's proposed debt relief amendments to the Telemarketing Sales Rule, 
http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00189.pdf. In a 
lawsuit brought against debt settler National Asset Services (NAS), the 
Florida Attorney General alleged that over a six-year period, only 13.5 
percent of Florida residents had completed NAS' debt settlement 
program. In a similar case brought against NAS, the New York Attorney 
General alleged that out of 1,981 New Yorkers enrolled in the NAS 
program, only about 3 percent completed it.
---------------------------------------------------------------------------
    Because of these rampant consumer abuses in the debt relief 
industry, 41 attorneys general specifically support the FTC's proposal 
to prohibit debt settlement companies from collecting advance fees. The 
advance fee ban, while opposed by much (but not all) of the debt relief 
industry, is the key to preventing fraud and ensuring that debt 
settlement services will be performed. There is precedent for such an 
advance fee prohibition, particularly for suspect services that purport 
to help distressed debtors. The Federal Credit Repair Organizations 
Act, 15 U.S.C.  1679b(b), and many similar state laws prohibit credit 
repair businesses from charging fees until all promised services are 
fully performed. Similarly, the Telemarketing Sales Rule, 16 C.F.R.  
310.4 (a)(4), prohibits advance fees for loan brokering services, 
another business activity characterized by deceptive promises and 
minimal performance. Many states prohibit advance fees for foreclosure 
relief and mortgage loan modification services because of widespread 
consumer fraud in the offering and delivery of those services. The FTC 
is also recommending an advance fee prohibition in its proposed Rule on 
Mortgage Assistance Relief Services (75 Fed. Reg. 10707, March 9, 
2010).

II. North Carolina Law Prohibits Debt Settlement Services If Advance 
        Fees Are Charged
    Debt relief services are not a new phenomenon, nor are the consumer 
abuses associated with such services. Over 40 years ago, at least 13 
states, including North Carolina, enacted ``debt adjusting'' or ``debt 
pooling'' statutes not just to regulate, but to prohibit, the then-
prevailing model of debt settlement. In fact, North Carolina and the 
other similar state statutes made debt adjusting a criminal offense. 
The 1963 preamble to the North Carolina statute, N.C. Gen. Stat.  14-
423, et seq., explained the reasons for banning debt adjusting 
services, reasons which are still very pertinent today:

        . . . these [debt adjusting] practices have grown to such 
        proportions that for the most part they have become a national 
        menace by preying upon unfortunate people and harassed debtors, 
        and those engaged in such practices, except for a few, have 
        engaged in false advertising, have falsely held themselves out 
        as competent and able to solve debt problems regardless of any 
        and all circumstances, have lured ignorant and unsuspecting 
        people into executing contracts heavily loaded in their favor 
        and have charged large fees for alleged services which results 
        in piling debt upon debt.\4\
---------------------------------------------------------------------------
    \4\ 1963 N.C. Session Laws, Chap. 394.

    In 1963, the U.S. Supreme Court upheld the constitutionality of a 
similar Kansas debt adjusting statute in a case brought by the Kansas 
Attorney General against a company known as ``Credit Advisors.'' The 
Court held that the prohibitory statute did not violate due process 
rights and noted the State's evidence that the business of debt 
adjusting ``lends itself to grave abuses against distressed debtors.'' 
Ferguson v. Skrupa, 372 U.S. 726.
    The original definition of debt adjusting in the North Carolina and 
similar statutes covered debt settlement activities but applied only 
where the debt adjuster received funds from the consumer to distribute 
to the consumer's creditors. To get around the statutes, debt settlers 
in recent years arranged for third party bank accounts to receive the 
consumer's funds. By this method, the debt settlement company did not 
hold consumers' money but could still direct the disbursement of funds 
to pay its fees and to pay creditors if and when settlements were 
reached.
    In 2005, the North Carolina General Assembly, recognizing the 
abuses perpetrated by the new breed of debt settlers, amended the debt 
adjusting statute to simply prohibit advance fees for any debt 
settlement or foreclosure assistance services, whether or not the debt 
settler directly managed and disbursed consumer funds. The amendments 
have created a bright line test for compliance and have been effective 
enforcement tools. The 2005 amendments do not prevent debt settlement 
companies from operating in North Carolina as long as no fees are 
charged prior to completion of settlements. The Attorney General's 
Office is aware of at least two national debt settlement companies 
currently doing business in North Carolina without charging advance 
fees.
    Licensed North Carolina attorneys are generally exempt from the 
debt adjusting statute but unfortunately, some attorneys have run their 
law firms as debt settlement businesses with some of the worst 
deceptive practices in the industry. Two of the North Carolina Attorney 
General's litigated enforcement cases have been against out-of-state 
law firms who defrauded consumers by diverting funds out of client 
settlement accounts. One continuing area of concern is the practice by 
some debt settlement companies to use attorneys as fronts to offer 
their services in states that have restrictive debt settlement laws. A 
debt settlement company will arrange for an out-of-state law firm to 
contract with a North Carolina resident. The law firm then assigns all 
of the accounting and debt negotiation work back to the debt settlement 
firm. To claim an exemption from the debt adjusting law, the law firm 
may associate a local North Carolina attorney to represent the client 
in name only.

III. Consumers Need Effective Debt Management Assistance
    There is clearly a need for legitimate, effective debt relief for 
consumers who cannot pay off their credit card accounts and do not want 
to file for bankruptcy. However, the current model of debt settlement 
is not the answer. Most debt-strapped consumers can benefit from 
financial counseling, budgeting, and debt management services offered 
by nonprofit consumer credit counseling agencies. These agencies offer 
debt management plans that allow for the orderly reduction of debt 
under a payment plan agreed to by both the consumer and the creditor. 
Fees are nominal and monthly payments are paid promptly to creditors, 
not held back for 12 months or more as with debt settlement. While in 
the plan, the consumer gets protection from collection contacts.
    One of the problems with current debt management programs is that 
they do not offer significant principal reduction. The logical next 
step, which would benefit both consumers and the banking industry, 
would be a combination of a multi-year payment plan followed by 
forgiveness of principal after successful completion of the payment 
plan. Principal reduction is now being incorporated into mortgage loan 
modification programs. Unfortunately, accounting rules relating to debt 
charge-offs have prevented principal reduction programs from being 
implemented. A coalition of bankers, consumer groups and credit 
counseling services have approached the Office of the Comptroller of 
Currency (OCC) to authorize these programs but the OCC has not been 
receptive to date.

IV. Conclusion
    The debt settlement industry has been characterized by deceptive 
solicitations, overpromising of results, underperformance of services, 
and excessive fees. Too often, debt settlement companies have profited 
off of economically distressed consumers while delivering little relief 
in return. My colleagues in other attorneys general offices and I 
appreciate the attention the Committee is giving this important 
consumer protection problem.

            Exhibit 1--Sample Debt Settlement Solicitations







             Exhibit 2--Sample Debt Settlement Fee Schedule




    The Chairman. Am I not correct in saying there are some 86 
to 96 of the States' attorneys general that are active in this?
    Mr. Lehman. Just from my experience, yes, most--the large 
majority of attorneys general are. And, as I said, 41 attorneys 
general signed very detailed comments in support of the FTC 
rule. And in those comments, which I would commend to the 
Committee, there are many examples of the kind that we've heard 
from today, and also examples of enforcement actions taken by 
attorneys general. But, that's--41 out of 50, that's 82 
percent, yes.
    The Chairman. Yes, that's what I meant to say.
    Thank you very, very much.
    Mr. John Ansbach, who is Legislative Director of the United 
States Organization for Bankruptcy Alternatives, USOBA, and 
General Counsel and Chief Compliance Officer for EFA 
Processing, from Houston, Texas.

                   STATEMENT OF JOHN ANSBACH,

              LEGISLATIVE DIRECTOR, UNITED STATES

            ORGANIZATIONS OF BANKRUPTCY ALTERNATIVES

    Mr. Ansbach. Thank you, Mr. Chairman.
    Quick correction. I'm not the Chief Compliance Officer, I 
am the Chief Operating Officer of that company. I'm happy to 
correct that in the record.
    Mr. Chairman, distinguished members, thank you so much for 
the opportunity to contribute to this very important meeting 
and this very important discussion.
    My name is John Ansbach. I am the Legislative Director for 
USOBA. We are a trade group based in Houston, Texas. We 
represent approximately 200 companies that operate in the debt 
settlement industry. In addition to supporting those companies 
with best practices, we also serve as a resource to consumers 
who are looking for information about the debt relief process, 
generally, and how to select an honest and ethical provider in 
this industry.
    I am also employed, as you pointed out, Mr. Chairman, by a 
company that actually performs debt settlement work. In my 
role, I directly oversee approximately 100 employees, Texans, 
who talk to consumers every day and who work to help these 
folks to find a way out of debt without ending up in personal 
bankruptcy.
    There has been a lot of discussion today about personal 
experiences. The Chairman--sir, you've had some stories, and 
obviously, we've heard Mrs. Haas' story. If I may, I'd like to 
begin my remarks with a consumer story, as well.
    A wonderful woman, by the name of Ms. Faith Zabriske, 
suffered an injury a few years ago. After utilizing her credit 
cards to pay her medical and her living expenses, she fell 
behind on those payments. At that point, she did exactly what 
the Better Business Bureau and others tell her and so many to 
do, which is to simply call your bank; they'll work with you. 
What she found instead, and what she was told candidly--the 
woman from the bank said, ``I'm not supposed to tell you this, 
but until you fall behind on your payments for 6 months, we 
can't help you,'' essentially telling her to stop paying her 
debts or there would be nothing that the bank could do for her.
    She tried credit counseling. They were similarly unhelpful. 
And she found her way to a debt settlement company in Dallas, 
Texas. After working her debt settlement program and saving the 
money and working with the counselor, I am very pleased to 
report that Ms. Zabriske is today debt-free. She is on her very 
last payments with her last creditor, and is well on her way to 
financial stability.
    Mr. Chairman, Ms. Zabriske, as well as another gentleman 
named Mr. Gary Ross, another consumer that had a very 
successful debt settlement experience, are both here today. 
They are, in fact--that's Mr. Ross and Ms. Zabriske, who have 
held up their hands--they've come today from Texas and 
Illinois. I understand it is not possible for them to tell 
their story to the Committee, or here in testimony, but I want 
the Chairman to know, and the members, that if there is any 
interest in visiting with folks who have, in fact, had a good 
experience, if there is something instructive in that, then 
they would be, both, very happy to appear and talk about what 
their experience was.
    The Chairman. You must have come up with them at the last 
moment, because we asked you--the Committee asked you if you 
wanted to have anybody testify, and you declined to have 
anybody testify except yourself.
    Mr. Ansbach. I understand, Mr. Chairman. I don't think 
that's actually accurate. I do understand that the Committee 
staff visited with staff from both USOBA and our sister trade 
group. I understand that Mr. Ross, in particular--his name and 
contact information were provided. Of course, we only found out 
about this hearing 7 days ago. But, in any event, I assume that 
their ability to talk and, certainly, to share perhaps what 
makes a good debt settlement versus a bad experience, such as 
Mrs. Haas had--perhaps there is some instruction in that. And 
again, they're here, if anybody would like to visit with them.
    It is certainly the case, Mr. Chairman, that--and I want to 
be very clear about this--despite the fact that Ms. Zabriske or 
Mr. Ross had a good experience--and, certainly, we are aware of 
hundreds and thousands of others who have had a good experience 
in debt settlement, both----
    The Chairman. Would you say that again? You're aware of 
hundreds of thousands of people that have had----
    Mr. Ansbach. Hundreds and thousands. Yes, sir.
    The Chairman. What is hundreds and thousands?
    Mr. Ansbach. Well, in particular, the Federal Trade 
Commission, when it held its hearing--a public forum and open 
public comment, there were 200 comments that were submitted by 
consumers directly who had, unlike me, been through a debt 
settlement program. And they ran 40-to-1 in support of, and in 
favor of, at least preserving the options of debt settlement. 
In addition to those, my company alone, and many of those that 
are represented here today, also have literally piles and piles 
of written testimonials that we would be very happy to share.
    We don't think, by any means, that that means there is no 
problem in the industry. In fact, I would very much agree with 
what's been said by Mr. Lehman and Mr. Kutz, and having heard 
Mrs. Haas' experience, it's very clear to us that we have 
significant challenges in our industry. And, candidly, it's the 
reason that folks, like myself, my counterpart at TASC, and a 
number of us, spend so much of our time going to different 
states, working on debt settlement-specific legislation.
    Along these lines, I wanted to share a couple of examples 
of what we think is a very important and needed regulatory 
approach. I know Senator Boxer is not with us today, but in 
California specifically, we have been working now for 3 years 
on Assembly Bill 350, which not only has fee regulation in it, 
which I think we all agree is critical, but it is a 
comprehensive piece of legislation that has insurance and 
surety and licensing and bonding requirements, as well as some 
of the things that the Federal Trade Commission have proposed, 
which we fully support. AB 350 has passed the House. It is 
pending in the Senate. We are hopeful, although, obviously, 
they have budget difficulties in the State, and I'm not sure 
where that will go, but we're hopeful it will move.
    I think an even better model is the Tennessee model. 
Tennessee passed a piece of legislation that is very specific 
on fees. And I want to be very clear on----
    The Chairman. Mr. Ansbach, this is fascinating testimony, 
and you're speaking to your own advantage by not speaking to 
the nature of the hearing. You're talking about what states are 
doing to try and get rid of the kinds of problems that your 
association causes. You're leading us to believe that what you 
do is absolutely wonderful and that all of these other 
experiences are just anomalies.
    It is our impression that it is quite exactly the opposite 
of that and that you're fundamentally making happy talk in 
front of a very serious problem. And I don't appreciate that.
    Now, if you have testimony which reflects upon, not what 
States are doing, but how you see this problem, which is being 
represented here and which will be further represented by the 
person next to you--the lady next to you--that's what I want to 
hear. That's what you're here for. You're not here to talk 
about what various States are doing.
    Mr. Ansbach. Mr. Chairman, I do apologize if in any way 
I've insulted this body. Because we were discussing fee 
regulation, I thought it would be instructive to know what has 
been worked on for the last 5 years. It was only in that 
respect that I wanted to offer what Tennessee has done.
    The Chairman. OK, well, you've done that now, so let's get 
back to the subject.
    Mr. Ansbach. What I want to be very clear about, Mr. 
Chairman, is--and I, again, apologize--this is not a rosy 
picture. I have 160 people that I employ, that do this work 
every single day. We work very hard to help folks. Now, that 
does not mean that we are 100-percent successful and that, in 
any way, Mrs. Haas or any of the other stories have been 
anomalies. I don't think that's true at all. I think there are 
some significant issues in the industry, and we need to address 
them.
    With that said, the Federal Trade Commission has proposed a 
number of things in the Notice of Proposed Rulemaking. Eighty 
percent of it is incredibly important. We need more disclosure 
requirements. We need more prohibited misrepresentation rules. 
We need fair advertising rules. The one portion of the rule 
that we are unable to support, as Mr. Lehman has pointed out, 
is the advance-fee ban.
    The Chairman. Yes, which is--of course, is the only thing 
that makes you money.
    Mr. Ansbach. Respectfully, I would----
    The Chairman. I apologize, Senator McCaskill; I seem to be 
asking questions, and I shouldn't be doing that. But, I can't 
quite help myself.
    Senator McCaskill. You'll get a chance, Mr. Chairman.
    The Chairman. Oh, I know that. I'm just taking any chance I 
can get.
    [Laughter.]
    Senator McCaskill. I just thought maybe you, you know, 
hadn't been around here long enough, and I could----
    The Chairman. Yes, right. Right.
    [Laughter.]
    The Chairman. Please proceed.
    Mr. Ansbach. Yes, sir.
    The Chairman. But, you don't disagree with my statement, 
that the one thing that you don't agree with is the one thing 
which puts money in your pocket.
    Mr. Ansbach. I do, respectfully, disagree. Yes, sir.
    The Chairman. And how would you disagree with--no, I'll ask 
that question later. Proceed with your testimony.
    Mr. Ansbach. Yes, sir.
    The advance-fee ban that's proposed essentially says that a 
small business owner that does this work must operate without 
revenue for up to a year. That is the absolute--I mean, that's 
what it does. And because it--the reason it's a year is because 
consumers must have time to create a savings. In that year, up 
to that time period, folks that I employ, and others, must be 
able to stay on the phones, to talk with them, to empower them 
with information about this process. The reality is, I cannot 
afford to pay my employees for a year without any revenue at 
all. That is the reason that we characterize this as the death 
of the industry. That is the reason, I suspect, that 85 percent 
of our members have indicated, in response to surveys, that 
they will go out of business if an advance-fee ban, in 
particular, is passed.
    All--to be very clear, all of the rest of the rule is 
incredibly necessary and needed. There are, absolutely, issues 
in this industry that must be addressed, but an advance-fee 
ban, actually, as Mr. Lehman has already pointed out, has a 
very obvious consequence. Most, if not all, of our members 
don't do business in North Carolina anymore, because they can't 
afford to. I don't see that as a successful outcome, because 
what has then happened, consumers no longer have any other 
option. They have bankruptcy, they have credit counseling, and 
nothing in the middle.
    I do not believe, with all due respect, that that is the 
consumer-protective outcome that we are trying to get to with 
this regulation.
    Mr. Chairman, I--you've been very gracious with your time. 
If I may just share a few very last things. And I will promise 
to answer any questions that you may have.
    Under the very fee structure that is being proposed to be 
outlawed, our members, as well as our sister trade group's 
members, have resolved almost $3 billion in unsecured debt for 
consumers. Clearly, there are positive results that are 
happening in this industry. We would simply ask that we be 
given the opportunity to stay at the table. And again, we're 
incredibly grateful that we were invited today. We simply want 
to continue to participate in this process. We want to help 
find appropriate and strong consumer protection regulation, 
whether it is here in Washington, D.C., or in the states.
    And in that regard, I'm happy to answer any questions that 
you might have.
    [The prepared statement of Mr. Ansbach follows:]

       Prepared Statement of John Ansbach, Legislative Director, 
         United States Organizations of Bankruptcy Alternatives

    Chairman Rockefeller, Ranking Member Hutchison, distinguished 
members of the Committee, thank you so much for the opportunity to be 
here today and to contribute to what I hope is a helpful and 
informative hearing for you on the topic of debt settlement.
    My name is John Ansbach, and I volunteer in service as the 
Legislative Director of the Unites States Organizations for Bankruptcy 
Alternatives or ``USOBA.'' USOBA is a trade association in Houston 
Texas whose members are  200 companies that offer debt relief services 
to financially strapped consumers who are trying to avoid bankruptcy. 
In addition to supporting these member companies, USOBA also serves as 
a resource to consumers who are trying to find out information about 
the debt resolution process and what to look for in an honest, ethical 
provider. It is in my capacity as the Legislative Director of USOBA 
that I appear before you today.
    I want you to know, as well, so that I can shed light on other 
areas of interest to the Committee, that I am also the Chief Operating 
Officer and Genera Counsel of what we in the industry refer to as a 
``back-end'' company. As such, our company works for other companies 
servicing their clients. In this role, I directly oversee more than 100 
Texas employees in the City of Frisco just north of Dallas who talk to 
debt settlement consumers every day, supporting them, negotiating for 
them, giving them information about the unsecured debt process and 
otherwise helping them to meet their savings goals and succeed in their 
programs.
    The title of today's hearing is ``The Debt Settlement Industry--The 
Consumer's Experience.'' In this regard, I want to offer as much 
information as I can to help this committee better understand debt 
settlement and what it can and has done to help consumers.
    In this regard, please let me begin today with a real life example 
of debt settlement. It is the story of Faith Zabriske, a wonderful 
woman in my home state of Texas who has lived the nightmare of being 
overwhelmed by debt, and who utilized the services of a debt settlement 
company to not only survive that nightmare, but to emerge from it 
stronger and financially stable.
    Ms. Zabriske suffered an injury a few years ago and like many 
Americans was forced to turn to her credit cards to pay medical bills 
and other living expenses to survive.
    Although she recovered from her injuries, she was soon overwhelmed 
by the debt created by her ordeal. At that point she did exactly what 
the Better Business Bureau and consumer advocates tell consumers to do 
who are in such situations: she called her credit card company to find 
out if they would work with her on repayment of the debt. At the time, 
Ms. Zabriske had a credit score in the high 700s and had always paid 
her debts timely.
    Unfortunately, what Ms. Zabriske found from her creditor was not 
help, but rather a refusal to work with her. She was told that until 
she was 6 months delinquent, the bank wouldn't work with her. She tried 
credit counseling, as well, but they were similarly unhelpful.
    It wasn't until she enrolled in a debt settlement program that she 
found true support. After working her program, saving money as needed, 
her provider was able to help Ms. Zabriske settle all of her debts and 
today she is debt free, on the path to financial stability.
    Ms. Zabriske is here today, having traveled all the way from Texas 
to tell her story. USOBA offered to have her appear today to tell this 
story herself, but she was not extended an invitation.
    Mr. Gary Ross from Illinois, another consumer who had a successful 
experience with debt settlement is also here and prepared to tell his 
story. HE was also offered, but like Ms. Zabriske was not extended an 
opportunity to tell his story.
    If any member of this committee or anyone else would like to visit 
with either of these good folks to hear their story and their 
experience, they welcome the opportunity to visit after this hearing.
    Ladies and gentlemen of this committee, Ms. Zabriske and Mr. Ross 
represent just two of hundreds of stories of consumers who have had 
successful outcomes in debt settlement programs. In fact, in the 
Federal Trade Commission's own public comment period, of the 200 
consumer testimonials the Commission received, we understand those 
testimonials ran 40:1 in favor and in support of preserving debt 
settlement as an important option for consumers in need.
    And in fact, that is truly what we are here to talk about: 
preserving options. The truth is that USOBA, as well as our sister 
trade group the Association of Settlement Companies (``TASC''), 
supports strong consumer protection regulation in the debt settlement 
industry, including the overwhelming majority of what has been proposed 
by the FTC in its August Notice of Public Rulemaking. Stronger consumer 
disclosure requirements are needed and should be adopted. Rules 
proscribing certain misrepresentations in advertising are needed and 
should be adopted. In fact, USOBA and TASC have been arguing and 
working in support of these actions as well as others for more than 5 
years now in roughly 20 states, including but not limited to licensing 
and registration requirements; bonding and insurance requirements; 
strong advertising rules; reasonable fee regulation including limits on 
amount and timing of fee collection; contract requirements that set out 
specific language that must be included for the benefit of consumers; 
requiring education for consumers; even requiring multiple language 
efforts where debtors in need don't speak English as a first language 
to ensure an understanding of the program. These efforts are ongoing 
even as we sit here today in California, Texas, Florida, Pennsylvania, 
New York, Illinois, Connecticut and Maryland. Nevada, Tennessee, 
Minnesota, Oregon, Utah, Montana, Delaware, Rhode Island and Colorado 
have already adopted debt settlement statutes with input from both 
consumer groups and industry trade organizations.
    In short, the industry has supported and continues to work for 
strong consumer protection regulation of this industry; regulation that 
manages to enact such protection while preserving the ability of 
honest, ethical companies to provide consumers with the services and 
options they need.
    What we cannot support, however, and what we understand the FTC is 
attempting to implement via the Telemarketing Sales Rule, is fee 
regulation that would kill the industry. The FTC's proposed ``advance 
fee ban'' would put 85 percent of our members--most of whom are small 
business owners--out of business. They would accomplish this by 
essentially starving these businesses of revenue, disallowing the 
collection of any fees for services rendered unless and until there was 
a settlement of a debt, a process that often takes up to a year or 
more. In short, the FTC proposes to require American businesses owners 
to work for free for up to a year--paying their own employees to talk 
to and help consumers; paying their rent; addressing expenses related 
to information technology and required infrastructures--all the while 
being unable to collect fees from the very consumers they are trying to 
help.
    The truly troubling part of this effort is that there exists 
another more reasonable alternative, which the states themselves have 
adopted and which would be preempted by this effort. More specifically, 
the states of Colorado, Utah, Montana, Nevada, Delaware and Tennessee 
have adopted a capped and limited pay as you go fee structure that both 
limits the amount of money a consumer may be charged and when the fees 
may be collected.
    Tennessee in particular has a very workable system that balances 
good consumer protection and the rights of honest ethical providers to 
be compensated for their services. Under the Tennessee law, a provider 
may charge in one of two ways: a savings model that allows for fee 
recovery based on what the provider saves the consumer; and, a ``pay as 
you go'' fee system, under which no more than 17 percent of a 
consumer's enrolled debt may be charged. Further, fees cannot be 
collected any sooner than in equal payments spread out over half the 
life of a consumer's program. In a typical case where $10,000 in debt 
is enrolled then, a consumer may not be charged more than $1,700. This 
fee must then be collected over half the life of a program. Where 
programs typically last thirty-six months, half the life would be 
eighteen months, thus fees of $1,700 over eighteen months or $94 per 
month. The result is a good, middle of the road approach than ensures a 
consumer does not face high up front fees, while preserving a modicum 
of revenue for his or her provider, allowing the business to pay its 
employees and rent.
    Distinguished members, the allegations that are often made by the 
consumer groups in particular, and which you may hear today, resonate 
around one critical point: that debt settlement services are ``rarely 
if ever provided to consumers'' as promised. Well ladies and gentlemen, 
please allow me to report the following facts that we believe refute 
such assertions:

   USOBA members alone have settled more than $1.4 billion in 
        unsecured debt over the last few years.

   This debt was settled for consumers who experienced an 
        average reduction of 53 percent; that is, they settled their 
        debt for 47 cents on the dollar.

   Our members alone are right now servicing more than 277,000 
        consumers, consumers who will be stranded and left to 
        bankruptcy if the FTC's rule is passed as drafted and these 
        providers go out of business.

   When you add TASC's members into this mix, you find that 
        roughly $3 billion of unsecured debt has been settled for 
        America consumers.

    If I may, let me also add for you the very most recent numbers from 
my company, just one USOBA member company that services other providers 
working for consumers:
    Last month alone, in March 2010, we:

   Settled 1,491 individual accounts with a value at enrollment 
        of $9.14 million.

   Those accounts were settled for $3.9 million, or $0.36 on 
        the dollar, a savings of 64 percent to the consumers.

    Over the last 3 months (Jan-March), we:

   Settled 3800 accounts (3,793) with a total value at 
        enrollment of $22.9 million.

   Those accounts were settled at an average of $0.36 on the 
        dollar, again saving those consumers 64 percent on their 
        outstanding debts.

    To date, my company has settled more than 39,000 accounts with a 
value of $214.5 million at approximately $0.40 on the dollar--a 60 
percent savings to American consumers. We are currently working on 
settling $1.17 billion in debt for our consumers, again most if not all 
of whom will be stranded and abandoned to bankruptcy if we are forced 
out of business by the FTC's proposed fee ban.
    On this last note, I do want you to know the impact of the FTC's 
proposed fee regulation on employees. In my home state of Texas, alone, 
we estimate more than 1,100 Texans will lose their jobs if this rule is 
adopted. These are hard working folks employed by USOBA member 
companies, only. If we add the TASC companies, we estimate this number 
is closer to 2,500-3,000 jobs lost just in Texas. While we do not have 
numbers in every state, we do know that hundreds if not thousands of 
more jobs will be lost from this rule, specifically in California and 
Florida, where debt settlement is a much needed service due to economic 
conditions and the still lingering effects of the housing bubble. In 
short, it is likely if not certain that as many as 10,000 Americans 
will lose their jobs if the FTC rejects the approach adopted by the 
states and proceeds instead with the radical fee ban they propose.
    Senators, we know you--like USOBA and TASC--want to protect 
consumers. And we know you--like USOBA and TASC--want to ensure that 
honest, ethical debt settlement companies can continue to help those 
consumers, keeping employed the thousands of hard working folks who 
dedicate their days to helping people get out of debt responsibly and 
ethically. In that, please allow us to work with you and the Commission 
on a reasonable approach that includes reasonable fee regulation, as 
well as the many other consumer protections we and so many others 
support.
    On behalf of the 160 people in my company in Frisco, Texas, the 
thousands of others employed by our members companies, the more than a 
quarter million consumers they serve right now across the country, as 
well as the folks employed by TASC and the consumers they serve, I 
thank you so much for the opportunity to contribute to this discussion 
and I look forward to trying to answer any questions you may have.

    The Chairman. Thank you.
    And finally, the Honorable Julie Brill, Commissioner of the 
Federal Trade Commission.

         STATEMENT OF HON. JULIE BRILL, COMMISSIONER, 
                    FEDERAL TRADE COMMISSION

    Ms. Brill. Thank you very much.
    The Chairman. We're trying to save your life, incidentally.
    Ms. Brill. Oh, really?
    The Chairman. Of the FTC. There are those who are----
    Ms. Brill. Oh, yes.
    The Chairman.--who are malevolently proceeding to try and 
remove your powers. That will not happen.
    Ms. Brill. And we certainly appreciate all your efforts in 
that regard, Mr. Chairman. Thank you very much.
    Chairman Rockefeller, members of the Committee, I am Julie 
Brill, a Commissioner of the Federal Trade Commission.
    Thank you for inviting me to testify about a critical issue 
for consumers during these difficult economic times: 
problematic practices in the debt relief industry.
    I'm honored to be here today in my brand new role as an FTC 
Commissioner. As you know, I've spent almost my entire career 
working to protect consumers from unscrupulous business 
practices. I'd like to thank the Committee for giving me the 
opportunity to bring my consumer protection skills and 
experience to the FTC.
    American consumers are overwhelmed with mortgage and credit 
card debt. At least 13 million Americans owe $10,000 or more in 
credit card debt. Of those households that are carrying credit 
card debt, the average amount of the debt load is approximately 
$16,000. And over 14 million American households are 30 or more 
days delinquent in their credit card bills. Many of these 
consumers have lost their jobs or have seen their working hours 
cut back, making their debt load all the more worrisome.
    Such financially distressed consumers are vulnerable to 
schemes that promise miraculous solutions to their debt 
problems. As I stated in my confirmation hearing, these 
consumers have a target on their back.
    You've heard compelling testimony this afternoon from the 
GAO regarding the deceptive and unfair marketing of debt 
settlement services. While there are some consumers, like Ms. 
Zabriske and Mr. Ross, who have benefited from the services 
offered by debt settlement companies, the GAO's disturbing 
findings are consistent with what the FTC has encountered in 
many of our own investigations. Debt settlement firms 
frequently convince consumers to pay large fees by falsely 
promising to obtain deep reductions in the consumers' debt.
    You've probably heard the advertisements on the radio or 
late-night TV: ``In debt? Can't pay your bills? Debt collectors 
calling you at all hours? Call us now. We will negotiate with 
your creditors so that you can become debt-free.'' Through 
advertisements like these and follow-up aggressive 
telemarketing pitches, debt settlement companies often make 
dramatic savings promises that they cannot keep.
    They also sometimes make misleading statements about the 
fees that the consumers must pay for their services. Consumers 
may end up shelling out large sums of money up front, hundreds 
or even thousands of dollars, with nothing in return but empty 
promises.
    Now, keep in mind, the financially strapped consumers who 
respond to these sales pitches are having trouble paying 
creditors before piling on the fees of a debt settlement 
company. Many consumers, like Mr. Spaulding in West Virginia 
and Mr. and Mrs. Haas, who are here today, simply can't keep up 
with paying the new fees and covering their existing debt, and 
are forced to drop out of these programs, often forfeiting all 
the money they've paid in fees, leaving them worse off than 
when they started.
    The Commission has been actively pursuing those debt relief 
service providers and other fraudsters who prey on Americans 
hardest hit by the financial crisis. In an effort to improve 
law enforcement and set clear standards for the debt relief 
industry, the Commission published a proposed rule last August. 
The proposal would amend the telemarketing sales rule to cover 
debt relief providers that promote and sell their services over 
the telephone.
    It would be premature to speculate about whether the 
Commission will issue a final rule, and, if so, what the rule 
might contain. But, I can assure you that the proceeding has 
been thorough, thoughtful, transparent, and fair. The 
Commission received written comments from over 300 individuals, 
corporations, and organizations. The Commission also hosted a 
public forum to discuss the proposed amendments, with 
stakeholders representing a wide variety of viewpoints. And the 
Commission staff has had extensive discussions with industry 
representatives, consumer advocates, and other interested 
parties.
    Thank you, again, for the opportunity to describe how the 
FTC is protecting financially strapped consumers from those 
debt relief services that engage in deceptive and abusive 
practices.
    I'd be happy to answer any questions.
    [The prepared statement of Ms. Brill follows:]

         Prepared Statement of Hon. Julie Brill, Commissioner, 
                        Federal Trade Commission

I. Introduction
    Chairman Rockefeller, Ranking Member Hutchison, and members of the 
Committee, I am Julie Brill, a Commissioner of the Federal Trade 
Commission (``FTC'' or ``Commission'').\1\ I appreciate the opportunity 
to appear before you today, and the Commission thanks this Committee 
for its interest in the work of the FTC to protect consumers from 
deception and abuse in the sale of debt relief services.
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    \1\ The views expressed in this statement represent the views of 
the Commission. My oral presentation and responses to any questions you 
may have are my own, however, and do not necessarily reflect the views 
of the Commission or any other Commissioner.
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    The Commission has long been active in protecting consumers of 
financial products and services offered by entities within the agency's 
jurisdiction. With Americans continuing to feel the effects of the 
recent economic downturn, the Commission has stepped up its efforts to 
stop fraudulent financial schemes that exploit consumers who are 
particularly vulnerable as a result of financial distress. Stopping 
deceptive debt relief practices is one of our highest consumer 
protection priorities. Providers of debt relief services purport to 
help people who cannot pay their debts by negotiating on their behalf 
with creditors. Debt settlement companies, for example, market their 
ability to dramatically reduce consumers' debts, often by making claims 
to reduce debt by specific and substantial amounts, such as ``save 40 
to 60 percent off your credit card debt.'' To be sure, some debt relief 
services do help consumers reduce their debt loads. In too many 
instances, however, consumers pay hundreds or thousands of dollars for 
these services but get nothing in return.
    The FTC utilizes its four principal tools to protect consumers of 
debt relief services: law enforcement, rulemaking, consumer education 
efforts, and research and policy development. To halt deceptive and 
abusive practices and return money to victimized consumers, the 
Commission has brought 20 lawsuits in the last 7 years against sham 
nonprofit credit counseling firms, debt settlement services, and debt 
negotiators, including 6 in the past year alone.\2\ These cases have 
helped over 475,000 consumers who have been harmed by deceptive and 
abusive practices.\3\ The Commission continues to actively investigate 
debt relief companies and will continue aggressive enforcement in this 
arena. As the Commission's law enforcement experience has shown, 
victims of these schemes often end up more in debt than when they 
began. Especially in these difficult economic times, when so many 
consumers are struggling to keep their heads above water, this is 
unacceptable.
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    \2\ A list of the Commission's law enforcement actions against debt 
relief companies is attached as Appendix A.
    \3\ In addition to consumers who lost money from fraudulent debt 
relief companies, hundreds of thousands, if not millions, of consumers 
have been harassed by automated robocalls pitching services in 
violation of the Do Not Call provisions of the Telemarketing Sales 
Rule. The Commission has charged companies engaging in these robocalls 
with violations of the rule. See, e.g., FTC v. Economic Relief Techs., 
LLC, No. 09-CV-3347 (N.D. Ga., preliminary injunction issued Dec. 17, 
2009); FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill., 
preliminary injunction issued Dec. 17, 2009); FTC v. JPM Accelerated 
Servs. Inc., No. 09-CV-2021 (M.D. Fla., preliminary injunction issued 
Dec. 31, 2009).
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    Below, this testimony provides an overview of the three common 
types of debt relief services, as well as the Commission's law 
enforcement efforts with respect to each. The testimony then describes 
the Commission's proposal to amend its Telemarketing Sales Rule 
(``TSR'') \4\ to strengthen the agency's ability to stop deception and 
abuse in the provision of debt relief services. Finally, the testimony 
addresses the FTC's ongoing efforts to educate consumers about debt 
relief options and how to avoid scams.\5\
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    \4\ 16 C.F.R.  310.1 et seq.
    \5\ With respect to its research and policy development in this 
area, in September 2008, the Commission held a public workshop entitled 
``Consumer Protection and the Debt Settlement Industry,'' which brought 
together stakeholders to discuss consumer protection concerns 
associated with debt settlement services. Workshop participants also 
debated the merits of possible solutions to those concerns. An agenda 
and transcript of the Workshop are available at www.ftc.gov/bcp/
workshops/debtsettlement/index.shtm. Public comments associated with 
the Workshop are available at www.ftc.gov/os/comments/
debtsettlementworkshop/index.shtm.
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II. The Commission's Authority
    The Commission enforces Section 5 of the FTC Act, which prohibits 
unfair or deceptive acts or practices in or affecting commerce,\6\ as 
well as the Telemarketing and Consumer Fraud and Abuse Prevention Act 
(``Telemarketing Act''),\7\ and the associated TSR that prohibit 
certain deceptive and abusive telemarketing practices.\8\ The 
Commission has used this authority to challenge debt relief providers 
within its jurisdiction \9\ who have engaged in deceptive or abusive 
practices. In addition, the Commission works to protect consumers from 
a wide range of other unfair, deceptive, and abusive practices in the 
marketplace, such as credit-related and government grant scams, 
mortgage loan modification scams, deceptive marketing of health care 
products, deceptive negative option marketing, and business opportunity 
and work-at-home schemes.\10\ The FTC works closely with many state 
attorneys general and state banking departments to leverage resources 
in consumer protection.
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    \6\ 15 U.S.C.  45.
    \7\ 15 U.S.C.  6101-6108. Pursuant to the Telemarketing Act's 
directive, the Commission promulgated the original TSR in 1995 and 
subsequently amended it in 2003 and in 2008.
    \8\ The Commission also has law enforcement authority and, in some 
cases, regulatory powers under a number of other consumer protection 
statutes specifically related to financial services, including the 
Truth in Lending Act, 15 U.S.C.  1601-1666j; the Consumer Leasing 
Act, 15 U.S.C.  1667-1667f; the Fair Debt Collection Practices Act, 
15 U.S.C.  1692-1692o; the Fair Credit Reporting Act, 15 U.S.C.  
1681-1681x; the Equal Credit Opportunity Act, 15 U.S.C.  1691-1691f; 
the Credit Repair Organizations Act, 15 U.S.C.  1679-1679j; the 
Electronic Funds Transfer Act, 15 U.S.C.  1693-1693r; the privacy 
provisions of the Gramm-Leach-Bliley Act, 15 U.S.C.  6801-6809; and 
the Omnibus Appropriations Act of 2009, Pub. L. No. 111-8,  626, 123 
Stat. 524 (Mar. 11, 2009).
    \9\ The FTC Act exempts banks and other depository institutions and 
bona fide nonprofits, among others, from the Commission's jurisdiction. 
15 U.S.C.  44 and 45(a)(2). These exemptions apply to the 
Telemarketing Act and the TSR as well.
    \10\ Since the beginning of 2009, the FTC has brought 40 cases 
against defendants engaged in deceptive practices targeting 
financially-distressed consumers.
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III. Overview of Debt Relief Services and FTC Law Enforcement Efforts
    Debt relief services have proliferated over the past few years as 
greater numbers of consumers are struggling with debts they cannot pay. 
A range of nonprofit and for-profit entities--including credit 
counselors, debt settlement companies, and debt negotiation companies--
offer to help consumers facing debt problems. As detailed below, 
consumers have complained of deceptive and abusive practices in all of 
these services, resulting in the FTC and state enforcement and 
regulatory bodies bringing numerous cases.\11\
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    \11\ The Commission has addressed similar problems with respect to 
companies offering to resolve consumers' mortgage debts. The Commission 
has engaged in an aggressive, coordinated enforcement initiative to 
shut down companies falsely claiming the ability to obtain mortgage 
loan modifications or other relief for consumers facing foreclosure. In 
the past year, the FTC has brought 17 cases (against more than 90 
defendants) targeting foreclosure rescue and mortgage modification 
frauds, with other matters under active investigation. In addition, 
state enforcement agencies have brought more than 200 cases against 
such firms. Further, as directed by Congress under the Omnibus 
Appropriations Act of 2009, Pub. L. No. 111-8, the Commission has 
initiated a rulemaking proceeding addressing the for-profit companies 
in this industry. Under the proposed rule, companies could not receive 
payment until they have obtained for the consumer a documented offer 
from a mortgage lender or servicer that comports with any promises 
previously made. Mortgage Assistance Relief Services, 75 Fed. Reg. 
10707 (Mar. 9, 2010).
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A. Credit Counseling Agencies
    Credit counseling agencies (``CCAs'') historically were nonprofit 
organizations that worked as liaisons between consumers and creditors 
to negotiate ``debt management plans'' (``DMPs''). DMPs are monthly 
payment plans for the repayment of credit card and other unsecured debt 
that enable consumers to repay the full amount owed to their creditors 
but under renegotiated terms that make repayment less onerous.\12\ 
Credit counselors typically also provide educational counseling to 
assist consumers in developing a manageable budget and avoiding debt 
problems in the future. Beginning in the late 1990s, however, some CCAs 
registered as nonprofit organizations with the Internal Revenue 
Service, but in reality operated as for-profit companies and engaged in 
aggressive and illegal marketing practices. Other CCAs incorporated and 
openly operated as for-profit companies.
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    \12\ To be eligible for a DMP, a consumer generally must have 
sufficient income to repay the full amount of his or her debts, 
provided that the terms are adjusted to make such repayment possible.
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    Since 2003, the Commission has filed six cases against for-profit 
credit counseling providers for deceptive and abusive practices.\13\ In 
one of these cases, the FTC sued AmeriDebt, Inc., at the time one of 
the largest CCAs in the United States.\14\ On the eve of trial, the FTC 
obtained a $35 million settlement, and thus far has distributed $12.7 
million in redress to 287,000 consumers.\15\ In the various cases, the 
FTC charged that the credit counseling agencies engaged in several 
common patterns of deceptive conduct in violation of Section 5 of the 
FTC Act and the TSR, including:
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    \13\ See Appendix A (items 10, 12, 13, 16, 18, and 20).
    \14\ FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. MD., final order 
May 17, 2006).
    \15\ See FTC Press Release, FTC's AmeriDebt Lawsuit Resolved: 
Almost $13 Million Returned to 287,000 Consumers Harmed by Debt 
Management Scam (Sept. 10, 2008), www.ftc.gov/opa/2008/09/
ameridebt.shtm. A court-appointed receiver is continuing to track down 
the defendant's assets, and the FTC expects to make another 
distribution this year.

   misrepresentations about the benefits and likelihood of 
        success consumers could expect from the services, including the 
        savings they would realize; \16\
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    \16\ See United States v. Credit Found. of Am., No. CV 06-3654 
ABC(VBKx) (C.D. Cal., final order June 16, 2006); FTC v. Integrated 
Credit Solutions, Inc., No. 06-806-SCB-TGW (M.D. Fla., final order Oct. 
16, 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674-T-17-MSS 
(M.D. Fla., final order Mar. 30, 2005).

   misrepresentations regarding CCA fees, including false 
        claims that they did not charge upfront fees; \17\ and
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    \17\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D. 
Fla., final order May 5, 2008); FTC v. AmeriDebt, Inc., No. PJM 03-3317 
(D. MD. 2006).

   deceptive statements regarding their purported nonprofit 
        nature; \18\
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    \18\ See FTC v. Integrated Credit Solutions, Inc., No. 06-806-SCB-
TGW (M.D. Fla. 2006); FTC v. Express Consolidation, No. 06-cv-61851-WJZ 
(S.D. Fla. 2008); United States v. Credit Found. of Am., No. CV 06-3654 
ABC(VBKx) (C.D. Cal. 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 
04-1674-T-17-MSS (M.D. Fla. 2005); FTC v. AmeriDebt, Inc., No. PJM 03-
3317 (D. MD. 2006). Although the defendants in these cases had obtained 
IRS designation as nonprofits under Section 501(c)(3) of the Internal 
Revenue Code, they allegedly funneled revenues out of the CCAs and into 
the hands of affiliated for-profit companies and/or the principals of 
the operation. Thus, the FTC alleged that the defendants were 
``operating for their own profit or that of their members'' and fell 
outside the nonprofit exemption in the FTC Act. 15 U.S.C. 44.

   violations of the TSR's provisions that require certain 
        disclosures and prohibit misrepresentations, as well as the 
        requirements of the TSR's Do Not Call provisions.\19\
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    \19\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D. 
Fla. 2007); United States v. Credit Found. of Am., No. CV 06-3654 
ABC(VBKx) (C.D. Cal. 2006).

    Over the last several years, in response to abuses such as these, 
the IRS also has challenged a number of purportedly nonprofit CCAs--
both through enforcement of existing statutes and new tax code 
provisions--resulting in the revocation, or proceedings to revoke, the 
nonprofit status of 41 CCAs.\20\ In addition, state authorities have 
brought at least 21 cases against CCAs under their own statutes and 
rules.
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    \20\ Eileen Ambrose, Credit firms' status revoked; IRS says 41 debt 
counselors will lose tax-exempt standing, Baltimore Sun, May 16, 2006; 
see generally TSR Proposed Rule, 74 Fed. Reg. 41988, 41992 (Aug. 19, 
2009). To enhance the IRS's ability to oversee CCAs, Congress amended 
the IRS Code in 2006, adding Section 501(q) to provide specific 
eligibility criteria for CCAs seeking tax-exempt status as well as 
criteria for retaining that status. See Pension Protection Act of 2006, 
P.L. 109-280,  1220 (Aug. 2006) (codified at 26 U.S.C.  501(q)). 
Among other things, Section 501(q) of the Code prohibits tax-exempt 
CCAs from refusing to provide credit counseling services due to a 
consumer's inability to pay or a consumer's ineligibility or 
unwillingness to agree to enroll in a DMP; charging more than 
``reasonable fees'' for services; and, unless allowed by state law, 
basing fees on a percentage of a client's debt, DMP payments, or 
savings from enrolling in a DMP. In addition, as a result of changes in 
the Federal bankruptcy code, 158 nonprofit CCAs, including the largest 
entities, have been subjected to rigorous screening by the Department 
of Justice's Executive Office of the U.S. Trustee. Finally, nonprofit 
credit counseling agencies must comply with state laws in 49 states, 
most of which specify particular fee limits.
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B. Debt Settlement Services
    For-profit debt settlement companies purport to obtain lump sum 
settlements for consumers with their unsecured creditors for 
significantly less than the full outstanding balance of the debts. 
Unlike a traditional DMP, the goal of a debt settlement plan is to 
enable the consumer to repay only a portion of the total owed. Debt 
settlement providers heavily market through Internet, television, 
radio, and print advertising. The advertisements typically make claims 
about the company's supposed ability to reduce consumers' debts to a 
fraction of the full amount owed, and then encourage consumers to call 
a toll-free number for more information.\21\ During the calls, 
telemarketers repeat and embellish many of these claims.
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    \21\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo., final order Apr. 11, 2008); FTC v. Edge Solutions, Inc., No. CV-
07-4087 (E.D.N.Y., final order Aug. 29, 2008); FTC v. Connelly, No. SA 
CV 06-701 DOC (RNBx) (C.D. Cal., final order Oct. 2, 2008); FTC v. 
Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal., final order 
Dec. 12, 2004).
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    Most debt settlement companies charge consumers hundreds, or even 
thousands, of dollars in upfront fees, in many cases with the entire 
amount of fees due within the first few months of enrollment and before 
any debts are settled. An increasing number of providers spread their 
fees over a longer period--for example, 12 to 18 months--but consumers 
generally still pay a substantial portion of the fees before any of 
their payments are used to pay down their debt. And most consumers drop 
out of these programs before completion because they cannot afford, as 
many of the plans require, to simultaneously: (1) pay the provider's 
fees, (2) save money for the settlements, and (3) continue making their 
monthly payments to creditors to avoid late charges and additional 
interest. Consumers who drop out typically forfeit all of the money 
they paid to the debt settlement company, regardless of whether they 
received any settlements from their creditors.
    Since 2004, the Commission has brought eight actions against debt 
settlement providers, alleging that they failed to deliver the results 
promised to consumers and deceived consumers about key aspects of their 
programs.\22\ The defendants' misrepresentations included claims that:
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    \22\ See Appendix A (items 1, 7, 8, 11, 15, 16, 17, 19).

   the provider will, or is highly likely to, obtain large 
        reductions in debt for enrollees, e.g., a 50 percent reduction 
        or elimination of debt in 12 to 36 months; \23\
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    \23\ See, e.g., FTC v. Edge Solutions, Inc., No. CV-07-4087 
(E.D.N.Y. 2008); FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF 
JTLx (C.D. Cal., final order July 13, 2005).

   the provider will stop harassing calls from debt collectors 
        as well as collection lawsuits; \24\
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    \24\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. 2008); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) 
(D. Mass., final order Mar. 28, 2005); FTC v. Jubilee Fin. Servs., 
Inc., No. 02-6468 ABC (Ex) (C.D. Cal. 2004).

   the provider has special relationships with creditors and is 
        expert in inducing creditors to grant concessions; \25\
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    \25\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. 2008); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) 
(D. Mass. 2005). Some providers are also misrepresenting that their 
service is part of a government program through the use of such terms 
as ``government bailout'' or ``stimulus money.'' See, e.g., Steve 
Bucci, Settle Credit Card Debt For Pennies?, Feb. 2, 2010, 
www.bankrate.com/finance/credit-cards/settle-credit-card-debt-for-
pennies-1.aspx; see also FTC, Press Release, FTC Cracks Down on 
Scammers Trying to Take Advantage of the Economic Downturn (July 1, 
2009), available at www.ftc.gov/opa/2009/07/shortchange.shtm.

   the consumer will not have to pay substantial upfront 
        fees,\26\ and
---------------------------------------------------------------------------
    \26\ See, e.g., FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo. 
2008).

   the consumer will be able to obtain a refund if the provider 
        is unsuccessful.\27\
---------------------------------------------------------------------------
    \27\ See, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 
GAF JTLx (C.D. Cal. 2005).

    The Commission also has alleged that debt settlement companies 
represented that consumers can, and should, stop paying their 
creditors, while not disclosing that failing to make payments to 
creditors may actually increase the amount consumers owe (because of 
accumulating fees and interest) and would adversely affect their credit 
rating.\28\ In addition to the FTC cases, state attorneys general and 
regulators have filed over 117 law enforcement actions against debt 
settlement providers under state statutes that, among other things, ban 
unfair or deceptive practices.\29\
---------------------------------------------------------------------------
    \28\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. 
Cal. 2008); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex) 
(C.D. Cal. 2004).
    \29\ See, e.g., Minnesota v. American Debt Settlement Solutions, 
Inc., No. 70-CV-10-4478 (Minn., 4th Dist., filed Feb. 18, 2010); 
Illinois v. Clear Your Debt, LLC, No. 2010-CH-00167 (Ill. 7th Cir., 
filed Feb. 10, 2010); Colorado Attorney General Press Release, Eleven 
Companies Settle with the State Under New Debt-Management and Credit 
Counseling Regulations (Mar. 12, 2009), available at 
www.ago.state.co.us/press_detail.cfmpressID=957.html; Texas v. CSA-
Credit Solutions of Am., Inc., No. 09-000417 (Dist. Travis Cty, filed 
Mar. 26, 2009); Florida v. Boyd, No. 2008-CA-002909 (Cir. Ct. 4th Cir. 
Duval Cty, filed Mar. 5, 2008).
---------------------------------------------------------------------------
C. Debt Negotiation
    For-profit debt negotiation companies assert that they can obtain 
interest rate reductions or other concessions from creditors to lower 
consumers' monthly payments. Such companies often market debt 
negotiation services through so-called automated ``robocalls.'' Like 
debt settlement companies, many debt negotiation providers charge 
significant upfront fees and promise specific results, such as a 
particular interest rate reduction or amount of savings.\30\ In some 
cases, the telemarketers of debt negotiation services refer to 
themselves as ``card services'' or a ``customer service department'' 
during calls with consumers in order to mislead them into believing 
that the telemarketers are associated with the consumer's credit card 
company.\31\
---------------------------------------------------------------------------
    \30\ See FTC v. Economic Relief Techs., LLC, No. 09-CV-3347 (N.D. 
Ga. 2009); FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill. 
2009); FTC v. JPM Accelerated Servs. Inc., No. 09-CV-2021 (M.D. Fla. 
2009); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-MAP (M.D. 
Fla.2009); FTC v. Select Pers. Mgmt., No. 07-0529 (N.D. Ill., final 
order May 15, 2009); FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. 
Wash., final order June 18, 2007).
    \31\ See cases cited supra, note 30.
---------------------------------------------------------------------------
    The FTC has brought six actions against defendants alleging 
deceptive debt negotiation practices.\32\ In each case, the Commission 
alleges that defendants: (1) misrepresented that they could reduce 
consumers' interest payments by specific percentages or minimum 
amounts, (2) falsely purported to be affiliated, or have close 
relationships, with consumers' creditors,\33\ and (3) violated the 
TSR's Do Not Call provisions, among other TSR violations.\34\
---------------------------------------------------------------------------
    \32\ See Appendix A (items 2, 3, 4, 5, 6, and 14).
    \33\ See FTC v. Economic Relief Techs., LLC, No. 09-cv-3347 (N.D. 
Ga. 2009); FTC v. 2145183 Ontario, Inc., No. 09-cv-7423 (N.D. Ill. 
2009); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-MAP (M.D. 
Fla. 2009); FTC v. Select Pers. Mgmt., No. 07-0529 (N.D. Ill. 2009); 
FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. 2007).
    \34\ See FTC v. Economic Relief Techs., LLC, No. 09-CV-3347 (N.D. 
Ga. 2009); FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill. 
2009); FTC v. JPM Accelerated Services Inc., No. 09-CV-2021 (M.D. Fla. 
2009).
---------------------------------------------------------------------------
    Our law enforcement colleagues at the state level also have focused 
attention on bogus debt negotiation companies. The states have brought 
at least ten cases against such firms, and the FTC will continue to 
work closely with our state partners on these and related issues.
IV. The Commission's Rulemaking Proceeding
    In August 2009, the Commission published in the Federal Register 
proposed amendments to the TSR to address abuses in the debt relief 
industry.\35\ Congress authorized the FTC to conduct rulemaking 
proceedings under the Telemarketing Act using the Administrative 
Procedure Act's ``notice-and-comment'' procedures,\36\ and this 
proceeding has moved expeditiously and is nearing completion.
---------------------------------------------------------------------------
    \35\ TSR Proposed Rule, 74 Fed. Reg. 41988 (Aug. 19, 2009).
    \36\ 15 U.S.C.  6102(b).
---------------------------------------------------------------------------
    The TSR amendments proposed last August would, among other things:

   extend the existing protections of the TSR to inbound debt 
        relief calls, i.e., those where consumers call a telemarketer 
        in response to a general media or direct mail advertisement; 
        \37\
---------------------------------------------------------------------------
    \37\ Outbound calls to solicit the purchase of debt relief services 
are already subject to the TSR.

   mandate certain additional disclosures and prohibit 
        misrepresentations in the telemarketing of debt relief 
---------------------------------------------------------------------------
        services; and

   prohibit any debt relief service from requesting or 
        receiving payment until it produces the promised services and 
        documents this fact to the consumer.

    In response to this proposal, the Commission received written 
comments from 314 stakeholders, including representatives of the debt 
relief industry, creditors, law enforcement, consumer advocates, and 
individual consumers.\38\ In November 2009, Commission staff hosted a 
public forum on the proposed TSR amendments, at which participants 
representing all of the major stakeholders discussed the key consumer 
protection issues and problems that are present in the debt relief 
industry and possible solutions for them.\39\ After the forum, 
Commission staff sent letters to industry trade associations and 
individual debt relief providers that had submitted public comments, 
soliciting follow-up information in connection with certain issues that 
arose at the forum.\40\ Sixteen trade associations and companies 
responded and provided data. At this time, the Commission staff is 
reviewing the entire record in this proceeding and drafting a final 
rule for the Commission's consideration.
---------------------------------------------------------------------------
    \38\ These public comments are available at www.ftc.gov/os/
comments/tsrdebtrelief/index.shtm.
    \39\ A transcript of this forum is available at www.ftc.gov/bcp/
rulemaking/tsr/tsr-debtrelief/index.shtm.
    \40\ The letters are posted at www.ftc.gov/os/comments/
tsrdebtrelief/index.shtm.
---------------------------------------------------------------------------
V. Efforts to Educate Consumers
    To complement its law enforcement and rulemaking, the Commission 
has made significant efforts to educate consumers about debt relief 
services and alert them to possible deceptive practices. Most recently, 
the agency released a brochure entitled ``Settling Your Credit Card 
Debts,'' which offers struggling consumers tips on seeking assistance 
with their debts and spotting red flags for potential scams.\41\ This 
brochure, along with additional educational materials on debt 
relief,\42\ is available at a new FTC web page, www.ftc.gov/
MoneyMatters.\43\
---------------------------------------------------------------------------
    \41\ The brochure is available at www.ftc.gov/bcp/edu/pubs/
consumer/credit/cre02.shtm.
    \42\ Fiscal Fitness: Choosing a Credit Counselor (2005), available 
at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm; For People on 
Debt Management Plans: A Must-Do List (2005), available at www.ftc.gov/
bcp/edu/pubs/consumer/credit/cre38.shtm; Knee Deep in Debt (2005), 
available at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm. In 
the last year and a half, the FTC has distributed more than 248,000 
print versions of these three publications combined, and consumers have 
accessed them online more than 760,000 times.
    \43\ Over the last 6 months, the Money Matters website has received 
approximately 50,000 hits per month.
---------------------------------------------------------------------------
    In addition, the Commission has conducted numerous education 
campaigns designed to help consumers manage their financial resources, 
avoid deceptive and unfair practices, and become aware of emerging 
scams. For example, the FTC has undertaken a major consumer education 
initiative related to mortgage loan modification and foreclosure rescue 
scams, including the release of a suite of mortgage-related resources 
for homeowners.\44\ Moreover, the agency has focused outreach efforts 
on a number of other issues faced by people in economic distress, 
including stimulus scams, rental scams, church ``opportunity'' scams, 
offers for bogus auto warranties, and solicitations for phony charities 
that exploit the public's concern for the welfare of our troops and 
public safety personnel in a time of crisis.
---------------------------------------------------------------------------
    \44\ NeighborWorks America, the Homeowners Preservation Foundation 
(a nonprofit member of the HOPE NOW Alliance of mortgage industry 
members and U.S. Department of Housing and Urban Development-certified 
counseling agencies), and other groups are distributing FTC materials 
directly to homeowners at borrower events across the country, on their 
websites, in their statements, and even on the phone. The Nation's 
major mortgage servicers now provide to consumers, while they are on 
hold, information derived from FTC materials about the tell-tale signs 
of a mortgage foreclosure scam.
---------------------------------------------------------------------------
    The Commission encourages wide circulation of all of its 
educational resources and makes bulk orders available free of charge, 
including shipping. We provide FTC materials to state attorneys general 
and other local law enforcement entities, consumer groups, and 
nonprofit organizations, who in turn distribute them directly to 
consumers. In addition, media outlets--online, print, and broadcast--
routinely cite our materials and point to our guidance when covering 
debt-related news stories.

VI. Conclusion
    The FTC appreciates the opportunity to describe to this Committee 
its work to protect vulnerable consumers from deceptive and abusive 
conduct in the marketing of debt relief services. Stopping the 
purveyors of empty promises who prey on consumers facing financial 
hardship is among the FTC's highest priorities, and we will continue 
our aggressive law enforcement and educational programs in this area.

                               Appendix A

FTC Law Enforcement Actions Against Debt Relief Companies
    1. FTC v. Credit Restoration Brokers, LLC, No. 2:10-cv-0030-CEH-SPC 
(M.D. Fla., complaint issued Jan. 20, 2010) (debt settlement and credit 
repair)
    2. FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill., 
preliminary injunction issued Dec. 17, 2009) (debt negotiation)
    3. FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga., 
preliminary injunction issued Dec. 14, 2009) (debt negotiation)
    4. FTC v. JPM Accelerated Servs. Inc., No. 09-CV-2021, (M.D. Fla., 
preliminary injunction issued Dec. 31, 2009) (debt negotiation)
    5. FTC v. MCS Programs, LLC, No. 09-CV-5380 (W.D. Wash. preliminary 
injunction issued July 13, 2009) (debt negotiation)
    6. FTC v. Group One Networks, Inc., No. 09-CV-00352 (M.D. Fla., 
preliminary injunction issued March 25, 2009) (debt negotiation)
    7. FTC v. Edge Solutions, Inc., No. CV 07-4087-JG-AKT (E.D. N.Y., 
final order Aug. 29, 2008) (debt settlement)
    8. FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo., final order 
Apr. 11, 2008) (debt settlement)
    9. FTC v. Select Pers. Mgmt., Inc., No. 07C 0529 (N.D. Ill., final 
order May 15, 2009) (debt negotiation)
    10. FTC v. Express Consolidation, No. 0:06-CV-61851-WJZ (S.D. Fla., 
final order May 5, 2007) (credit counseling)
    11. FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal., final 
order Oct. 2, 2008) (debt settlement)
    12. United States v. Credit Found. of Am., No. CV06-3654 ABC(VBKx) 
(C.D. Cal., final order June 16, 2006) (credit counseling)
    13. FTC v. Integrated Credit Solutions, Inc., No. 8:06-CV-00806-
SCB-TGW (M.D. Fla., final order Oct. 16, 2006) (credit counseling)
    14. FTC v. Debt Solutions, Inc., No. CV06-0298 (W.D. Wash., final 
order June 18, 2007) (debt negotiation)
    15. FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC(Ex) (C.D. 
Cal., final order Dec. 12, 2004) (debt settlement)
    16. FTC v. Nat'l Consumer Council, Inc., No. ACV04-0474CJC (JWJX) 
(C.D. Cal., final order Apr. 1, 2005) (credit counseling and debt 
settlement)
    17. FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (D. 
Mass., final order Mar. 28, 2005) (debt settlement)
    18. FTC v. Debt Mgmt. Found. Servs., Inc., No. 8:04-CV-1674-T-17MSS 
(M.D. Fla., final order Mar. 30, 2005) (credit counseling)
    19. FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 (C.D. Cal., 
final order July 13, 2005) (debt settlement)
    20. FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. MD., final order 
May 17, 2006) (credit counseling)

    The Chairman. Thank you very much.
    Senator McCaskill, do you have a--opening thoughts, 
comments that you would like to make?
    Senator McCaskill. Well, I have questions, and I will 
certainly defer to the Chairman for questions first.
    My thought is that, if doing away with advance fees does 
away with these companies--probably a good thing. Probably a 
good thing.
    So, I will defer to your questions and look forward to my 
opportunity to ask questions.
    The Chairman. I think you are looking forward to your 
opportunity.
    Mr. Kutz, I'd like to ask you the following. First of all, 
thank you for your testimony. And thank you, in fact, for all 
the work that GAO does, in general. And I understand that, in 
your testimony, you've not named the particular companies 
you've investigated. You've given them case numbers. It's 
very--that's very professional, and it's correct. I've decided 
that I'm not particularly professional, and so, I'm just naming 
the names of all the companies. And I hope that you'll forgive 
me for that.
    So, let's start with what you call ``case number 1.'' Your 
investigators, who were pretending to be financially distressed 
consumers, started a website called 
``FreeDebtSettlementNow.com'' Can you please describe this 
website?
    Mr. Kutz. Yes. If we could also put up, on the monitor, one 
of the advertisements they had on that.
    [The information referred to follows:]

    
    
    But, actually, Senator, this case came to us through a spam 
e-mail from Lebanon. And when you actually clicked on the e-
mail, it took you to FreeDebtSettlementNow. And so--and, for 
example, on the monitor, it shows some of the advertisements 
they had about a government program. If you read that, you can 
see that's another one of these outrageous cases of false, 
deceptive--in this case, I call this fraudulent marketing. So, 
that's a company that then led you--so, they're one of the 
front companies that Mr. Lehman described here, and they were 
funneling work to companies called Procorp and Web Credit, 
which are members of the trade associations: TASC and USOBA. 
And that's where the actual back-end processing of the actual 
debt settlement was.
    And within that, there were a whole number of, I guess, 
deceptive and fraudulent claims. For example, one of the 
companies--Web Credit--claimed a 100-percent success rate--and 
you heard that in the tape, at the beginning, or the excerpts 
in the beginning--I mean, ``100 percent of consumers 
successfully settle within 3 years.'' And, as you've heard from 
my colleagues at the table, that's just an outrageous claim.
    The Chairman. All right. And you say, in your testimony, 
that Web Credit advisors belongs to a debt settlement industry 
association, which is called USOBA, United States Organization 
of Bankruptcy Alternatives. That's an organization that Mr. 
Ansbach is representing here today, is that not correct?
    Mr. Kutz. That's correct.
    The Chairman. And you also say, in your testimony, that the 
telephone representative from Web Credit advisors made multiple 
statements that GAO found to be, quote, ``deceptive or 
questionable,'' close quote. Can you please describe these 
statements, and explain why they are deceptive, and why they 
are questionable?
    Mr. Kutz. Certainly. The first one is the 100-percent 
success rate for people enrolling in the program. As we've 
described, I believe the FTC and the State AGs would say it's 
closer to less than 10 percent. No one knows for sure, I don't 
think. If you look across the industry, one of the 
organizations says it's 34 percent. But, 100 percent is 
something that would not be reasonable to expect under any 
circumstances.
    Another one says everyone in the program makes the 
independent decision to stop paying their creditors. Worst-case 
scenario, you will save 40 cents on the dollar. They also 
promise that hiring the company would ensure that calls from 
creditors would slow down and eventually stop. So, those are 
combinations, Senator, in my view, of some fraudulent claims 
or, at a minimum, deceptive or otherwise questionable.
    The Chairman. And, as I think you mentioned before, they 
sort of claim to be somehow a part of government activity.
    Mr. Kutz. Yes. In this particular case, you see on the 
monitor exactly what they had advertised.
    The Chairman. I think what you've just described to me is 
out-and-out fraud. I'm not a lawyer. Senator McCaskill is. And 
don't mess with her; she's a very good one.
    [Laughter.]
    The Chairman. Mr. Ansbach testified that companies in his 
organization are ``honest and ethical.'' That was in quotes. It 
sounds like you don't agree.
    Mr. Kutz. I can't speak to all 150 or 200 companies, but 
several of our worst cases were, in fact, members of his trade 
association, yes.
    The Chairman. I'm just going to--we're going to have some 
fun here, Senator McCaskill. We've got lots of time and few 
members. So, it's yours.

              STATEMENT OF HON. CLAIRE McCASKILL, 
                   U.S. SENATOR FROM MISSOURI

    Senator McCaskill. I--let me first ask Mr. Ansbach. Mr. 
Ansbach, have you made public all the members of your 
organization?
    Mr. Ansbach. No, ma'am, we have not.
    Senator McCaskill. And why not?
    Mr. Ansbach. I think that's something that's going to 
change. We've discussed that. We've been asked about that. As 
the Senator may know, the Association of Settlement Companies 
does. That's our sister group. In the past, the leadership in 
our trade group, candidly, was concerned that publishing a list 
of members ended up being a subpoena list. We were concerned 
about----
    Senator McCaskill. Probably a genuine concern.
    Mr. Ansbach. Well, ma'am, we do think that we represent a 
lot of very good folks. But, the reality is, I think that these 
are good folks, and we have an agenda item on our conference 
this summer to talk about that. I think that all that should be 
published.
    Senator McCaskill. Well, I'm looking at all the case 
studies--GAO's case studies--and I see that Prime Debt Services 
is a member of yours. American Debt Settlement Group is a 
member of yours. Credit Solutions of America, I'm familiar 
with, because our attorney general has sued them. They're a 
member of yours.
    You have to understand that the premise of the business is 
offensive, in this way. The premise is that when people are in 
debt and worried, they are more easily persuaded that someone 
can help them, because they're desperate for help. And when 
someone tells them, ``You don't have to pay your bills anymore 
and we're going to make a lot of your bills go away,'' that is 
like asking a 5-year-old if they want to get a Happy Meal. It 
is equivalent to that. And what is hard for me to understand is 
how your association thinks you can stop the inevitable march 
of regulation, lawsuits, enforcement actions, because I don't 
think you can produce statistics that show that you're helping 
anyone.
    I have prepared for this hearing. I'm not aware of any 
statistics that show that you've helped anyone. In fact----
    And let me ask Mr. Lehman this. It's my understanding, Mr. 
Lehman, that one of the problems in these lawsuits that are 
being brought by the attorneys general is the fights over 
discovery, that it has been very difficult to get the 
documents, to get the data, to be able to make sure that every 
fact is uncovered so that, first, the members of Mr. Ansbach's 
organization have due process, but, most importantly, if--
whether or not these are civil cases for consumer action, or 
whether or not these are criminal fraud cases.
    Mr. Lehman. Yes, Senator McCaskill. That is true; it's been 
very difficult for the attorneys general to get any 
verification of any of the claims that are made.
    Senator McCaskill. I'm sorry. I don't think you have your--
does he have his microphone on?
    Mr. Lehman. I'm sorry.
    Senator McCaskill. Yes. There you go.
    Mr. Lehman. Yes, it has been very difficult for attorneys 
general to get any verification of the claims made by debt 
settlement companies about success rates and amounts of--
numbers of debts settled and that kind of thing. And I know, in 
the Credit Solutions case that you refer to, that the Missouri 
attorney general has brought, and along with, I might add, four 
or five other States, they have said that it has been very 
difficult to get information from--on their investigations of 
that company.
    Senator McCaskill. Mr. Ansbach, do you have data that you 
could give the Committee today?
    Mr. Ansbach. Yes, ma'am.
    Senator McCaskill. OK. And is it data that has been--that 
is subject to our questioning of the companies and getting at 
the--I mean, are you actually maintaining that the majority of 
people that you sell this service to, that you actually 
produce?
    Mr. Ansbach. Senator, I have data that I would provide to 
you, and the only reason I would bring it to you is if I 
trusted it. What I can tell you, if I may--and I apologize, I 
don't remember if you were in the room when we first started--
our members, alone, have settled $1.4 billion in unsecured 
debt.
    Senator McCaskill. And how much was the unsecured debt that 
they were--that was the outer perimeters of what they were 
given to try to settle? Does that represent 10 percent? Five 
percent? Forty percent?
    Mr. Ansbach. Sorry, I don't appreciate the question.
    Senator McCaskill. Well, you say you've settled $1.4 
billion in debt.
    Mr. Ansbach. Yes, ma'am.
    Mr. Ansbach. That means you have saved your customers that 
much debt?
    Mr. Ansbach. No, I'm sorry. The aggregate value of the debt 
that was----
    Senator McCaskill. OK.
    Mr. Ansbach.--held is $1.4 billion.
    Senator McCaskill. OK.
    Mr. Ansbach. TASC, the other trade association, last year 
alone, settled another $1.1 billion in debt. That debt is 
settled at roughly somewhere around 53 to 50 cents on the 
dollar. So, with all due respect, Senator, when you say that 
we're not providing any value, there are a lot of folks that 
would disagree--folks that received these settlements--folks 
that got their debts settled and ultimately paid 53 cents on 
the dollar and who are now on their way to financial stability. 
I think there is significant value in that.
    Senator McCaskill. Well, then, why isn't a contingency fee 
appropriate? Why do you have to have the money up front?
    Mr. Ansbach. Right. The----
    Senator McCaskill. Why is that--why do you go out of 
business--if, in fact, you are successful in settling that 
percentage of your debt, there is no way you go out of business 
with depending on your success as the parameter for your fee 
payment.
    Mr. Ansbach. Again, with respect, Senator, I disagree. The 
issue is really a very simple one. No business, big or small--
but most of ours are small business owners--can operate without 
revenue for a year. It cannot be done. I run a business. I 
don't think you'll find anyone in this room that runs a 
business that will tell you that it is a stable financial model 
to operate without revenue.
    Now, please, if that--that being said, I agree absolutely 
100 percent with what's being said here today, particularly 
about these egregious ads that have government seals on them. 
Every time we've gotten one, we've sent it to the Federal Trade 
Commission or some of the Senators that have expressed interest 
in that. The question here is not regulation or no regulation. 
And you said we can't stop the inevitable march. I don't want 
to stop the inevitable march. I spend more time in Sacramento 
and Tallahassee and Austin and Springfield, Illinois, than I do 
in my hometown, trying to get regulation in place. The question 
is, Can we get regulation that will protect consumers from this 
very bad stuff, but still allow honest, ethical companies to 
provide the services?
    Senator McCaskill. Well, you now have the premier auditing 
investigative agency in the world that has now determined that 
a number of your members engaged in flat-out fraud--
uncontroverted facts. Now, are you going to ask those members 
to leave your organization because they have participated in 
this kind of activity? Are you going to take any action against 
them, and clear out these clearly deceptive practices that are 
going on? Because I know why these people did this on the 
phone. They get paid by how many people they sign up. Correct?
    Mr. Ansbach. Not all do. No, ma'am.
    Senator McCaskill. Are you telling me that the people that 
he did these case studies on--are they all your members, or 
just some of them?
    Mr. Ansbach. I do not know.
    Senator McCaskill. Well, let me read them to you.
    Web Credit. Are they one of your members?
    Mr. Ansbach. Senator, we have 200 members. I do not know 
all----
    Senator McCaskill. You don't have a list with you?
    Mr. Ansbach. No, ma'am. I do not.
    Senator McCaskill. You--is Procorp Debt Solution a member 
of yours?
    Mr. Ansbach. Ma'am, I just saw the GAO report as--well, 
actually I've not seen the report. So----
    Senator McCaskill. OK.
    Mr. Ansbach. I don't know----
    Senator McCaskill. Well, here's what--here's--you 
understand the credibility gap that exists in this hearing, I 
assume, by now.
    Mr. Ansbach. Senator, what I understand is that there are 
serious problems that we need to talk about. And what I also 
understand is that there is an attempt to say that, because 
there are serious problems, that nobody should do business in 
this industry. And with that, I absolutely disagree.
    Senator McCaskill. Well, I will tell you, that since the 
Chairman is in a frisky mood--as Desi Arnaz would say, ``You've 
got some `splainin' to do.''
    There is a serious issue facing this country. I will not 
sit on this committee--and I know the Chairman--the Chairman 
will not--and I know, having gone through the confirmation for 
the new Commissioner at the FTC--I can't decide which is worse, 
the FreeCreditReport.com or you guys. You are preying upon the 
fears of people. You're making a lot of money, and you're 
delivering a substandard product; and many, many times, you're 
engaging in fraud to get the customers, by promising something 
that you know is not true, that they can quit paying their 
bills, that you've had 100-percent success, that you're going 
to settle the debts, and your record of success--and you've had 
so few dropouts--on and on and on. And, you know, you should 
just tell your members--and I look forward to learning all--
will you give us the list of all 200 of your members?
    Mr. Ansbach. Yes, ma'am, I will talk--again, I'm not the 
legislative director, and I'm certainly not--I'm sorry--I'm not 
the executive director and I'm not the owner of the trade 
group. My plan is to go back to our board and say, ``This is 
important and we should publish the list.'' So, assuming that, 
then, yes, ma'am, you have my word.
    Senator McCaskill. OK, well I will be checking in with the 
Missouri attorney general. We are told that Credit Solutions of 
America is one of your members.
    Mr. Ansbach. Yes, ma'am.
    Mr. Ansbach. And if they have to keep fighting for 
discovery, I think the U.S. Congress is going to have their 
back. So, I think the word needs to go out--if you can prove 
what you say, I suggest you get to proving it.
    Mr. Ansbach. Senator, I'm trying my very best with you to 
say that anybody that makes a claim of 100 percent--I'm a born 
and raised Texan, so pardon me if say this with some lack of 
delicacy--let's take him out back and beat him with a stick.
    Senator McCaskill. Well----
    Mr. Ansbach. I mean, I don't--you are not going to find me 
or my group, or anybody that believes in responsible service, 
defending any of that. Now, what I would like to say to you, 
and I'm desperately trying, is to say to you, ``I have 
statistics. I have numbers.'' I even have some numbers that are 
specific to Missouri that show how much money we've saved 
consumers in Missouri. I'm simply asking you, please don't 
throw the baby out with the bathwater. There are people that do 
this well, and there are customers that get help. Two of them 
are right here with us today.
    Senator McCaskill.--well, I--listen, I'm willing--you know, 
I'm from the ``Show Me State.'' But, it's awfully hard, when an 
organization won't even tell who's in the organization, to take 
your data very seriously. And I say that as a former auditor. 
You've got to show the data, and you've got to let us look, and 
let these attorney generals look, and let the people that are 
trying to fight for consumers look, and they've got to get 
everything. And if what you're saying is true, you've got 
nothing to be afraid of. But, it doesn't appear that way. It 
appears that everyone has circled the wagons. You've told your 
salespeople, ``Close them, close them, close them. Get the 
money up front. If they drop out, don't worry about it; we've 
already made our money.'' That's what it looks like, Mr. 
Ansbach. And it looks that way to anybody with common sense.
    So, I'm just giving you the challenge--and I know the 
Chairman wouldn't have this hearing if he didn't feel the same 
way--I'm giving you the challenge, and telling you, if what 
you're saying is true, then you've got to show us.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator McCaskill.
    I believe the states, Mr. Kutz, that have sued are Texas, 
New York, Maine, Missouri, Florida, Illinois, and Idaho. Now, 
that's just on case number 6, which is Credit Solutions of 
America, which is part of your organization, right?
    Mr. Kutz. Yes, sir.
    The Chairman. Now, you answered that rather quickly, but 
when asked by Senator McCaskill about other companies--you 
know, a list of 200 is very small, and you pointed out that you 
weren't the----
    Mr. Kutz. Executive Director, Mr. Chairman.
    The Chairman. Yes. No, that you weren't the Chief 
Compliance----
    Senator McCaskill. [inaudible.]
    Mr. Ansbach. It's OK, ma'am. I--I mean, at the risk of 
perhaps talking out of turn, I understand the passion in this. 
I'm sitting two chairs down from Mrs. Haas, who obviously had a 
horrific experience that I would never, in my life, defend. 
But, you know, I have an office full of folks that I believe in 
very much. I know sometimes even they make mistakes. But, I 
think there's good work to be done here, and I just want to 
find us a way to do it.
    The Chairman. That's just an amazing statement.
    Let me try to get at it a different way. What percentage of 
the people that you say that you serve--I mean, 200 companies 
is a very small amount. You're actually the Chief Operating 
Officer--you corrected me--you're not Chief Compliance, you're 
Chief Operating--you have even more reason to know what these--
what the 200 companies are. But, you don't. You simply don't.
    Mr. Ansbach. I'm sorry, Mr. Chairman. Perhaps I misspoke. 
I'm--my role with USOBA, the trade association is--I'm the 
volunteer as a Legislative Director. I'm the Chief Operating 
Officer of just my company.
    The Chairman. So, you didn't have to get--you didn't have 
to pay up front. You didn't have to get paid up front. I'm 
sorry. I'm just being cynical.
    The--what percentage of the people that you take on, and 
your 200 organizations take on, do you think do well by their 
clients?
    Mr. Ansbach. If you'll permit me, I want to--I know I've 
got some data to provide you with. And, by the way, I want to 
encourage you--if you want to ask questions to anybody else on 
the panel, I'm sure----
    The Chairman. No, you're my interest right now.
    [Laughter.]
    Mr. Ansbach. I just--I don't want to hog the microphone--so 
I'd be happy to do that.
    The Chairman. You can joke about this, if you want.
    Mr. Ansbach. No, sir, I don't think it's a joking matter at 
all. I will tell you that the statistics that we've discussed--
the 35-percent number--34, 35 percent, which I think was 
referenced--is a TASC number. We think that number has merit. 
That means that 35 percent of consumers will settle all of 
their debts in a particular debt settlement program. What that 
means is that there's still 65 percent that do not complete the 
program. It's very important to understand what that means. And 
this is the difficulty we've had with the discussion on success 
rates.
    The Chairman. How would you react to that, Mr. Kutz and 
Commissioner Brill--35-percent successful?
    Mr. Kutz. It was 34. But--and I think there may be a 
question of what the definition is of ``success'' there, 
because, I mean, I think success--we would assume that you 
settle all your debts. I think the success rate there may have 
been some or all of the debts. But, it's very different from 
what the State AGs have found, which is less than 10 percent. 
So, certainly less than 50 percent is clearly--makes sense to 
me, given who you're talking about. And I don't know if FTC has 
any further data on that. But, I think less than 34 or--34 has 
got to be the high end of what we're talking about.
    The Chairman. Commissioner Brill?
    Ms. Brill. Mr. Chairman, we have asked for this kind of 
data as part of our rulemaking procedure, and we are currently 
analyzing data that has been provided to us, not only by Mr. 
Ansbach and some of his compatriots in the industry, but also 
by the State attorneys general and others. And at this point, 
because the rulemaking process is underway, I don't want to 
comment on my view or the Commission's view about that data. 
But, to the extent that the information we have is public, we'd 
be more than happy to share that with you. I don't have the 
numbers with me right here today. But, we'd be more than happy 
to share what----
    The Chairman. OK, well----
    Ms. Brill.--with you what we have.
    The Chairman.--you could have just said that.
    Mr. Ansbach, in your testimony, you present a lot of 
numbers showing the debt settlement companies that save 
consumers money. I didn't hear anything about the numbers 
showing how much your industry costs consumers. Remember, in my 
opening statement I said they often end up owing more than they 
did before. So, you say that you're saving them money. How much 
are you costing them money?
    Mr. Ansbach. If I understand the Senator's question, you're 
asking, What damage does debt settlement, as a program, cause?
    The Chairman. Yes.
    Mr. Ansbach. You know, it's--actually, it's a very 
important question, and it gets to the root of the 35-percent 
number. In and of itself, a debt settlement program does not 
cause damage. What does cause damage is not paying your 
creditors. Obviously, that's whether you're in a debt 
settlement program or not. What does cause damage--of course, 
not paying your bills causes damage in the form of a worsened 
credit rating or litigation. And that's the very reason, Mr. 
Chairman, that I would join with the colleagues here at the 
table--disclosure agreements in contracts must tell people 
that, ``If you stop paying your bills, then these things will 
happen.'' And that is a disclosure requirement for USOBA. It is 
a disclosure requirement for TASC. Clearly, the members that 
have been related here today failed, and did not, in those 
respects. And I know Senator McCaskill has left us, but to that 
extent, we will absolutely be following up with those 
companies.
    The Chairman. I think that--Mrs. Haas, didn't you say that 
you and your husband owe $20,000 more now than when you 
enrolled?
    Mrs. Haas. We owed $13,000 more, 6 months after we 
enrolled, immediately after we terminated our attorney--
$13,000.
    The Chairman. So, you ended up owing $13,000 more.
    Mrs. Haas. Thirteen--that's not including what we had 
already paid our attorney. We had paid our attorney $3,800.
    The Chairman. And, Mr. Kutz and Commissioner Brill, would 
you say this is pretty standard? Because, that's the question, 
Mr. Ansbach, I was asking you--costing people, as opposed to 
saving.
    Mr. Kutz. Well, I would say you have the additional fees, 
plus, of course, many creditors are going to continue to charge 
interest, penalties, and late fees. So, again, how the numbers 
shake out with the industry savings, I'm not sure how they 
calculate that, but there's--it's a fairly interesting possible 
calculation you could make.
    Ms. Brill. I agree. There are different levels of potential 
damage. And I think that was what your question was getting at. 
So, I agree that it's something that's important to consider as 
a whole.
    The Chairman. Mr. Lehman, the--when a company decides to go 
into business, it's not my understanding that they raise their 
capital to go into business from customers and then offer, as 
an excuse, that, ``We couldn't have--since we charged you fees 
up front, that's the way we could do business.'' And then, I 
believe that Mr. Ansbach said that only went on for a year. 
But, this has been around for quite a long time. Does that 
mean--do you think he thinks that, after that first year, that 
the fees don't have to be paid up front? It would be my 
impression that they continue to have to be paid up front as 
new customers come in.
    Mr. Lehman. Mr. Chairman, I think one of the----
    The Chairman. I mean, is business done that way in this 
country?
    Mr. Lehman. Well, I think any kind of business that you 
start, even a law practice--you've got to start it and you've 
got to buy books, you have to have clerical help, you have to 
have equipment of various kinds. I know people who have started 
a law practice, and it takes--it does take some time to make 
any money. You do have to have a capital investment. If you're 
starting a restaurant or a car repair shop, you have to put 
money into it first.
    The Chairman. But, you put your money into----
    Mr. Lehman. You put money into it.
    The Chairman.--it first. Somebody else puts their money 
into it first. You don't----
    Mr. Lehman. And what----
    The Chairman. You don't charge the restaurant customer 
upfront fees and then feed that person a month or a year later, 
right?
    Mr. Lehman. Exactly right. It would be like--yes--somebody 
contributing to the restaurant today for the privilege of 
having a meal, 2 years from now. And that is one of the 
problems with the industry, is that the entry barriers are very 
low. That's why we have, by the industry's estimates, over 
1,000 of these companies out there. You need very little money. 
Most of the work, that we've found, is outsourced. Somebody can 
set up a debt settlement company, outsource all the marketing 
and lead-generation work, can outsource the work to actually do 
the negotiations, to the extent they're done, can outsource the 
accounting, the drafting of consumers' banks accounts to 
deposit in the debt settlement account. And, frankly, this 
confuses consumers, because they don't know where the ``there'' 
is, who is actually doing the work. As I gave the example 
before, with the law firm, the law firm is out there, in its 
name and with the retainer agreement, but it wasn't performing 
the services. So, you have this kind of network of companies, 
and it's hard for the consumers to identify who is the 
responsible party. And it could be hard for regulators, too, to 
determine, you know, where the real action is.
    The Chairman. Mr. Ansbach, you say you're a volunteer? Are 
you here as a volunteer?
    Mr. Ansbach. As hard as it is to believe, yes, sir.
    The Chairman. You believe in it so strongly that you're 
here as a volunteer.
    Mr. Ansbach. I have seen the benefits of this program, when 
done right. I do believe in it. Yes, sir.
    The Chairman. Why is it, Mrs. Haas, that I'm having a hard 
time accepting that as anything but a joke?
    Mrs. Haas. Chairman, because I've been through a lot, I 
don't believe him, either. I don't think debt settlement should 
be allowed to practice any kind of consumer help whatsoever.
    The Chairman. Do you think, if they charge fees before they 
provide services, which, in most cases, they don't do, that 
they should be in business at all?
    Mrs. Haas. Absolutely not. Absolutely not. The attorney 
that we had paid took our money and did absolutely nothing. And 
we got no refund.
    The Chairman. And if that were the case in, let's say, 60 
percent of all their clientele--and let's--and it's probably 
more than that--would that not be enough reason to say they 
should not be in business at all, that they are harming the 
majority of their customers?
    Mrs. Haas. I don't think they should be in business, 
because of their illegal practices. They don't follow State and 
local rules. They mislead the consumers. And they take their 
consumers' money and are--and the credit reports--the credit--
your credit is damaged beyond belief.
    The Chairman. Mr. Kutz, and particularly Commissioner 
Brill--no, I would say, actually, particularly Mr. Lehman--
the--there is so much of this we--in this country, right now 
and always. Americans can always find a way to skim a buck, and 
they can always find a way to take it off of somebody who is in 
crisis, is desperate, and who will fall for what they have to 
say. And they don't have to make their promise. And the 
glorious way that America works is that we concentrate on the 
big picture and on the big people, and we don't concentrate on 
the little people who are hurting and in trouble. That's what 
you do. That's what you do, and that's what you do, and that's 
what you do. And that's what you have suffered through. It's 
sad.
    My question is, how can they remain in business? And is 
there a way, if they are practicing fraud--and you say 
deceptive--the fraud and deceptive practices--why are they in 
business?
    Mr. Lehman. Mr. Chairman, as I mentioned, there are many, 
many companies out there. If that over-1,000 figure is 
accurate, that's a lot of companies. We have a lot of attorneys 
general that are interested in this issue that are bringing 
enforcement actions. There is no way that we can target the 
number of companies that are out there.
    And, as I also said, the barriers to entry to this business 
are very low, so it is not hard for companies to shut down, 
move on, and reopen. So, for enforcement purposes, it's kind of 
like playing a game of whack-a-mole. You can get a few, but you 
cannot cover the whole realm of bad practices out there.
    But, I--you know, the--I think the answer is to continue 
enforcement, to continue cooperative enforcement efforts among 
the States, to advocate for strong Federal rules or Federal 
legislation and to--you know, and encourage legislation in the 
states. But, it's--it is a big problem, and it's going to take 
a lot of resources to address it.
    The Chairman. Is this something--I mean, I would be 
delighted to prepare legislation in this committee. Is this 
better done by states?
    Mr. Lehman. The--as I said earlier, the 41 attorneys 
general supported the proposed FTC rule. So, I think it's fair 
to say the attorneys general would approve and appreciate 
Federal legislation to create at least a Federal floor of 
practices for the debt settlement industry. There are some 
States that do have laws. And it was interesting for me to see 
some of the attorneys general of those States that still 
advocate for a--for Federal law in this area.
    The Chairman. This has already been gone over, but it's so 
utterly repulsive to me that I can't help but talk about. This 
is one of their products. And we've had many other hearings on 
the scamming of poor people. And we had one which simply--see 
this way, this is, ``Find out if you are eligible,'' in big 
blue print.
    [The information referred to follows:]
    
    
    And in this previous one, this--the fact that this was big 
blue print--and you don't have a lot of small print on here; 
it's down here. The other one, there's a lot of small print. 
And so, people sort of ``find out if you're eligible.'' Well, 
you can't very well say ``no'' to that. You're desperate. 
You've got debts. You've got people closing in on you. So, you 
push it. And then you're kind of hooked into that thing.
    This is the--what is this? The--yes, that's your 
Commission. Now, Mr. Ansbach has already said that he's 
appalled that this is on this piece of material. But, this is 
available broadly, under the companies that he represents.
    And then, I think we have, over here, the Social Security 
Administration, which strikes me as an enormously--those two--
an enormously cynical attempt to--along with the--sort of, the 
stimulus-package aspect of this--it's a cynical attempt to sort 
of give credibility to a group that doesn't have any 
credibility.
    And I look up here. Where's that lovely American flag? No. 
I'm talking about the other chart. Yes. See, now this--I--this 
is really wonderful, ``The future of debt settlement begins 
with accountability, credibility, and transparency.''
    [The information referred to follows:]

    
    
    I would say to--ask Mr. Kutz, Mrs. Haas, Mr. Lehman, 
Commissioner Brill, How many of those tests do you think that 
his group of 200, with this eagle and American flag as their 
symbol, meet?
    Mr. Lehman. It doesn't measure up, from the evidence and 
the complaints we've received, Mr. Chairman.
    The Chairman. Mrs. Haas, would you have a view on that?
    Mrs. Haas. I know when we looked into our credit counseling 
on the Internet, and we found Credit--Consumer Credit 
Counseling of America, that's what sold us. It was American. 
Why--you know, we can't go wrong. If it says ``America'' in 
there, we can't go wrong.
    The Chairman. And there's no way that you can analyze this, 
because you haven't gotten into it.
    Mrs. Haas. No.
    The Chairman. Commissioner Brill?
    Ms. Brill. We have been very concerned about offers that 
make representations that they're somehow part of the 
government, part of the stimulus plan, that have shields like 
this on it. We've brought cases in this area, as have the 
States. It's a tremendous concern, for the exact reasons that 
Mrs. Haas is pointing out. It lends an air of credibility. That 
is the concern.
    The Chairman. Well, but the question I was asking Mr. 
Lehman--and then I'll say Mr. Kutz--they don't measure up on 
those three promises, do they? That's not a question; I 
shouldn't have said that. Do they measure up on these three 
promises?
    Mr. Kutz. All but one of the USOBA members we spoke to and 
dealt with did not meet up to them. And the other one, we just 
didn't get anything that was not--that was bad, necessarily. 
One was reasonably good. The other five or so would not measure 
up to those standards, in our judgment.
    The Chairman. OK. I sort of think that we've gotten what we 
can out of this. There are a lot of questions. I feel a great 
sense of sadness about this. And also anger--not denying that 
there may be, you know, a couple of your companies that do a 
good job. And you've got some nice people sitting in the back 
who are ready to come up front and testify. But, boy, we sure 
didn't run into any of those people. And we've worked very 
hard, and these are professional investigators behind me, and 
they are hired on to this committee to do--that's what they do, 
they investigate. They look for wrong-doers and people who take 
advantage of people. And we have a lot of hearings about this. 
And it's very, very sad to me that, at a time of such economic 
distress, that there are so many companies, in so many ways 
with people, whether they are pop-up Internet deals or, you 
know, all kinds of scams. People fall victim to them.
    I come from the State of West Virginia, where there are a 
lot of very, very poor people who are desperate and, for a 
whole lot of reasons, are in all kinds of trouble. And they--
you know, they give their faith to God and their money to these 
companies. And I don't know how you---on a net basis, I guess 
you probably turn out all right, in that case; but, you 
certainly don't turn out all right financially.
    And I just express disdain and contempt for these kind of 
efforts. And I, frankly, am glad there are committees, like us 
and the Federal Trade Commission, that look for these things 
and try to stop them. We've got to be honest in this country. 
We've got to treat our people with respect. A lot of people 
don't. Or----
    Do any of you have closing comments?
    Mr. Kutz. Can I make a comment----
    The Chairman. Please.
    Mr. Kutz.--on what you said, I mean the faith in God? 
Interesting thing is, three of the companies used Christianity 
as the link to bring people in. Giving, of course----
    The Chairman. Good point.
    Mr. Kutz.--an air of credibility. Then they provided the 
fraudulent and deceptive information after that. And I found 
that, Senator, to be particularly despicable.
    The Chairman. Any others?
    Mr. Lehman. Mr. Chairman, I'd just say, attached to my 
written remarks that I've submitted to the Committee are some 
other examples of misuse of Federal information or Federal debt 
relief programs, stimulus money, and that kind of thing. The 
one that was blown up, that you just displayed, is one that is 
running right now. We heard about that within the last week. 
And it's--if you go onto the Internet, on many sites, that link 
will pop up and it's--the one you showed said ``North Carolina 
Relief Act,'' but there are similar sites for West Virginia--
West Virginia Relief Act, Florida Relief Act, and so forth.
    So, yes, the problem is still ongoing.
    Mr. Ansbach. Mr. Chairman, just the few last remarks that I 
would leave the Committee with. One of the things that we did 
not get to today, but I think perhaps the Chairman wants to be 
sure that you consider. There does appear--and it's not just 
from our point of view, but consumer activists have stated 
this, as well--there is going to be some type of a need to help 
people that cannot afford credit counseling, but who want to 
still avoid bankruptcy. And, in that regard, we have tried--
obviously with some failing, but we have tried very hard to 
fill that particular void. Some numbers say as high as 30 
percent of folks cannot afford credit counseling, but want to 
avoid bankruptcy. I would simply ask the Chairman that, as we 
move forward on this important issue, allow us to continue to 
work on this and get better at this, allow us to join you in 
condemning some of the particularly egregious ads that we've 
seen here today. And we will continue to join, as best as we 
are able to do, if you allow us for that.
    The Chairman. That was a touching closing statement. I 
guess mine would be, I don't know how you sleep at night.
    Mr. Ansbach. Well, with all due respect, Senator----
    The Chairman. This hearing is adjourned.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]

                            A P P E N D I X

  Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from 
                                 Texas

    Thank you, Mr. Chairman, for holding this afternoon's hearing. The 
continuing home foresclosures, high unemployment, and unprecedented 
levels of consumer debt that have accompanied our current economic 
recession have given rise to new industries tailored to helping those 
in need. The recession has also given rise to just as many scams and 
unscrupulous individuals willing to take advantage of those who have 
fallen on hard times. We have a responsibility to understand the 
services available to consumers to address their economic troubles and 
ensure those services are accompanied by appropriate consumer 
protections.
    As more and more people are being overwhelmed by their debt, there 
is a greater demand for debt relief services. Consumers unable to fully 
repay their debt generally have three choices--credit counseling, where 
consumers enroll in a program designed to allow them to pay off the 
full balance of their debts over a longer period of time; debt 
settlement, where a third party negotiates with creditors to lower the 
overall balance due from the consumer; and bankruptcy.
    Debt settlement can seem very appealing, with promises of lowering 
the overall debt owed and avoiding the negatives associated with filing 
for bankruptcy. Unfortunately, too little is known about the debt 
settlement industry. It is unclear exactly how many of these businesses 
are in operation, how many consumers use their services, and--more 
importantly--whether the current debt settlement business model 
benefits a significant number of consumers.
    There have been a number of concerns raised about debt settlement. 
Foremost among these is the allegation that many companies use 
deceptive advertising to lure vulnerable consumers. These 
misrepresentations may include promises about settling debts in an 
extremely short timeframe, for unrealistically high savings, and 
without disclosing the actual costs to the consumer. In Texas, such 
misrepresentations have given rise to more than half a dozen 
enforcement actions by Attorney General Greg Abbott's office.
    Last fall Chairman Rockefeller commissioned GAO to conduct an 
investigation into the advertising and marketing practices of debt 
settlement companies, and I am interested to hear their findings.
    I am also interested in learning more about the fee structure used 
by debt settlement companies. Many reportedly charge a significant 
portion of their fees at the outset of a consumers' program, and 
critics have expressed concern that these fees are being paid before 
any real service has been performed or any debt has been settled. The 
fee structure is the subject of a current rulemaking at the Federal 
Trade Commission, and we are fortunate to have Commissioner Brill here 
today to discuss this. I am curious to hear how different fee models 
work. There is no question that a business must have revenue to 
operate. However, there does appear to be the potential for abuse in a 
system where the majority of fees are paid before any tangible benefit 
to the consumer is realized.
    I am also pleased to welcome John Ansbach here today as a 
representative of the debt settlement industry. Mr. Ansbach, who is 
from my home state of Texas, is Legislative Director for the United 
States Organization of Bankruptcy Alternatives (USOBA) and General 
Counsel for EFA Processing, based outside Dallas. My staff has met with 
Mr. Ansbach on a number of occasions, and he has been a tireless 
advocate for the industry, relaying USOBA's support for sound business 
practices among debt settlement companies. Mr. Ansbach and other 
representatives of the industry have worked very closely with the FTC 
during the creation of their proposed rule, and I know they support 
many of its provisions.
    Among other things, I understand Mr. Ansbach is prepared to discuss 
the stories of some consumers who may have benefited from debt 
settlement services. At the same time, we will hear from Mrs. Holly 
Haas and her husband today. I want to thank them for being willing to 
share their experience with us, so that we can better understand how a 
consumer can be negatively impacted by a debt settlement program.
    Again, Mr. Chairman, thank you for holding this hearing today. I 
look forward to hearing from all of our witnesses.
                                 ______
                                 
   Prepared Statement of Hon. Mark Pryor, U.S. Senator from Arkansas

    I thank Chairman Rockefeller, for holding this hearing on the 
consumer's experience in the debt settlement industry. Today's dialogue 
is important as many consumers continue to be targeted in a distressed 
economy.
    According to the Commission's 2010 annual report on the Fair Debt 
Collection Practices Act, ``the FTC receives more complaints about the 
debt collection industry than any other specific industry.'' In 2009, 
the FTC received over 88,000 complaints about third-party debt 
collectors--comprising almost 17 percent of all consumer complaints the 
agency received that year.
    The FTC report also notes that many consumers may never file a 
complaint with an entity other than the debt collector. Therefore, 
consumers may not recognize that debt collection violations have 
occurred or that the FTC manages a complaint database and enforces 
specific consumer protection laws. By extension, this means that not 
all consumers' experiences may have been recorded.
    In Arkansas, abusive debt collection practices appear to be on the 
rise. Our state attorney general's staff has reported a steady increase 
in the number of abusive debt collection consumer complaints received 
in the state. In 2007, the state received 510; in 2008, 659 complaints; 
in 2009, 667 complaints.
    As Chairman of the Consumer Protection, Product Safety, and 
Insurance Subcommittee with oversight authority over the Federal Trade 
Commission, I recognize the FTC's important work to enforce against 
consumer abuse in the debt collection and debt settlement areas. I look 
forward to hearing Commissioner Brill's perspective and her thoughts 
about what else should be done.
    We also will hear from members of the business community with us 
today. I welcome their thoughts regarding how to better police the 
marketplace from actors that violate consumer protection statutes.
    In this tough economic environment, Americans are repeatedly 
targeted by fraudulent actors seeking to exploit their vulnerabilities. 
I know today we will hear from some consumers first-hand about their 
experience and I welcome their insights.
    The investigation instigated by Senator Rockefeller is important 
and I commend him for his vigilance and illumination of consumer abuse. 
As we strive to protect Americans from unfair or deceptive financial 
practices, the importance of the FTC's role in this domain is 
underscored. I look forward to a robust conversation.
                                 ______
                                 
               Prepared Statement of John Mark Spaulding

    Thank you, Chairman Rockefeller, Ranking Member Hutchison, and 
members of the Committee for the opportunity to share my experience 
with you. My name is Mark Spaulding and I am a resident of South 
Charleston, West Virginia. I am writing to tell you about an experience 
I had with a debt settlement company.
    A few years ago, my wife and I were both having medical problems 
and were starting to fall behind on our bills. I did not want to file 
for bankruptcy, so I contacted a debt settlement company. In March 
2008, I contacted U.S. Debt Settlement Company (USDS) from an Internet 
advertisement that I had seen. When I called, I spoke to a lady and 
told her I was trying to pay off some hospital bills, some old and some 
new. I was asked what other types of unsecured debt I had, and I told 
her that I had some credit card debt, but was current with all of my 
payments. I was asked how much I owed the hospitals and the credit card 
companies, and I told her. I was then asked to fax copies of my bills 
for them to review.
    After the review, I was told that USDS could help me reduce my debt 
as much as half, and sometimes for as low as 40 cents on the dollar. I 
was told they have the best success with credit card companies. I was 
also told I could be well on my way to financial freedom and 
reestablishing my good financial situation. This all sounded very good 
to me, so I went with it.
    I filled out an application and gave USDS all of my medical bills 
and credit card information. I also gave my banking information so they 
could automatically withdraw the enrollment fee and monthly service 
fee. I was asked to sign a ``power of attorney'' form so they could 
contact my creditors on my behalf. After that, I was signed up for a 
48-month pay-off schedule.
    I was told it was best not to have any contact with my creditors, 
and that USDS would handle them. Within 2 months the credit card 
companies were calling me for payments. I called USDS to ask what I 
should do. I was told that I should screen my calls and send any and 
all correspondence to USDS and they would take care of it. I asked if I 
should let the credit card companies know that I was in a debt 
settlement program. They said no, and that if I were to do that, they 
would not negotiate a settlement. I was reassured that settling with 
credit card companies is what they do best.
    During that time, calls and letters from my creditors were coming 
in. Calls at home and at work seemed nonstop. I would fax the 
collection letters to USDS and they said that they would handle it and 
not to worry.
    After paying $296.41 per month for 6 months and $55.00 per month 
after for service fees, nothing in the way of negotiations had started. 
I called USDS to ask why nothing had started yet, and I was told that 
waiting is all part of the negotiation process. They told me that I 
should start saving money to start negotiations, and wait.
    A few months later, I started receiving letters from my creditor's 
lawyers and summons from the courts. Again, I forwarded this 
information to USDS, and they told me not to worry and that this was 
all part of the negotiation process. At that point, 14 months had gone 
by and nothing had been done to settle my debt. I called USDS to 
express that I was afraid of being sued by the credit card companies. I 
was told I should ``hurry up and wait.'' At that point, USDS asked me 
how much money I had saved in my banking account. I told them about 
$1,200.00. They told me that was not enough to settle anything, and 
that I should agree to the terms of the credit card lawyers.
    Now I have two judgments against me and will end up paying 40 cents 
more on the dollar than I originally owed. In December 2009, my 
negotiator said bankruptcy would be my best option. I had paid over 
$2,400.00 to USDS for a service that I never received. I was strung 
along all that time for them to say that they could not help me. I was 
furious about the lack of service and their slow response time.
    I asked for a refund and was told that they would settle with me 
for $600.00. That is when I decided to file a complaint with the West 
Virginia State Attorney General's Office. Since then, USDS has given me 
a full refund. No one should have to go through this type of grief from 
a company that has been entrusted to help with someone's personal 
finances. Now I am back to square one, only worse off than I was 
before. This has been a costly lesson that will take me several years 
to recover from.
                                 ______
                                 
  American Coalition of Companies Organized to Reduce Debt 
                                                   (ACCORD)
                                        Phoenix, AZ, April 20, 2010
Hon. John D. Rockefeller IV,
Chairman,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.
Hon. Kay Bailey Hutchison,
Ranking Member,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.

Dear Chairman Rockefeller and Ranking Member Hutchison:

    The American Coalition of Companies Organized to Reduce Debt 
(ACCORD) is a trade association representing debt settlement firms and 
related businesses that are committed to ensuring the highest standards 
of professionalism and integrity in the debt settlement industry. 
ACCORD and its members support fair regulation of debt settlement 
practices that will fully protect the interests of consumers who can 
benefit from debt settlement services.
    Responsible debt settlement is unquestionably a benefit to 
consumers, especially in economic times like these, when large numbers 
of consumers are facing unmanageable credit card debt. One conservative 
estimate of the obligations to credit card issuers and other unsecured 
creditors that debt settlement companies resolved for consumers last 
year is $1 billion.\1\ Not only do consumers facing financial hardship 
benefit from debt settlement, creditors do as well because it allows 
them to collect debts that might otherwise be discharged in bankruptcy 
or sold to debt buyers for a small fraction of their face value.
---------------------------------------------------------------------------
    \1\ See October 26, 2009, and March 8, 2010, letters from Andrew 
Housser, on behalf of The Association of Settlement Companies, to the 
Federal Trade Commission, available at: http://www.ftc.gov/os/comments/
tsrdebtrelief/index.shtm.
---------------------------------------------------------------------------
    Despite these benefits, the bona fide debt settlement industry has 
suffered from bad publicity arising from bad actors in the industry and 
consumers who, for various reasons, did not achieve expected results. 
Consumer groups and law enforcement have charged some companies with 
exploiting the financial vulnerability of debt-strapped consumers by 
taking fees from them and not delivering the promised services. In some 
cases, it appears that purported debt settlement firms engaged in 
outright fraud.
    Often, however, debt settlement firms enroll consumers who simply 
lack the financial resources to succeed in a debt settlement program. 
Front-loaded fees provide a strong economic incentive for debt 
settlement companies to do this. Consumers complain when they find 
themselves unable to save the money needed to settle with their 
creditors. They may have already paid hundreds or thousands of dollars 
in fees to a debt settlement firm, only to find themselves with unpaid 
debts to their creditors that have grown even larger through 
accumulated interest and late fees. When debt settlement companies have 
the contractual right to collect fees whether or not a consumer's debts 
are settled and creditors paid, this sad outcome is often inevitable. 
Creditors remain unpaid; consumers fall even deeper into debt. The only 
person who benefits is the debt settlement company.
    The essential problem is that, under this fee model, debt 
settlement companies have the incentive to sign up every possible 
consumer for their programs. Whether the consumer succeeds or not, the 
company collects its fees. In many cases, careful screening of 
potential clients would reveal that a consumer is not a suitable 
candidate for debt settlement. Debt settlement companies have no 
incentives, however, to perform such screening. This is the 
disincentive the Federal Trade Commission's current rulemaking would 
correct.
    A key initiative of ACCORD since its 2009 formation has been to 
support the Commission's proposed amendments to the Telemarketing Sales 
Rule addressing the practices of debt settlement companies and other 
providers of debt relief services to consumers. In particular, ACCORD 
believes that the proposed ban on collecting fees until services are 
performed is a vitally important provision, which will benefit both 
consumers and the debt settlement companies that work for them.
    ACCORD believes that adhering to two principles will generate the 
respect the industry deserves from consumers, consumer advocates, 
Congress, law enforcement, and the consumer financial services 
industry.

        1. A ban on advance fees; \2\ and
---------------------------------------------------------------------------
    \2\ The common short-hand reference to an ``advance fee ban'' can 
cause confusion. Some industry members have begun to advocate a ``pay-
as-you-go'' model, which they define as collecting a fixed fee on a 
monthly basis over the first half of the expected duration of the 
program. This model, which at best is a very accelerated pay-as-you-go 
scheme, does little to solve the problem of collecting fees from 
consumers unlikely to experience any or much debt relief. It entitles 
the debt settlement firm to collect sizable fees regardless of whether 
any debt is settled. On the other hand, proposals that require a debt 
settlement firm to settle all of a consumer's debts before collecting 
any fee go too far in the opposite direction. ACCORD advocates a fair 
compromise: the debt settlement firm should be permitted to collect a 
portion of its fee as each debt is settled and the creditor is paid the 
negotiated amount.

---------------------------------------------------------------------------
        2. Fees based on the savings achieved for consumers.

    These two principles protect consumers from the nightmare we all 
fear--a debt settlement program that leaves a consumer in worse 
financial shape than when he started the program. By agreeing to take 
no fee until a creditor is paid, and by basing the fee on the amount of 
savings negotiated, the debt settlement company will ensure that its 
client debtors always benefit from its services. ACCORD members have 
either already adopted these two principles or pledged to transition 
their operations to incorporate them in the coming months.
    With these two simple changes, a true ban on advance fees and a fee 
calculation based on the success of debt settlement negotiations, 
abuses in the debt settlement industry can end. These principles align 
consumers' interests with their debt settlement company's interests--
the consumer can work her way out of unmanageable unsecured debt and 
the company can earn an appropriate fee for its services.
    Critics of the debt settlement industry sometimes point out that 
some consumers drop out of the program before a single settlement is 
negotiated. When that occurs today, the debt settlement company can 
usually collect its fee even though the consumer has received no 
meaningful benefit from the program. This is a situation ripe for 
abuse. Careful screening of prospective clients will reduce the chance 
of enrolling consumers for whom debt settlement is not a suitable 
choice. This is precisely the effect of the Commission's proposed 
advance fee ban. The debt settlement company will bear the risk that 
the consumer will not see the program through to the settlement of her 
debts.
    Some industry members will point out that many consumer ``drop 
outs'' do so through no fault of the debt settlement firm and that even 
the most careful screening will not eliminate the problem of drop outs. 
This is unquestionably true. ACCORD and its members have found, 
however, that careful screening, excellent customer service, and full 
disclosure greatly reduce this problem.
    The ban on advance fees is an important step in transforming the 
industry to one that always works for consumer interests. Alone, 
however, it is not enough. Equally important is the concept of a fee 
based on the company's success for the consumer. This provision ensures 
that a consumer will not be left worse off by beginning a debt 
settlement program.
    Some industry members suggest that abuses can be prevented by 
simply capping the fees a debt settlement company can charge, based on 
the amount of a consumer's unsecured debt. ACCORD disagrees. Such an 
approach still allows companies to collect fees even when the consumer 
receives no benefit. Even when a settlement occurs, under this approach 
the net cost to the consumer, including the debt settlement company's 
fees, can exceed the original debt. Indeed, ensuring a debt settlement 
company's right to collect a fee based on the enrolled debt ensures a 
disconnect between the value of the service and the size of the fee. In 
contrast, a success-based fee links the consumer's benefit and the 
amount of the company's fee, providing the debt settlement company with 
a strong incentive to achieve good results for its clients.
    Occasions will exist in which the debt settlement company cannot 
negotiate a significant savings for the client debtor from a particular 
creditor. It may seem unfair to the company to deny it a fee despite 
its best efforts on the consumer's behalf. This objection does not 
withstand scrutiny, in ACCORD's view. On average, creditors do 
negotiate significant reductions for appropriate consumers. Despite the 
occasional situation in which the success-based fee structure yields no 
fee, the debt settlement company will generally be able to earn fair 
fees while achieving valuable benefits for its clients.
    Perhaps the most important issue facing the Federal Trade 
Commission as it considers its final rule on debt relief service 
providers is whether to provide a broad exemption from the advance fee 
ban when debt settlement services are offered by licensed attorneys. 
ACCORD believes that such an exemption is unjustified and will 
effectively negate the consumer protection provided by the advance fee 
ban. Today, in anticipation of a likely FTC rule banning the collection 
of fees before debts are settled and paid, debt settlement companies 
are affiliating with ``attorney networks'' that hope to circumvent the 
advance fee ban. If affiliating with attorneys proves to be an 
effective strategy for the continued collection of advance fees, the 
Commission rulemaking is likely to have little impact on the abusive 
practices that have concerned the agency and this committee.
    ACCORD is grateful for the Committee's leadership and continued 
interest in this important consumer protection issue. We appreciate the 
opportunity to make our views part of the record of this hearing.
            Best regards,
                                               Jean Noonan,
                                                           Counsel.
                                 ______
                                 
                                            Consumers Union
                                                  San Francisco, CA
To: Federal Trade Commission, Office of the Secretary
From: Gail Hillebrand, Financial Services Campaign Manager, Consumers 
            Union
Re: Telemarketing Sales Rule--Debt Relief Amendments--R411001
Date: October 9, 2009

    Consumers Union, the nonprofit publisher of Consumer Reports, will 
be filing joint comments during the extended comment period with the 
Consumer Federation of America, the National Consumer Law Center, and 
other consumer and community groups. We are also separately submitting 
this analysis of the white paper entitled `Economic Factors and the 
Debt Management Industry'' by Richard A. Briesch, PhD, Associate 
Professor, Cox School of Business at Southern Methodist University 
(August 6, 2009). The white paper has significant limitations that 
render questionable its ability to support claims about the level of 
any benefit to consumers from using debt settlement services. That 
report fails to demonstrate that debt settlement services benefit most 
consumers who sign up for it.
    This report was released by the industry-sponsored organization 
Americans for Consumer Credit Choice (ACCC) and is branded as ACCC. The 
report does not disclose whether it was funded by ACCC or by members of 
the debt settlement industry. The ACCC's website does not disclose its 
members. When ACCC released the report in August 2009, it stated that: 
``ACCC, with other industry and interested groups'' requested the 
analysis. (Press Release, ``Americans for Consumer Credit Choice 
Releases Debt Management Industry Study,'' August 7, 2009, http://
www.consumercreditchoice.org/node/4.) ACCC also stated that it asked 
the study's author for an independent objective assessment of the 
consumer benefit, if any, provided by debt settlement companies.
    The study includes data from only one debt settlement company, 
which is not identified. There is no way to tell from the study report 
if that company, its undisclosed fee structure, practices, dropout 
rate, or success rate are or are not representative of the debt 
settlement industry as a whole. In addition, the study does not 
describe important information relevant to the consumer experience such 
as the amount or timing of the fees, the total fees paid by the 
consumers in the sample to the debt settlement company, or the amounts 
by which the debt grew during the time of the debt settlement program. 
The study also does not provide data on the number or percentage of 
debts settled for all consumers in the sample, nor even for all of the 
40 percent of consumers who did not drop out of the program during the 
study period.
    The study's author forthrightly admits some of its limitations. The 
study's author discloses that: ``it is unclear whether or not the 
findings can be generalized beyond this firm to the industry as a 
whole.'' (p. 23) The study also states bluntly that: ``Accurate 
measures of consumer completion and cancellation cannot be 
calculated.'' (p. 2) For consumers with canceled accounts--those who 
dropped out of debt settlement--the author states: ``. . . it is very 
difficult to determine if value was generated for these customers.'' 
(p. 23) The study states that the dataset included no information about 
either settlements or offers of settlement for the consumers who 
canceled, even though that was more than a majority of the sample.
    The study documents a shockingly high cancellation rate.
    The study reports that that 60 percent of the customers in the 
large sample canceled the service within 2 years. (p. 2) The majority 
of consumers who signed up for debt settlement dropped out. For more 
than half of these consumers, the only reason given in the study for 
cancellation is ``other.'' The consumers who owed the most dropped out 
at a higher rate than the overall dropout rate (64.5 percent vs. 60.57 
percent overall). (p.15, Table 2)
    This is a very high cancellation rate for an industry that often 
charges substantial fees upon signing up. The author asserts that a 60 
percent cancellation rate is not excessive because other subscription-
based businesses such as wireless service providers also have high 
cancellation rates. (p.15) However, there is no discussion about how 
the fee structures of those services compare to the fee structure in 
debt settlement. In addition, consumers who pay monthly for a cell 
phone also receive services each month, and are heavily marketed to 
upgrade their current plans or to switch companies. In debt settlement, 
consumers pay sizable fees upfront, and those who cancel without having 
any debts settled have not gotten what they sought- relief from their 
debts. The median duration of the debt settlement contract at 
cancellation was 5 to 6 months.
    The study contains incomplete information about the reason for 
consumer cancellations. Reasons for cancellation are attributed as 
follows: bankruptcy--13.5 percent; inability to save--6.8 percent; 
buyer's remorse, that is, cancellation in an initial period of up to 90 
days--9.2 percent; actual or attempted settlements directly by the 
consumer--14 percent; and ``other''-- 56.5 percent. (p.16) Because more 
than half the canceling consumers are listed under ``other,'' the study 
gives no detail on the reasons for cancellation for the majority of 
consumers who canceled. Categories such as ``debt not being settled''; 
``unhappy with service''; ``program unsuitable for the consumer'' or 
``consumer did not understand the program'' or ``promises to consumer 
not kept'' apparently were not used.
    The author suggests that the cancellation rate is overstated 
because the debt settlement company's records indicated that 14 percent 
of those who canceled did so in order to ``settle/try to settle on 
own.'' (p.16) But these consumers still canceled; presumably after 
paying some fees. It is not reported whether those consumers later 
settled their debt on their own; but even if they did so there is no 
reason to attribute that to the efforts of the debt settlement company. 
In addition, if consumers did not settle their own debts, those debts 
presumably may have grown in size before the consumer canceled the debt 
settlement contract due to creditor charges such as late fees or 
penalty interest rates.
    With respect to the category of consumers who canceled due to 
bankruptcy, the study's author states that these consumers were 
``forced out of the program due to litigation.'' A different 
perspective is that these consumers should have filed for bankruptcy 
instead of signing up for debt settlement and saved paying an upfront 
fee of perhaps 2 percent to 4 percent to start a debt settlement 
program.
    Common reasons that consumers would cancel any type of service are 
that they are unhappy with the service, think it costs too much, or it 
doesn't meet their expectations. The large ``other'' category may 
include customers who were signed up for an unsuitable program, those 
who were not satisfied with the program, and those with other reasons. 
It is simply impossible to tell from this study.
    The study cannot support any conclusions about the results for 
consumers, because information about any settlements or even offers is 
missing for more than half the sample.
    The report fails to include any information about debt settlements 
or offers of settlement for those customers who canceled, because the 
company studied did not retain this information. (p.17) Consumers who 
canceled may have experienced worse results than other consumers--they 
may not have had any debts settled at all. Indeed, this might be why 
they chose to cancel. The study's author forthrightly concedes: ``it is 
very difficult to determine if value was generated for those customers 
[who canceled].'' (p.23)
    The remaining conclusions are of limited value because they don't 
reveal what portion of the non-canceling consumers are excluded from 
the table on consumer welfare metrics.
    For that 40 percent of the sample for which there is data about 
offers and settlements, the study reports information about the size 
and frequency of offers and settlements, but only for those consumers 
who had at least one settlement or one offer of settlement. The report 
doesn't disclose how many consumers had no debts settled, and how many 
had no offers of settlements. It simply reports settlement data 
``conditional on the client settling at least one account.'' (p.17) 
While it is not entirely clear, it appears that the information about 
offers also includes only consumers who had at least one offer. The 
study appears to essentially divide the non-canceling 40 percent of the 
sample into groups--those with at least one settlement or offer, and 
those without. The study doesn't disclose the size of each group, and 
it gives success-related data only for the first group--those who 
experienced some success. This is like calculating average results by 
first omitting from the average all of the people who received zero 
results.
    The comparison between debt settlement costs and consumer credit 
counseling costs attributes some costs to credit counseling that are 
not paid by the individual in order to receive that service.
    The study's comparison of the relative costs of consumer credit 
counseling and debt settlement include payments made by creditors, and 
not by the consumer, in the cost of consumer credit counseling. (p.11) 
The author suggests that creditors should be indifferent between making 
a fair share payment to a consumer credit counseling agency or giving 
individual consumers a discount of up to the same amount on the debt. 
However, the study offers no evidence that this is the case in 
practice. In addition, this argument ignores the value that creditors 
place on the services that legitimate credit counseling services 
provide such as education, advice on budgeting, and overseeing monthly 
payments to creditors over multiple years.
    Since the cost analysis in the study includes some costs not paid 
directly by the individual consumers using the service, but instead 
spread throughout the credit system, the cost comparison discussion in 
the study does not provide a valid cost comparison from the perspective 
of the individual.
    The study's discussion about the relative cost of consumer credit 
counseling and debt settlement also does not appear to consider the 
fact that the 60 percent of consumers who dropped out of debt 
settlement in the sample still owe all of the debt they started with; 
may have paid a set-up fee plus monthly fees or more; and because of 
late fees or penalty interest rates, may owe more debt at the end of 
the program than they did at the beginning on any debt that has not 
been settled.
    The study cites another source stating that the average cost of 
consumer credit counseling services with a 5-year plan to pay off debt 
is $910 paid by the consumer and another $764.89 paid by the creditors. 
(p.11) Debt settlement would cost these consumers much more in fees. If 
these consumers were charged a total fee of 18 percent fee of the debt, 
which is within the range cited in the report, then they would owe an 
average debt settlement fee of $4,338 (averaging the three mean debt 
levels for the three subsamples to yield an overall mean debt for the 
sample of $24,099). (See p.15, Table 2; calculation of the overall 
sample mean by Consumers Union) These numbers make clear a conclusion 
not drawn by the report; that consumers pay much higher service fees 
for debt settlement than for debt management plans offered through 
consumer credit counseling agencies. Of course, it is difficult to 
compare the costs of apples and oranges. If consumers do get their 
debts settled, they should pay less on those debts, but the report 
provides no basis to assess how frequently that occurs overall for the 
full sample. Also, with a debt management plan administered by a 
consumer credit counseling organization, the amount owed falls each 
month as the payments are made. That benefit is missing in debt 
settlement.
    The study shows that many consumers did not benefit from debt 
settlement.
    In spite of the methodological limitations, the numbers reported in 
the study suggest that the majority of consumers did not feel that they 
were benefiting from debt settlement since 60 percent of them canceled. 
The study also shows that even those consumers who did not cancel 
received offers or settlements on less than all of their debt at each 
of the three time periods comprising the sample of 12, 18, and 24 
months. (p.15)
    The study's reported percentages of debts settled appear to be 
calculated using only consumers for whom at least one debt was settled. 
(p.17) These results do not reveal how many consumers had no debts 
settled at all. These results also do not reveal how many consumers 
came in with the apparent median of four debts, and left the program 
with some of those debts unsettled and having grown larger in the time 
elapsed during debt settlement program. (p.15, Table 2) This is like 
estimating the consumer benefit without averaging in all of the ``zero 
benefit'' people who got no settlements at all.
    Even for those consumers for whom at least one debt was settled, it 
appears that the debt settlement provider studied was consistently 
unable to settle all of the debt during the time of the sample. (For 
reasons not disclosed by the author, the study did not sample results 
at a time period that matched the usual end time for a debt settlement 
program.) The study concludes that ``conditional on receiving at least 
one offer, clients seem to receive offers from more than 67 percent of 
their accounts and debts.'' (p.20) This means that even if the consumer 
had saved enough to fund all of the offers, and accepted all of the 
offers, this would still leave the consumers who got some offers 
saddled with 33 percent of the debts they started out with, plus 
additional creditor charges which might include late fees, additional 
interest, and perhaps penalty interest, accrued during the time period 
for debt settlement.
    The numbers from the study's tables can illustrate some points not 
drawn by the study (Data from study is noted, other calculations are by 
Consumers Union)
    The study examined 4,500 customers of one debt settlement provider. 
(p.15) Here is some further analysis by Consumers Union using the 
average debt, cancellation rate, and average results reported in the 
study.
    The sample was divided into three groups of consumers, who owed an 
average (mean) debt of $7,927; $16,966; and $47,404. (p.15, Table 2) 
Since each group was equally represented, this yields an overall 
initial average debt for the full sample of $24,099.
    Just over 60 percent, or 2,700, of those consumers canceled the 
program within 6 months to 2 years of entering the program. (p.15) The 
study doesn't disclose the total fees paid by those consumers. Using 
the mean debt in the sample and a 2 percent set up fee, which is the 
low end of the range cited in the study, those consumers who dropped 
out would have paid $1.3 million in fees, and there is no evidence as 
to whether or not they received any settlements before leaving the 
program. Under the 6 percent set up fee cap promoted by the trade 
organization USOBA in its recent model act, a similar group of 
consumers could be charged $3.9 million in front-loaded set up fees 
before canceling.
    Of the 1,800 consumers who remained in the program, the study does 
not disclose how many settled at least one account. However, for 
consumers who did settle at least one account, the author reports at 
Table 5 that the mean `` percent total debt'' for the three sub-samples 
was 54.7 percent, 54.1 percent, and 53.1 percent, respectively. (p.17) 
The average of those three numbers is 54 percent. In other words, an 
undisclosed percentage of the minority of consumers who did not cancel 
had at least one debt settled, and among those consumers, 54 percent of 
their debt was settled at either 12, 18, or 24 months from entering the 
program. These consumers still had substantial remaining debt--46 
percent of what they started with.
    These consumers also had a substantial number of accounts 
remaining. For the undisclosed percentage of consumers who had at least 
one account settled, the percentages of all accounts settled were 52 
percent, 51.5 percent, and 53 percent, for a mean of 52 percent. (p.17, 
Table 5)
    Let's look at those results in plain language:

   After one to two years under a debt settlement contract, 
        even those consumers who had not canceled and who had at least 
        one debt settled still owed 46 percent of the total debt that 
        they owed when they started the debt settlement program, plus 
        whatever amount that debt had grown to during the interim.

   After one to two years under a debt settlement contract, 
        even those consumers who had not canceled and who had at least 
        one debt settled still owed money on 48 percent of the debt 
        accounts that they brought into the debt settlement program.

    The study's numbers suggest that the 4,500 studied consumers:

   Cancelled at a rate of 60 percent, or 2,700 consumers. (p. 
        2)

   Owed a total of $108.5 million in debt. (extrapolation from 
        table 2, combined mean debt of $24,099 for each of 4,500 
        consumers)

   Paid $2.2 million in set up fees if they were charged a 2 
        percent set up fee. (This is a conservative estimate; the study 
        cites other sources noting a range of 2 percent to 4 percent 
        set up fees). (p.12)

   Lost $1.3 million in those set up fees when 60 percent of 
        them dropped out.

   Would owe over $19 million in fees if they were charged an 
        overall fee of 18 percent of the debt, which is within the two 
        ranges cited by the report of 14-20 percent or 15-25 percent 
        (this does not include a reduction for any fees still owed when 
        the consumer dropped out). (p.12)

   Continued to owe $85 million in debt one to 2 years after 
        starting debt settlement.

    The remaining debt calculation is based on the full initial debt, 
of just over $65 million, for the 60 percent who canceled and just 
under $20 million for the 46 percent of remaining debt for those who 
got at least one settlement. The actual remaining debt number may be 
higher, because this calculation applies to the entire 40 percent non-
canceling group the remaining debt percentage of 46 percent which the 
study provides for that subset of consumers in the non-canceling group 
who received at least one settlement, and the study does not document 
or claim that each non-canceling consumer had even one debt settled 
during the study period. Of course, the debt numbers could actually be 
higher because the debt amounts for unsettled debt can be expected to 
continue to increase during the settlement program.
    The study does not analyze or discuss the cost to consumers of high 
upfront payments for debt settlement.
    The study asserts that charging consumers reasonable upfront fees, 
i.e., fees before settlement, ``can be justified'' but it offers no 
analysis of the actual fee amounts charged for debt settlement. (p. 24) 
The fee structure and fee amounts imposed on the 4,500 consumers in the 
sample is not disclosed, and the report also has no discussion of the 
amount of fees lost by the 60 percent of customers who canceled, every 
presumably after paying both a setup fee and monthly fees.
    The study also contains some internal inconsistencies.
    As released in August 2009, the study contains some inconsistencies 
and makes some assertions it does not support. The study states on page 
13 that 20.5 percent of consumers who canceled did so because of 
bankruptcy, while Table 3 on page 16 says that bankruptcies accounted 
for 13.5 percent of cancellations.
    Table 3 identifies 14 percent of consumers who canceled in order to 
``settle/try to settle on own,'' but the text on pages 16 and 20 treats 
the consumers in that 14 percent as if all of them in fact did pay off 
their debt on their own.
    On page 3, the study says that more than 57 percent of clients have 
offers to settle at least 70 percent of their debt, but the only table 
of data to support this, found at page 17, contains data only on the 
offers for those consumers who received at least one offer to settle a 
debt. Consumers who received no offers are omitted from the analysis of 
results, which would bias the reported results upwards by excluding the 
``zero'' category from the calculations of mean (average) results.
            Analysis prepared by:
                                           Gail Hillebrand,
                               Financial Services Campaign Manager.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                            Gregory D. Kutz

    Question 1. What is the average fee amount charged to consumers as 
a percentage of the consumer's unsecured debt?
    Answer. We are unable to provide information about the average fee 
amount charged to actual consumers nationwide, as this analysis was 
beyond the scope of our investigation. However, we were able to obtain 
fee information from 18 of the 20 debt settlement companies we called 
while posing as fictitious consumers. Of these 18 companies, 17 
represented that they collect advance fees before debts are settled. 
Representatives of these companies told us that the advance fees are 
calculated based on a percentage of the consumer's debts to be settled. 
The advance fees cited most commonly ranged between 15 and 17 percent. 
Moreover, representatives from several companies told us that our 
monthly payments would go entirely to fees for up to 4 months before 
any money would be reserved for settlements with our creditors. Only 1 
of the 20 companies we called represented that it followed a contingent 
fee model where primary fees are charged based on a percentage of the 
reduction of debt it says it obtains for consumers (in this case, 35 
percent). Some companies also represented that they assessed monthly 
maintenance and other fees. One of the 17 advance-fee companies also 
revealed that it charged a contingent fee after each debt is settled 
based on a percentage of the debt reduction.

    Question 2. On average, how long does it take for consumers to 
buildup sufficient funds in an escrow account before those funds are 
used by debt settlement companies to negotiate and reduce the 
consumers' credit card balances?
    Answer. We are unable to provide information about how long it 
takes for actual consumers to buildup funds to be used for settlements, 
as this analysis was beyond the scope of our investigation. However, 
based on our knowledge of the industry, the length of time needed to 
obtain a settlement for a consumer may depend upon several factors, 
including: the consumer's number of accounts, amount owed to each 
creditor, availability of pre-existing funds, the length of time the 
consumer's accounts are past due, and the willingness of creditors to 
negotiate settlements, among other things.

    Question 3. In instances where consumers with insufficient income 
indisputably cannot pay a debt settlement company, how often do debt 
settlement companies turn away consumers after their initial 
consultation?
    Answer. We are unable to provide information about how often 
companies turn away actual consumers who do not have sufficient income 
to afford a debt settlement program, as this analysis was beyond the 
scope of our investigation.

    Question 4. Could you describe to the Committee, based on your 
investigation, the method of solicitation most often associated with 
consumer abuse in this area? (Are you seeing mostly online 
solicitations touting consumer savings, telemarketing, mailings, radio 
advertisements)?
    Answer. We did not conduct an assessment of method of solicitation 
most often associated with consumer abuses as part of our 
investigation. However, during the process of identifying debt 
settlement companies and selecting 20 companies to call, we found 
examples of online, television, print, and radio solicitations, some of 
which we found to be fraudulent, abusive, or deceptive. In one case, we 
identified a company through an unsolicited spam message received by 
one of our investigators through his private e-mail account. This 
message advertised debt settlement services, listed a mailing address 
in the country of Lebanon at the bottom, and contained a link that took 
us to the company's website. Most of our investigative work to identify 
debt settlement companies was conducted online.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                         William and Holly Haas

    Question 1. By what percentage were you told your principal would 
be reduced? Did your chosen debt settlement company achieve that level 
of promised reduction?
    Answer. We were told (and it's written in the contract) our 
principal would be reduced to 46 percent of the total debt that we 
owed. We did NOT receive any reduction from our debt. Instead, numerous 
fees and penalties were added onto our balances because we were not 
paying them (as instructed by the debt settlement company). It actually 
increased our debt approx. $9,000 more than what we owed before going 
thru debt reduction for the 6 months that we continued with them.

    Question 2. Did your debt settlement company clearly explain to you 
how your monthly payments would be used?
    Answer. No. The referring company told us that the monthly payments 
would go into a holding account where it would stay until there was 
enough money in the pot to pay a settlement and pay the attorney fees. 
They did not tell us that the $7,500 attorney's fees would be paid 
first, before the credit card companies and the debt settlement company 
negotiated our settlement.

    Question 3. What do you believe law makers should do to encourage 
better protection of consumers from abusive debt collection practices?
    Answer. Clearly, there should be some regulation of the way they 
take your money. Debt settlement companies, if allowed to exist, should 
have to document and prove how much time they work on your settlements 
each month, and be allowed to take out a certain percentage each month 
when they do work on your case, with a maximum cap of some sort (5 
percent) of your monthly payments, just for overhead expenses. Only 
after they negotiate and the settlement is complete, should they be 
allowed to charge and receive payment for their services. What 
incentive to do they have to negotiate a settlement if they take their 
fees off right from the start? This is how any ``normal'' business 
works, and so it should be for debt settlement. We also believe that 
these debt settlement companies should receive heavy monetary fines if 
they don't document time as required, (or falsely report time) and for 
falsely advertising things that they simply cannot do. They should be 
licensed in the same state that they do business, regulated and watched 
with a paper or electronic trail, and affiliated with credit card 
companies so the consumer knows that they are honest and legitimate.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                            Philip A. Lehman

    Question 1. Mr. Lehman, consumer complaints related to debt 
collection are on the rise in Arkansas. You mentioned in your 
testimony, ``In our experience, most consumers are worse off after 
enrolling in debt settlement programs.'' Could you elaborate upon that 
for the Committee please?
    Answer. The typical debt settlement program requires a consumer to 
pay substantial advance fees, to cease direct communications with 
creditors, and to cease making payments on credit accounts. As a 
result, the consumer's limited funds are diverted to the debt settler 
instead of the consumer's creditors. The consumer becomes further in 
arrears while interest and default charges mount and the consumer's 
credit standing deteriorates. Since the consumer is not communicating 
with creditors, collection efforts intensify and collection lawsuits 
are more likely. The debt settler offers little protection against 
collection activity and typically does not begin settlement efforts for 
a year or more. In the meantime, the consumer is left to deal with 
collection pressure and ballooning account balances.
    It is undisputed that the large majority of consumers drop out of 
these debt settlement programs before they are completed. Many of these 
consumers cancel because they are not seeing any results. These 
consumers may have paid thousands of dollars in advance fees to the 
debt settler. They are not likely to get refunds because the fees are 
deemed fully earned when paid. Therefore, these consumers have lost 
valuable time and money due to being sidetracked in a debt settlement 
program. Many could have resolved their delinquent accounts directly 
with their creditors. Many end up filing for bankruptcy after the debt 
settlement program fails.

    Question 2. Do you think that a fixed-fee pro-rated payment 
structure over a certain period of time, as proposed by some members of 
the debt settlement business community, is a salient solution to the 
consumer complaints reported by many state attorneys general?
    Answer. No. The prorated payment models we have seen still 
frontload the consumer's fees. Typically, they require the consumer to 
pay a total of 15 to 18 percent of the consumer's debt as a fee 
collected over the first 12 months of the program. Since settlements 
often do not take place until after a year or more, the debt settlement 
company gets paid whether it delivers results or not.
    Once its fees have been fully earned, the debt settler has little 
economic incentive to perform. The program becomes like a Ponzi scheme, 
requiring new customers to generate revenue in order to provide 
services to earlier customers.

    Question 3. What do you see as Congress's or the Federal Trade 
Commission's role in further preventing consumer abuse in the area of 
debt collection and other relief services?
    Answer. A Federal role is appropriate because debt settlement 
abuses are national in scope and most debt settlement providers operate 
on an interstate basis. The State Attorneys General, in their public 
comments to the Federal Trade Commission, have strongly supported the 
FTC's proposed debt relief services amendments to the Telemarketing 
Sales Rule. The FTC's proposed Rule comprehensively addresses consumer 
abuses through enhanced disclosures, prohibitions on deceptive 
representations, coverage of attorney-led debt settlement providers, 
and prohibitions on advance fees. S. 3264, the Debt Settlement Consumer 
Protection Act, sponsored by Senators Schumer and McCaskill, has a 
similar comprehensive approach that will protect consumers.
    While the Attorneys General support Federal regulation and 
enforcement in this area, it is important that the States have the 
authority to enforce any Federal laws or rules. The Federal standards 
should set a floor of consumer protection and should not prevent the 
States from enacting stronger legislative measures.

    Question 4. What is our recommendation for better protecting 
consumers from debt collection abuses moving forward?
    Answer. The debt settlement industry has been characterized by 
deceptive advertising, misleading representations, spotty performance 
and the charging of excessive fees before delivery of services. As 
noted above, a comprehensive approach as proposed by the FTC rulemaking 
and S. 3264 is best suited to address the widespread consumer 
protection problems.
    However, the key to protecting consumers from future harm is a 
prohibition on advance fees. Debt settlement companies should not be 
allowed to profit while the consumer loses. North Carolina and now 
Illinois have adopted strict limitations on advance fees for debt 
settlement services. There is precedent for such a prohibition from 
regulation of other debt-related services that were notorious for 
widespread consumer abuses. Under the Federal Credit Repair 
Organizations Act and most state credit repair laws, advance fees are 
prohibited for credit repair services. The FTC's Telemarketing Sales 
Rule bars advance fees in loan brokering, another area characterized by 
false promises and minimal performance. Many states currently prohibit 
advance fees for foreclosure relief or mortgage loan modification 
services, and the FTC has recommended a similar ban in its proposed 
Mortgage Assistance Relief Services Rule.

    Question 5. What qualities or criteria would help distinguish debt 
settlement programs that legitimately help consumers versus those that 
take advantages of vulnerable people?
    Answer. A legitimate debt settlement program should have a 
demonstrated record of performance and should earn its compensation 
from successful completion of settlements. Unfortunately, reliable 
evidence of completion rates and settlement results has not been 
available from the debt settlement industry. Without such evidence, it 
is difficult to acknowledge any debt settlement company as beneficial 
to consumers.
    A more responsible debt settlement program would incorporate the 
best features of credit counseling and debt management plans. Consumers 
would be offered budget and financial planning counseling before 
beginning any payment program. As with debt management, consumers would 
make monthly payments that would be distributed to creditors under a 
plan agreed to by the creditors. The consumers would then be relieved 
of collection efforts and escalating finance charges. If the consumer 
performed under the payment plan, the consumer would receive an earned 
benefit of significant principal reduction. This hybrid debt 
management/principal reduction model is supported by lenders and 
nonprofit credit counseling agencies but accounting rules from Federal 
banking regulators have impeded its implementation.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                              John Ansbach

    Question 1. What is the range of administrative fees charged to 
consumers by your member companies?
    Answer. Although USOBA has not surveyed its members to determine 
the range of fees charged to consumers by each, USOBA believes that the 
most common service fee charged by USOBA members is 15 percent of the 
debt enrolled by a consumer at the time of contract formation. Further, 
we are pleased to share the following data and statistics, all of which 
were provided to the Federal Trade Commission in January: \1\
---------------------------------------------------------------------------
    \1\ Please note that the definitions reflected here were provided 
by the Federal Trade Commission and were posed to USOBA members 
verbatim.

        (a) 77.58 percent of USOBA member companies providing 
        information in a recent survey primarily use a ``fixed fee'' 
        model in which fees are spread out in a series of payments over 
---------------------------------------------------------------------------
        a fixed period of time.

        (b) 10.34 percent of USOBA member companies providing 
        information in a recent survey primarily use a ``front-end fee 
        model'' in which the company requires consumers to pay as much 
        as 40 percent or more of the fee within the first three or 4 
        months of enrollment and collects the remaining fee over an 
        ensuing period of 12 months or less.

        (c) None of USOBA member companies providing information in a 
        recent survey primarily use a ``back-end model'' in which the 
        consumer pays all of the fee upon program completion, paying a 
        fee equal to a percentage of total savings.

    Question 2. What do you believe is the ideal pay structure a debt 
settlement company should implement to assist consumers in reducing 
unsecured debt?
    Answer. USOBA believes that the ``ideal pay structure'' is the one 
adopted in State of Tennessee. Under such a structure, fees are capped 
not only in amount, but in timing, as well, i.e., fees are capped at 17 
percent of the enrolled debt and providers are then required to spread 
fee collection out over ``half the life'' of a consumer's program.\2\ 
Because programs are typically 3-4 years in length, this means that 
fees must be spread out over a period of 1\1/2\ to 2 years. Such an 
approach has been adopted in Nevada, Colorado, Delaware, Iowa, Montana, 
Idaho, Tennessee and Utah and is under consideration in Texas, 
California, New York and several other states.
---------------------------------------------------------------------------
    \2\ By way of example, if a consumer enrolls $10,000 of debt in a 
debt settlement program, the maximum allowable fee would be 17 percent 
of that debt, or $1,700. That fee would then be spread out over half 
the life of the consumer's program, or 18 months in an average three-
year program. As such, the maximum allowable monthly fee under this 
hypothetical would be $94.44 per month ($1,700 in equal payments over 
18 months).

    Question 3. Do any of your member companies encourage consumers to 
discontinue communication with their credit card companies?
    Answer. While USOBA cannot speak to the specific practices of every 
one of its members, it is against USOBA member policies to encourage 
consumers to discontinue communication with their creditors. What USOBA 
does support in this area is member companies fully informing consumers 
of their rights as well as providing information, generally, pertaining 
to the repayment of unsecured debts. Whether or not to continue 
servicing any particular debt is ultimately a decision that consumers 
must make on their own and in consideration of their own personal 
circumstances. It is a debt settlement company's responsibility to arm 
consumers with as much information as possible so that such a decision 
can be made considering all of the facts and consequences.
    Furthermore, USOBA would also advise that most of USOBA's members' 
clients are already unable to meet their monthly creditor obligations 
by the time they first contact a debt settlement provider. A recent 
survey of USOBA members revealed that approximately 61 percent of 
consumers were missing debt payments \3\ prior to starting their 
program. This number climbed to 93 percent when consumers who would be 
missing payments ``very soon'' were factored in.
---------------------------------------------------------------------------
    \3\ ``consistently,'' ``often'' or ``occasionally''
---------------------------------------------------------------------------
    In short, although USOBA is aware of instances where consumers have 
been told not to pay their bills, USOBA also believes that many if not 
most potential debt settlement consumers are already not able to pay 
their bills when they come to a debt settlement program. What they need 
is accurate information to make informed decisions about how to address 
their specific situations, and USOBA encourages its member companies to 
provide that information.

    Question 4. What do you see as the best solution for preventing 
consumer harm in the debt settlement sector?
    Answer. USOBA believes that the best solution for preventing 
consumer harm in the debt settlement sector is a strong state licensing 
and registration regime, coupled with insurance and/or surety bonding 
requirements for providers to ensure ability to address consumer 
wrongs. While we do believe that the states are best positioned to 
articulate appropriate rules and regulations pertaining to contract 
requirements, as well as reasonable fee regulation, we do also believe 
that there is a role for the Federal Trade Commission to play in 
prescribing debt settlement rules, regulations and guidelines for what 
is and is not proper advertising. We would also respectfully suggest 
that there is an additional role for the FTC to play in working with 
the industry to promulgate appropriate standards for consumer 
disclosures and a common vocabulary that could normalize disclosures 
across all forms of debt relief providers, not just debt settlement 
companies. USOBA also respectfully suggests that the debt settlement 
law recently enacted in the State of Tennessee, which contains many of 
these provisions, should serve as a model for any effort to prevent 
consumer harm in the provision of debt relief services.
    Further, two additional regulatory and/or legislative tools should 
be considered to prevent abuses in the debt settlement sector. First, a 
change in the United States tax code regarding debt settlement tax 
treatment should be considered. In much the same way that short sales 
under certain circumstances no longer create a taxable event (pursuant 
to the Mortgage Forgiveness Debt Relief Act and Debt Cancellation), 
debt settled by consumers (through the services of an intermediary and 
otherwise) should not create a taxable event. This change would remove 
a major impediment to debt resolution and eliminate abuses created by 
such taxation.
    Second, USOBA would also respectfully suggest the provision of some 
measure of protection from creditors for consumers who can demonstrate 
they are actively, faithfully working a debt settlement program, 
similar to the forbearance enjoyed by customers of credit counseling 
programs. Because aggressive collection activity is generally the 
single most significant reason why consumers are forced to withdraw 
from debt settlement programs, often seeking protection in bankruptcy, 
providing insulation from collection efforts to those consumers would 
go a long way toward raising program completion rates.
                                 ______
                                 
Response to Written Question Submitted by Hon. Kay Bailey Hutchison to 
                              John Ansbach

    Question. Mr. Ansbach, you stated at the hearing that two 
individuals that had positive debt settlement experiences had prepared 
statements about their experience. Please provide copies of those 
statements to the Committee.
    Answer. As requested, please see the statements from Mr. Gary Ross 
and Ms. Faith Zabriske, which are attached to this document. Both Mr. 
Ross and Ms. Zabriske are individuals who had positive debt settlement 
experiences and traveled to Washington, D.C. (from Illinois and Texas, 
respectively) to tell their stories. They were both in attendance at 
the Senate hearing.
                                 ______
                                 
                              Testimonial
Gary Ross
Harwood Heights, IL

    My name is Gary Ross and I've come here today to tell my story of 
how debt settlement successfully helped me get my finances in order. 
Without the option of turning to a debt settlement company, I would be 
either sinking further into a debt load from which I would never 
escape. This industry is very important for people, like myself, who 
have fallen into hard times. Please do not take away this option when 
you are drafting your legislation.
    My story begins 5 years ago. I had always made it a point to pay my 
debts on time, but, when I was terminated from my position after 
thirty-nine years of service, I was faced with enormous financial 
hardship. I was out of work for a year and a half. During this time, I 
accrued a great deal of debt. And although I was lucky enough to find a 
job, my expenses including mortgage, utilities, groceries and credit 
card payments seemed insurmountable.
    I was paying the minimum on my debts but I couldn't keep up. With 
the late fees and high interest my creditors were charging, I fell into 
even greater debt. I was scared and felt desperate. I wanted to pay my 
debts, and I certainly did not want to file for bankruptcy or I was 
petrified of losing my home. Even after I got a job, I was paying the 
minimum payments and I felt like I would never be able to pay off 
everything I owed.
    After researching my options, I decided to pursue debt settlement. 
I had heard good things and I liked that the debt settlement company 
would take responsibility for all of my debts and communicating with my 
creditors. As soon as I started working with the debt settlement 
company, I felt relieved. They took over everything. All of their 
personnel were polite, understanding and professional.
    They explained the program, what was required of me and what I 
could expect. I was told the importance of good communication and 
keeping current with my payments. They explained that while I was 
accumulating money in my account, they would make settlements with my 
creditors. They also explained that if I was sued by any of my 
creditors, they would point me to resources that would guide me through 
the process. That was exactly what happened! I was sued, but I wasn't 
scared. I was able to complete the paperwork and appear in court. This 
company gave me the courage to handle court appearances.
    After 3 years, I completed the program and am now debt free. I did 
not lose my house like I would have in Chapter 7 bankruptcy--I have 
since paid off my house and I own it. I have to say that without debt 
settlement, I would not have been able to resolve my financial 
problems. I think it's very important for consumers like me to have 
this option. Please keep that in mind as you look at the industry.
            Thank you for letting me tell my story.
                                                  Gary Ross
                                 ______
                                 
Distinguished Members of the Committee:

    My name is Faith Zabriskie and I live in Bedford, Texas. I am the 
Director of Finance for a prestigious downtown Dallas business. While 
money matters are an important part of my professional career, like so 
many American citizens, health concerns placed me in a difficult 
financial situation. Without the help of debt settlement, I might have 
lost my home or wound up in bankruptcy, both of which would have been 
devastating on both a personal and professional level.
    In 2007, I suffered an injury to my knee and was forced to turn to 
my credit cards in order to pay medical bills and other expenses 
necessary to survive. I recovered but was overwhelmed with the debt 
created by my ordeal.
    I contacted my credit card company to find out if they could work 
with me on repaying my debt. I had an ``excellent'' credit score in the 
high 700s and had always paid my debts on time. To my dismay, I was 
told that until I was 6 months delinquent they would not help me.
    I tried credit counseling as well, but they were even more 
unhelpful. Among other things, they advised me to sell my house and 
move into an apartment. I simply could not accept that my only options 
were losing my home or filing for bankruptcy.
    It wasn't until I enrolled in a debt settlement program that I 
found true support. After working the program and saving money as 
needed, my provider was able to help me settle all of my debts. I am 
currently making payments on my last account and am well on my way 
toward being debt free and financially stable.
    I am so thankful to have had debt settlement available to me and I 
implore you to preserve it as an option for other American consumers 
who are so desperately in need. Thank you for your time.
            Best Regards,
                                            Faith Zabriskie
                                                         Bedford, Texas
                                 ______
                                 
             Supplement to the Statement of Faith Zabriske

    The following is from an unsolicited e-mail dated May 3, 2010, 
received by a debt settlement provider from their debt settlement 
consumer Faith Zabriske:
    ``I wanted to share with you an absolutely exciting experience that 
occurred this weekend but was in the making for the last 2 years--with 
the help of your company. . .
    As you know, back in 2007, a slip and fall at home resulted in 
reduced income--thus a fall back on credit cards to make ends meet. 
Increased rates by the cc companies created disaster and I connected 
with (your debt settlement company) -
    Prior to the slip & fall--I had zero balances on credit cards and a 
credit score of 780. My mortgage rate is 3.125 percent. After the 
fiasco with the credit cards, my score plunged as low as 480!!!
    After 2 yrs and a successful settlement on all accounts (almost 
debt free)--my score has climbed back.
    Trans Union score: 651--which qualified for a ``preferred'' 
customer rate with Honda finance--I was able to purchase a new 2010 
Odyssey EX-L with ease--the credit report did indicate that several 
credit cards were paid on a reduced scale--settlement. And, because 
scores are also based on debt to income ratio, the debt that was erased 
through [your company's] negotiations, left a revolving balance $4.0k--
down from $90k!!!! And, yes, I was required to pay taxes on portions 
settled--and planned accordingly. In addition, the paid on time 
mortgage, utilities, etc assisted the cause. [Your] consumer counseling 
encouraged paying these items FIRST--and then cc debt next.
    The Honda Pre-approval process--on line--was painless! By following 
the Consumer Report new car process--[I] realized a $4.0k savings via 
Internet sale and a waiver of $700 destination fee by choosing a 
vehicle on their lot--pre-visit assisted choice of dealer--by knowing 
their inventory. Self-education of consumer issues was also encouraged 
by your counselors.
    I wanted you to know how good it feels to be able to reclaim my 
life--provide for my family--and truly enjoy the accomplishments of my 
hard work--and the help and guidance (you) provided played a huge role. 
. . .
    I can't thank you and your team enough!!!!
Best,
Faith"
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                            Hon. Julie Brill

    As I stated in my testimony, in August 2009, the Commission 
published in the Federal Register proposed amendments to the 
Telemarketing Sales Rule (``Rule'') to address abuses in the debt 
relief industry. Given the pendency of the Rule before the Commission, 
it would be inappropriate for me to comment on matters on which the 
Commission may have to render a judgment in that proceeding. 
Accordingly, my answers are limited to information the Commission has 
obtained in its law enforcement in this area.
    Question 1. In your opinion, why have reported consumer complaints 
of unscrupulous debt settlement companies been on the rise over the 
past few years?
    Answer. Consumer debt has soared to record levels in the past 2 
years, and when consumers are in financial distress, fraudsters 
peddling phony solutions generally follow. As you stated, reported 
complaints about debt settlement companies have increased in recent 
years. Complaints to the FTC about debt relief services (which include 
debt settlement companies) have increased about 18 percent in the last 
year.
    The FTC takes into account the nature and number of complaints it 
receives when making enforcement decisions. The Commission has brought 
eight cases against debt settlement companies in recent years, alleging 
that the defendants deceived consumers into paying hundreds or 
thousands of dollars in upfront fees through false promises that they 
would obtain settlements of consumers' credit card debt for 
substantially reduced amounts, such as 50 to 60 cents on the dollar. 
The Commission also has brought a number of cases against other debt 
relief operations, including actions against sham nonprofit credit 
counselors and debt negotiators.
    In addition, State Attorneys General and state regulators are 
extremely active in this area. In recent years, the states have brought 
124 actions against debt settlement companies.

    Question 2. Based on the cases the FTC has brought and research 
conducted by your staff, do these debt settlement companies generally 
retain upfront and administrative fees even in instances where they 
have not successfully reduced consumers' debt?
    Answer. All of the debt settlement companies sued by the FTC 
allegedly had fee structures allowing them to retain all upfront and 
administrative fees, even in instances where they did not successfully 
reduce consumers' debt. Some of the defendants provided partial refunds 
in isolated cases when consumers complained, typically to the Better 
Business Bureau, the State Attorney General, or the FTC, although this 
appears to have been infrequent.

    Question 3. Are there some legitimate companies in the debt 
settlement industry that do in fact achieve their stated goals and aid 
consumers in reducing their debt? If so, how do they achieve these 
goals and how do their approaches differ from the practices of the 
unscrupulous companies?
    Answer. The extent to which there are companies in the debt 
settlement industry that achieve their stated goals and aid consumers 
in reducing their debt is a central issue in the ongoing rulemaking 
proceeding. It would therefore be inappropriate for me to express a 
view on this issue at this time.

    Question 4. You mention in your written testimony the FTC has 
alleged that some companies were encouraged to ``stop paying their 
creditors'' while failing to disclose that not making payments to 
creditors could increase the amount owed and could adversely affect 
their credit score. Could you elaborate on that for the Committee 
please? How common is that practice in the debt settlement industry?
    Answer. Based on the cases the FTC has brought, many debt 
settlement companies advise consumers to stop paying their creditors 
without disclosing that this could increase the consumer's debt burden 
(through accrued interest and late charges) and adversely affect his or 
her credit rating. The FTC has charged five companies with advising 
consumers to stop paying their creditors. I also note that the GAO 
testified that, out of calls that investigators made to 20 debt 
settlement companies, 17 companies encouraged the investigator to stop 
paying creditors.

    Question 5. How does the Commission alert consumers to deceptive 
financial practices including some abusive debt collection activities 
and what else do you think needs to be done to protect consumers?
    Answer. To complement its law enforcement and rulemaking 
activities, the Commission works diligently to educate consumers about 
deceptive financial practices, providing information to consumers in 
both English and Spanish. For example, the agency recently released 
English and Spanish versions of a brochure entitled ``Settling Your 
Credit Card Debts,'' which offers struggling consumers tips on how to 
obtain assistance with their debts and spot red flags for potential 
debt relief scams. The FTC has distributed more than 248,000 print 
versions of this or two other debt relief brochures in the past 18 
months, and consumers have accessed one or more of them online more 
than 760,000 times. These materials are now available at a new FTC web 
page, www.ftc.gov/MoneyMatters. Over the last 6 months, the Money 
Matters website has received approximately 50,000 hits per month.
    More broadly, the Commission has conducted numerous education 
campaigns designed to help consumers manage their financial resources, 
avoid deceptive and unfair practices, and become aware of emerging 
scams. For example, the FTC has undertaken a major consumer education 
initiative directed at consumers who are struggling to pay their 
mortgages. The initiative, which includes a suite of mortgage-related 
resources for homeowners, explains how to avoid mortgage loan 
modification and foreclosure rescue scams. NeighborWorks America, the 
Homeowners Preservation Foundation (a nonprofit member of the HOPE NOW 
Alliance of mortgage industry members and U.S. Department of Housing 
and Urban Development-certified counseling agencies), and other groups 
are distributing FTC materials and information directly to homeowners 
at borrower events across the country, on their websites, in their 
mailings, and over the telephone.
    With respect to abusive debt collection activities, the FTC 
educates consumers about their rights and responsibilities in a number 
of ways. An FTC brochure, entitled ``Debt Collection FAQs: A Guide for 
Consumers,'' explains the Federal Fair Debt Collection Practices Act in 
plain language. The brochure is accessible at www.ftc.gov/bcp/edu/pubs/
consumer/credit/cre18.shtm. In 2009, the FTC distributed 123,500 paper 
copies of the brochure to consumers in response to inquiries to the FTC 
and through non-profit consumer groups, state consumer protection 
agencies, Better Business Bureaus, and other sources of consumer 
assistance. In addition, online users accessed the brochure on the 
FTC's website 456,162 times. The FTC also publishes Spanish-language 
versions of this and related brochures, including ``Credit and Your 
Consumer Rights'' and ``Knee Deep in Debt.'' \1\ The FTC distributed 
12,400 paper copies of the Spanish version of ``Debt Collection FAQs'' 
in 2009. Online users accessed the brochure in Spanish 7,792 times in 
2009. Most recently, in September 2009, the FTC released a video 
explaining consumer rights regarding debt collection. The video can be 
found at www.ftc.gov/debtcollection and www.youtube.com/ftcvideos.
---------------------------------------------------------------------------
    \1\ The Spanish-language version of ``Debt Collection FAQs'' 
(``Preguntas Frecuentes sobre Cobranza de Deudas: Una Gu!a para 
Consumidores'') is accessible at www.ftc.gov/bcp/edu/pubs/consumer/
credit/scre18.shtm; ``Credit and Your Consumer Rights'' (``El Credito y 
Sus Derechos como Consumidor'') is accessible at www.ftc.gov/bcp/edu/
pubs/consumer/credit/scre01shtm; and ``Knee Deep in Debt'' (``Endeudado 
Hasta el Cuello'') is accessible at www.ftc.gov/bcp/edu/pubs/consumer/
credit/scre19.shtm.
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    The Commission also provides consumer education through its 
Consumer Response Center (``CRC''), whose highly trained contact 
representatives respond to telephone calls and correspondence from 
consumers, in both paper and electronic form, and provide them with 
relevant information and materials. A toll-free number, 1-877-FTC-HELP, 
makes it very easy for consumers to contact the CRC.
    The Commission encourages wide circulation of all of its 
educational resources and makes bulk orders available to anyone free of 
charge, shipping included. We provide FTC materials to State Attorneys 
General and other local law enforcement entities, consumer groups, and 
nonprofit organizations, who in turn distribute them directly to 
consumers. In addition, media outlets--online, print, and broadcast--
routinely cite our materials and point to our guidance when covering 
debt-related news stories. Finally, the FTC extends the reach of its 
consumer education initiatives through public speaking engagements to 
groups across the country.

    Question 6. What is your recommendation for better protecting 
consumers from these types of abuses moving forward?
    Answer. Given the pendency of the rulemaking proceeding, it would 
be inappropriate for me to express a view as to how to best protect 
consumers from these types of abuses. Aside from that issue, I fully 
expect that the agency will continue to expand both its enforcement 
efforts and its consumer education initiatives and outreach.

    Question 7. What is one example of an egregious and fraudulent debt 
settlement practice the FTC has reviewed or resolved, and in your view, 
how could it have been avoided?
    Answer. As one example, in October 2007 the Commission alleged that 
four companies and their principals, Robert and Miriam Lovinger, 
marketed their services through websites that offered a ``Debt Meltdown 
Program,'' described as ``an aggressive method of helping consumers out 
of the debt trap and away from the bankruptcy path.'' The FTC's 
complaint alleged that the defendants told consumers that they would 
obtain settlements that would substantially reduce the consumers' debt. 
The defendants allegedly promised to negotiate with creditors and begin 
making payments to them within several weeks after consumers joined 
their program, and to provide personalized financial counseling. 
Defendants also allegedly told consumers to have no further contact 
with their creditors and to stop paying them immediately, enabling the 
defendants to negotiate for them. The defendants, however, allegedly 
failed in many cases to contact each creditor as promised, and 
consumers continued hearing from creditors about their debts. In 
addition, the Commission alleged that defendants regularly withdrew 
money from consumers' trust accounts to pay their operating expenses.
    In August 2008, the defendants agreed to settle the Commission's 
charges. The settlement barred the defendants from violating the law 
again and barred the Lovingers from offering debt settlement services 
to consumers in the future without first obtaining a $1 million 
performance bond. The settlement imposed a $7 million judgment on the 
defendants that was partially suspended based on an inability to pay. 
The judgment may be imposed in full in the future if the Commission 
learns that the defendants misrepresented their financial condition 
during settlement negotiations. The judgment also required the 
Lovingers to transfer proceeds from the sale of property they owned to 
be used for possible restitution to injured consumers.
    The Commission works to prevent scams like this one from taking 
advantage of consumers by a combination of aggressive law enforcement 
(including seeking consumer redress where appropriate), extensive 
consumer education, guidance to industry as to how to comply with the 
law, and, where appropriate, promulgating rules.
                                 ______
                                 
                                                   October 16, 2009
Donald S. Clark, Secretary,
Federal Trade Commission,
Washington, DC.

RE: Telemarketing Sales Rule--Debt Relief Amendments--R411001

    Dear Secretary Clark:

    These comments are being submitted by Consumer Federation of 
America,\1\ Consumers Union,\2\ Consumer Action,\3\ the National 
Consumer Law Center on behalf of its low-income clients,\4\ the Center 
for Responsible Lending,\5\ the National Association of Consumer 
Advocates,\6\ the National Consumers League,\7\ U.S. PIRG,\8\ the 
Privacy Rights Clearinghouse,\9\ the Arizona Consumers Council,\10\ the 
Chicago Consumer Coalition,\11\ the Consumer Assistance Council,\12\ 
the Community Reinvestment Association of North Carolina,\13\ the 
Consumer Federation of the Southeast,\14\ Grass Roots Organizing,\15\ 
Jacksonville Area Legal Aid, Inc.,\16\ the Maryland Consumer Rights 
Coalition,\17\ Mid-Minnesota Legal Assistance,\18\ and the Virginia 
Citizens Consumer Council.\19\
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    \1\ Consumer Federation of America is a nonprofit association of 
some 300 nonprofit consumer organizations across the U.S. CFA advances 
the consumer interest through research, education and advocacy.
    \2\ Consumers Union of United States, Inc., publisher of Consumer 
Reports, is a nonprofit membership organization chartered in 1936 to 
provide consumers with information, education, and counsel about goods, 
services, health and personal finance. CU's publications and services 
carry no outside advertising and receive no commercial support.
    \3\ Consumer Action is a national non-profit education and advocacy 
organization that has served consumers since 1971. CA serves consumers 
nationwide by advancing consumer rights in the fields of credit, 
banking, housing, privacy, insurance and utilities.
    \4\ The National Consumer Law Center is a nonprofit organization 
specializing in consumer issues on behalf of low-income people. NCLC 
works with thousands of legal services, government and private 
attorneys, as well as community groups and organizations, from all 
states that represent low-income and elderly individuals on consumer 
issues.
    \5\ The Center for Responsible Lending is a not-for-profit, non-
partisan research and policy organization dedicated to protecting 
homeownership and family wealth by working to eliminate abusive 
financial practices.
    \6\ The National Association of Consumer Advocates is a non-profit 
corporation whose members are private and public sector attorneys, 
legal services attorneys, law professors, and law students, whose 
primary focus involves the protection and representation of consumers. 
NACA's mission is to promote justice for all consumers.
    \7\ The National Consumers League, founded in 1899, is America's 
pioneer consumer organization. Its mission is to protect and promote 
social and economic justice for consumers and workers in the United 
States and abroad.
    \8\ U.S. PIRG serves as the federation of non-profit, non-partisan 
state Public Interest Research Groups, which take on powerful interests 
on behalf of their members. The PIRGs have long advocated for a fair 
financial consumers marketplace.
    \9\ The Privacy Rights Clearinghouse is a nonprofit consumer 
education and advocacy organization, established in 1992 and located in 
San Diego, CA.
    \10\ The Arizona Consumers Council has been educating, protecting 
and advocating on behalf of Arizona consumers since 1966.
    \11\ The Chicago Consumer Coalition advocates for social and 
economic justice.
    \12\ The Consumer Assistance Council, located on Cape Cod, works 
with the Massachusetts Attorney General's office to provide consumer 
information and to mediate complaints.
    \13\ The Community Reinvestment Association of North Carolina is a 
bank watchdog agency promoting and protecting community wealth.
    \14\ The Consumer Federation of the Southeast is a not-for-profit 
consumer advocacy group founded in 2003 and dedicated to consumer 
advocacy in the Southeastern United States. Its goal is to establish a 
vigorous, new, pro-consumer agenda built upon public awareness, 
consumer education, and coalition-building.
    \15\ Grass Roots Organizing is a 501(c)3 nonprofit organization in 
Missouri, with a membership of more than 450 households. Founded in 
2000, GRO's mission is to create a grassroots voice for economic 
justice and human rights for all Missourians.
    \16\ Jacksonville Area Legal Aid, Inc. is a nonprofit law firm that 
provides free legal services to low income, elderly and working poor 
individuals in 17 counties in Northeast Florida. JALA's consumer law 
unit focuses on assisting those who have been victims of predatory 
lending, unfair collection practices and other illegal business 
practices.
    \17\ The Maryland Consumer Rights Coalition was founded in 
Baltimore, Maryland in 2000 to provide a voice for Maryland consumers. 
Its mission is to advance and protect the interests of Maryland 
consumers through education and advocacy and to ensure fairness and 
safety in the marketplace.
    \18\ Mid-Minnesota Legal Assistance is one of the network of Legal 
Aid programs in Minnesota that provides legal advice and representation 
for low-income clients in a wide range of areas, including consumer 
law, family law, health law, housing and landlord/tenant law, public 
benefits law, youth law, disability law, and elder law. Among its 
services, MMLA, through its Legal Services Advocacy Project, engages in 
legislative and administrative advocacy, conducting research and policy 
analysis and providing community education and training.
    \19\ The Virginia Citizens Consumer Council is a statewide 
grassroots volunteer consumer education and advocacy organization.
---------------------------------------------------------------------------
    We applaud the Federal Trade Commission (FTC) for its thorough 
analysis of the debt relief industry and for the essential amendments 
that it has proposed to the Telemarketing Sales Rule (TSR) to protect 
consumers from abusive practices in debt relief, including for-profit 
debt settlement services, debt counseling services, and debt 
negotiation services. These amendments are crucial to protecting 
consumers from deception and ensuring that they do not pay for false 
promises rather than real results.
Summary of Comments
    We strongly support the proposed rule, and in particular these 
crucial elements:

   A strong, effective ban on requesting or taking fees in 
        advance of achieving final, documented results for consumers. 
        We recommend that the results must be based on the consumer's 
        acceptance of the creditor's offer, as documented in writing.

   Coverage of calls that consumers make in response to 
        advertisements for debt relief services in the general media. 
        Since for-profit debt counseling, debt settlement, and debt 
        negotiation services are commonly advertised on the Internet, 
        on television, or by other means which are designed to induce 
        consumers to make inbound calls, not covering those calls would 
        create a huge loophole.

   Prohibitions on specific material misrepresentations. This 
        provides greater clarity to debt relief service providers 
        regarding the types of claims that the FTC will consider to be 
        deceptive.

   Specific required disclosures about how the service works 
        and other important information. We recommend that these 
        disclosures be made before the consumer enrolls for the 
        service, whether they have to pay or not at that point.

    In addition, we recommend that the TSR should prohibit debt relief 
services from these other abusive practices:

   Changing the addresses on the consumer's accounts so that 
        the debt relief company receives the bills and notices, not the 
        consumer.

   Instructing or advising consumers to have no further contact 
        with their creditors.

   Instructing or advising consumers not to make any payments 
        to their creditors directly.

   Making any representations about the percentage or dollar 
        amount by which debts or interest rates may be reduced, or in 
        the alternative, requiring that any representations about 
        results be based on those which are documented by actual 
        customer experience over the prior 2 years for all of the debt 
        those consumers brought into the program.

   Failing to provide a ``money-back'' cancelation period of at 
        least 90 days in the contract, plus more time if there has been 
        a material breach of the contract or a material violation of 
        law.

    We further recommend that the exemption in TSR for telephone calls 
in which the sale of goods or services is not completed, and payment or 
authorization of payment is not required, until after a face-to-face 
sales presentation should not apply with respect to telemarketing of 
debt relief services. This exemption could swallow the rule, as well as 
favor some debt relief providers over others.
    In our comments we will address the problems in the debt relief 
industry and why the proposed amendments to the TSR will help address 
those problems. We will also explain why specific language changes and 
additions are needed in order to improve the coverage and workability 
of the TSR in regard to debt relief services. We believe that strong 
FTC rules will benefit not only financially distressed consumers but 
also creditors who are owed money and legitimate debt relief services 
that truly provide consumers with help for their debt problems.

The Proposed Amendments are Sorely Needed
    In its Notice of Proposed Rulemaking (NPR), the FTC has vividly 
described the pervasive illegal conduct that has occurred as for-profit 
debt relief services have emerged.

1. Debt settlement services are fraught with problems.
    A debt settlement service promises to attempt to settle credit card 
and other unsecured debts for significantly less than the full amount 
owed. However, the consumer has to save enough to fund those lump sum 
settlements to each creditor. Settlement negotiations do not commence 
until the consumer has saved enough to settle at least one of the debts 
involved, and there is no likelihood that all of the debt can be 
eliminated unless the consumer saves a very sizable amount of money. 
Since multiple debts are often involved, the process may take several 
years. While the savings period is running, the debts grow in size due 
to creditor charges for interest and penalty fees. Entering a debt 
settlement program does not stop the consumer from being called by debt 
collectors, experiencing negative credit history, being sued for the 
debt, and having wages garnished after a judgment.
    The fee is often calculated on the amount of the consumer's debt or 
on the projected savings, regardless of whether the debt is ultimately 
settled or not. As the FTC noted, there are different fee models, but 
the most common is the ``front-end fee'' which requires consumers to 
pay a significant portion of the total amount within the first few 
months and the balance within a year or less--often well before any 
negotiations have taken place. Individuals who can't save enough to 
settle their debts end up paying hundreds, even thousands of dollars 
but getting no benefit in return. The so-called ``flat fee'' approach 
also involves significant fee payments well before any settlement is 
achieved. For example, the consumer may be charged a set-up fee of from 
2 percent to 4 percent, plus additional fees until the fees total from 
14 percent to 20 percent of the full amount of the original debt 
brought into the settlement program, with the entire percentage fee 
paid over the first half of the program.\20\
---------------------------------------------------------------------------
    \20\ ``Economic Factors and the Debt Management Industry,'' Richard 
A. Briesch, PhD, Associate Professor, Southern Methodist University, 
August 6, 2009, at 12, available at http://
www.consumercreditchoice.org, see also Keest, supra.
---------------------------------------------------------------------------
    Non-completion rates are very high and the rate of successful 
settlements is very low, as we will discuss further in our comments on 
the proposed prohibition against advance fees.
    Earlier this year, Consumer Federation of America (CFA) testified 
before Congress that debt settlement firms often mislead consumers 
about the likelihood of a settlement, cannot guarantee that a creditor 
will agree to a reduced payment, often mislead consumers about the 
effect of the settlement process on debt collection and their credit 
worthiness, and charge such high fees that consumers often don't end up 
saving enough to make settlement offers that a creditor will accept, 
causing many consumers to drop out of the program.\21\
---------------------------------------------------------------------------
    \21\ Testimony of Travis B. Plunkett on behalf of the Consumer 
Federation of America, the National Consumer Law Center, and U.S. PIRG 
before the Committee on Commerce, Science, and Transportation of the 
U.S. Senate regarding consumer protection and the credit crisis, 
February 26, 2009, http://www.consumerfed.org/elements/
www.consumerfed.org/File/Plunkett_Testimo
ny_Senate_Commerce_Feb_26(3).pdf.
---------------------------------------------------------------------------
    The problems consumers face in debt settlement have been much in 
the news:

   The New York Times reports that consumers rarely benefit 
        from debt settlement services. ``More often, they say, a 
        settlement company collects a large fee, often 15 percent of 
        the total debt, and accomplishes little or nothing on the 
        consumer's behalf.'' Debt Settlers Offer Promises But Little 
        Help, New York Times, April 19, 2009.\22\
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    \22\ http://www.nytimes.com/2009/04/20/business/
20settle.html?_r=1&emc=eta1.

   The New York Attorney General Andrew Cuomo has called debt 
        settlement a ``rogue industry.'' Cuomo Subpoenas Debt 
        Settlement Firms, Los Angeles Times, May 8, 2009.\23\
---------------------------------------------------------------------------
    \23\ http://articles.latimes.com/2009/may/08/business/fi-debt-
relief8.

   Debt settlement was identified in the March 2009 issue of 
        Consumer Reports as one of five ``financial traps.'' Financial 
        Traps are Flourishing, Tough Times Have Bred Five Costly Come 
        Ons: High Fee Debt Settlement, Consumer Reports, March 
        2009.\24\
---------------------------------------------------------------------------
    \24\ http://www.consumerreports.org/cro/magazine-archive/march-
2009/money/scams/high-fee-debtsettlement/scams-high-fee-debt-
settlement.htm.

   The CBS Morning News says that complaints to the Federal 
        Trade Commission about debt settlement ``more than quadrupled 
        between 2006 and 2007.'' Debt Settlement Can Hurt More Than 
        Help, May 12, 2009.\25\
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    \25\ http://www.cbsnews.com/stories/2009/05/12/earlyshow/living/
money/main5008357
.shtml.

   Smart Money reports that using these companies is ``fraught 
        with risk, not to mention outrageous fees.'' Debt Settlement: a 
        Costly Escape, August 6, 2007.\26\
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    \26\ http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/
DebtSettlement
ACostlyEscape.aspx.

    The Better Business Bureau of Los Angeles, Orange, Riverside and 
San Bernardino Counties offers this caution about debt settlement 
---------------------------------------------------------------------------
services:

        Complaints on these companies allege that creditors continue to 
        harass clients, fees and interest continue to accumulate, and 
        that the companies do not contact the creditors. Usually, 
        creditors turn the claims over to collection agencies, file 
        suit and pursue collection of the money owed to them. Debts are 
        seldom settled, customer's credit is ruined, and many people 
        are sued forcing them to seek bankruptcy protection. Typically, 
        it is difficult to obtain refunds from the companies.\27\
---------------------------------------------------------------------------
    \27\ http://www.la.bbb.org/BusinessReport.aspx?CompanyID=100046948.

    The FTC and state agencies have brought many cases against debt 
settlement companies. The FTC case against Edge Solutions, Inc. 
provides a good example of the types of problems that consumers have 
encountered with debt settlement services.\28\ The company allegedly 
promised to reduce consumers' debts to 55 cents on the dollar; told 
consumers to stop making payments to their creditors, which would place 
them in a ``hardship condition,'' making negotiations possible; 
promised that debts would begin to be paid to creditors within several 
weeks; required consumers to set up direct debits from their bank 
accounts to an account controlled by the company, from which their fees 
and debts would be paid; promised one-on-one financial counseling, 
which in most cases was never provided; buried in the agreement the 
fact that consumers must pay 45 percent of the total fee upfront before 
any payments would begin to creditors and that this might take several 
months; failed to negotiate with and pay creditors as promised; and 
caused consumers to incur late fees, finance charges, overdraft 
charges, and negative information on their credit reports, and to face 
various types of legal action by creditors.
---------------------------------------------------------------------------
    \28\See FTC press release at www.ftc.gov/opa/2008/08/edge.shtm.
---------------------------------------------------------------------------
    In its Congressional testimony, CFA concluded that, ``The essential 
promise made by debt settlement firms to the public, that they can 
settle most debts for significantly less than what is owed, is often 
fraudulent. There is general consensus that credit counseling, if done 
well, can provide significant benefits for some financially distressed 
consumers. No such consensus exists for debt settlement.'' \29\
---------------------------------------------------------------------------
    \29\ Testimony of Travis B. Plunkett on behalf of the Consumer 
Federation of America, the National Consumer Law Center, and U.S. PIRG 
before the Committee on Commerce, Science, and Transportation of the 
U.S. Senate regarding consumer protection and the credit crisis, 
February 26, 2009, http://www.consumerfed.org/elements/
www.consumerfed.org/File/Plunkett_Testimo
ny_Senate_Commerce_Feb_26(3).pdf.
---------------------------------------------------------------------------
2. The proposed amendments wisely cover all types of for-profit debt 
        relief services.
    The FTC has taken the correct approach in covering all types of 
for-profit debt relief services in the proposed amendments to the TSR. 
While they may operate differently,\30\ for-profit debt counseling, 
debt management, and debt negotiation services share some of the same 
characteristics as debt settlement services (in fact, sometimes the 
terms debt settlement and debt negotiation are used interchangeably). 
These businesses often charge significant fees upfront and make 
representations that lead consumers to believe that they will get debt 
relief in return--representations that are sometimes false.
---------------------------------------------------------------------------
    \30\ Debt management services offer to make arrangements for 
consumers to pay their entire debts with reduced interest rates and 
fees and over longer periods of time; debt negotiation firms offer to 
make consumers' debts more affordable by obtaining lower interest rates 
and other concessions from the creditors.
---------------------------------------------------------------------------
    A 2003 report \31\ by the National Consumer Law Center (NCLC) and 
CFA about credit counseling and debt management programs described 
problems with some debt management services, including: failing to make 
consumers' debt management program on time, or at all; deceptively 
claiming that fees are voluntary; not adequately disclosing fees; 
charging excessive fees; and falsely purporting to be nonprofit 
organizations. The report also noted that newer entrants in the 
industry were generally more aggressive in their marketing tactics, 
particularly with Internet and telemarketing advertising.
---------------------------------------------------------------------------
    \31\ ``Credit Counseling in Crisis: The Impact on Consumers of 
Funding Cuts, Higher Fees and Aggressive New Market Entrants,'' 
National Consumer Law Center and Consumer Federation of America, April 
2003, http://www.consumerfed.org/elements/www.consumerfed.org/file/
finance/credit_counseling_report.pdf.
---------------------------------------------------------------------------
    The FTC has cited many enforcement actions against debt counseling 
and debt negotiation services that illustrate the need to protect 
consumers by bringing these companies under the amendments to the TSR. 
For instance, in the largest debt management cases ever brought by the 
FTC, AmeriDebt allegedly misled consumers into believing that it was a 
nonprofit credit counseling service that would teach them how to handle 
their debts.\32\ Instead, it enrolled them in debt management plans 
operated by a service provider. Furthermore, contrary to AmeriDebt's 
claims that there were no upfront fees, it kept consumers' initial 
payments as fees rather than disbursing them to creditors as promised.
---------------------------------------------------------------------------
    \32\ See FTC press release at www.ftc.gov/opa/2008/09/
ameridebt.shtm.
---------------------------------------------------------------------------
    In the case against Debt Solutions, Inc., the FTC alleged that the 
company charged consumers hundreds of dollars for a ``debt elimination 
program'' that, despite its claims, did not greatly reduce interest 
rates or result in thousands of dollars in savings as represented.\33\ 
Furthermore, consumers were not told that the promised savings would 
take decades to achieve and that the majority of savings would come 
from increasingly paying more toward their debts every month, not from 
reduced interest rates.
---------------------------------------------------------------------------
    \33\ See FTC press release at www.ftc.gov/opa/2007/05/dsi.shtm.
---------------------------------------------------------------------------
    To protect consumers from deception and abuse, all types of for-
profit debt relief services should be covered by the proposed 
amendments. If debt counseling and debt negotiation services were not 
included, some debt settlement companies might try to escape the 
requirements and prohibitions by claiming to be engaged in those 
businesses instead. Furthermore, as the FTC has seen, some companies 
provide a range of debt relief options. For instance, Debt-Set offered 
a ``debt consolidation program'' for consumers whose unsecured debts 
were overdue by 1 month or less and a ``debt settlement program'' if 
the debts were overdue by a longer period.\34\ The FTC must be careful 
not to create any loopholes that would allow some businesses to escape 
the rules that apply to their competitors.
---------------------------------------------------------------------------
    \34\ See FTC press release at www.ftc.gov/opa/2008/02/
debtreduct.shtm.
---------------------------------------------------------------------------
    We agree that ``product'' should be added to the definition of debt 
relief service so that the rules cannot be evaded by recasting the 
service as a product. In addition, we suggest adding ``or seek to 
alter'' to the definition to avoid creating a loophole for services 
that might simply claim to attempt to alter the terms of the debt. The 
revised definition in 310.2 (m) would read:

        Debt relief service means any product or service represented, 
        directly or by implication, to renegotiate, settle, or in any 
        way alter or seek to alter the terms of payment or other terms 
        of the debt between a consumer and one or more unsecured 
        creditors or debt collectors, including, but not limited to, a 
        reduction in the balance, interest rate, or fees owed by a 
        consumer to an unsecured creditor or debt collector.

Key Aspects of the Proposed Amendments

1. Advance fees must be prohibited to prevent substantial consumer 
        injury.
    We strongly support the proposed restriction in section 310.4 
(a)(5) to ban fees in advance of consumers actually getting the 
services they are paying for. The FTC has proposed that debt relief 
services should not request or receive any payment until providing the 
customer with documentation that the particular debt has been 
renegotiated, settled, reduced, or otherwise altered. We agree that 
this is essential to protect consumers from the substantial injury that 
is caused when they pay fees upfront and little or no services are ever 
rendered.
    Consumers pay significant fees for debt relief services, often 
before any services are actually provided.
    Consumers pay significant amounts of money for debt relief 
services. For instance, Homeland Financial Services and four other 
companies charged non-refundable fees of up to 15 percent of consumers' 
unsecured debts with the promise of reducing those debts by as much as 
40 to 60 percent.\35\ This seems to be typical of debt settlement 
companies; whether the fees are based on the total amount of debts or 
the projected savings, they appear to range from 14 to 20 percent.\36\ 
For instance, for debts totaling $25,000, the consumer would pay $3,500 
to $5,000 if the fee was based on the amount of the debt, which seems 
to be the most common method of calculation. This is a very large 
amount of money, especially for consumers who are already in financial 
distress.
---------------------------------------------------------------------------
    \35\ See FTC press release www.ftc.gov/opa/2006/09/nationwide.shtm.
    \36\ See comments to the FTC by The Association of Settlement 
Companies, December 1, 2008, page 2, http://www.ftc.gov/os/comments/
debtsettlementworkshop/536796-00036.pdf.
---------------------------------------------------------------------------
    Furthermore, as in the case of Homeland Financial Services, 
negotiations with the creditors usually begin only after the consumer 
has paid a large percentage of the fees. One company representative at 
the FTC's September 2008 Public Workshop on ``Consumer Protection and 
the Debt Settlement Industry'' indicated that in the front-end fee 
models consumers could pay 40 percent or more within the first three or 
4 months, 65 percent within 6 months, ``without any results at that 
point.'' \37\ We also note the comments at that workshop of the United 
States Organization for Bankruptcy Alternatives acknowledging that 
``Some business models call for the fee to be paid up front in its 
entirety, over the first several months of the program prior to any 
negotiating with creditors takes (sic) place.'' \38\ The flat fee 
model, the second most common according to industry representatives at 
the workshop, works similarly, with the entire amount collected over 
the first half of the enrollment period.
---------------------------------------------------------------------------
    \37\ See U.S. Debt Resolve (Johnson), Tr. at 72-74 mentioning that 
40 percent or more is collected within the first three or 4 months and 
the rest in 12 months or less and again at Tr. 108 that 65 percent of 
the fees will be paid in 6 months ``and the client won't have any 
results at that point in time.''
    \38\ See http://www.ftc.gov/os/comments/debtsettlementworkshop/
536796-00022.pdf, page 12.
---------------------------------------------------------------------------
    As we commented previously, debt settlement negotiations cannot 
start until consumers have saved enough money for the service to make 
offers to their creditors. That can take years, depending on the amount 
of the debt, the willingness of various creditors to cooperate, and the 
consumer's capacity to save. For consumers with multiple debts, 
negotiations are typically initiated in sequence; when one is settled, 
the consumer starts saving for the next. This stretches the process out 
even further. Debt settlement companies typically advertise that they 
will help consumers become ``debt free'' within two to 4 years; none 
claim that they can resolve debt problems in less than 12 months.\39\ 
Part of the reason why the process takes so long is that in addition to 
saving funds toward a settlement, consumers are paying a substantial 
portion of the fees upfront.
---------------------------------------------------------------------------
    \39\ See Debt Consolidation Care at http://
www.debtconsolidationcare.com/debt-settlement
.html, Fidelity Debt Solutions at http://www.fidelitydebt.net/debt-
consolidationlp1.html?s=gaw
&kw=Debt%20settlement&gclid=CIayr5ikip0CFQ62sgod9xz32Q, 
FixYourDebtProblems.com at http://www.fixyourdebtproblems.com/debt-
relief-help-settlement/, Debtamerica Relief at http://
www.debtmerica.com/a/
debtsettlement_google.html?gclid=CND21LGmip0CFSTFsgod
qlEd3g.
---------------------------------------------------------------------------
    Meanwhile, the consumers are instructed not to make any payments to 
their creditors, or even to have any contact with them. Even if a 
settlement company does not explicitly direct customers not to pay 
their creditors, such encouragement is implicit. There is simply no way 
that the vast majority of highly indebted consumers can save enough to 
make a viable settlement and pay fees without reducing or eliminating 
the payments they make to creditors. By the time settlement 
negotiations begin, if at all, consumers' debts have become higher 
because of interest and penalties, and the amount of money at their 
disposal has been reduced by the fees they have paid, diminishing the 
chances that they will be able to make viable offers to their 
creditors.
    For-profit debt negotiation and credit counseling companies also 
charge significant fees before providing services. Debt Solutions 
charged $399 to $699 in advance for its debt negotiation ``program.'' 
Consumers paid $675 upfront to Select Management Solutions, which 
promised to reduce their credit card interest rates. When the service, 
which consisted of three-way telephone calls with their credit card 
companies, did not produce the results that consumers were led to 
expect, the company allegedly refused to honor its refund policy.\40\ 
National Consumer Council, masquerading as a nonprofit credit 
counseling service, debited $500 from consumers' banks accounts as an 
``establishment fee'' and $50 per month thereafter from the monthly 
payments that consumers thought were going to their creditors, without 
disclosing that the company would not start negotiating a payment plan 
with creditors until 6 months or longer had elapsed.\41\
---------------------------------------------------------------------------
    \40\ See FTC press release at www.ftc.gov./opa/2008/08/
smsomax.shtm.
    \41\ See FTC press release and link to complaint at http://
www.ftc.gov/opa/2004/05/ncc.shtm.
---------------------------------------------------------------------------
    Disclosures and prohibited misrepresentations, no matter how 
effective, are inadequate to prevent substantial injury by themselves. 
Unjustified fees and abusive practices must also be prohibited.
    While the disclosure requirements and prohibitions against 
misrepresentation that the FTC has proposed are helpful, they alone are 
not sufficient to prevent the substantial injury that the FTC has 
described. As the FTC has correctly pointed out, when consumers are 
considering debt relief services, they have no way to know whether the 
representations being made are true or not; they can only judge that 
after they have enrolled (sometimes long after), when the programs have 
either produced results or failed to do so.
    Furthermore, consumers who need help with debt problems are often 
in very stressful situations. A survey CFA recently conducted showed 
that the fastest growing complaints that state and local consumer 
protection agencies received last year were about aggressive debt 
collection practices.\42\ As the FTC noted in the NPR, this makes 
consumers very vulnerable when they respond to solicitations that 
promise them relief. The required disclosures that the FTC proposes 
will help consumers understand the total cost of debt relief services, 
how they work, and what other alternatives may be available. But 
desperate consumers will tend to focus most on the representations made 
in the advertisements about how these services can relieve them of 
their debt worries. We see the required disclosures and prohibited 
misrepresentations as good complements to, but not substitutes for, the 
proposed ban on advance fees.
---------------------------------------------------------------------------
    \42\ See press release with link to ``2008 Consumer Complaint 
Survey Report,'' July 30, 2009, http://www.consumerfed.org/elements/
www.consumerfed.org/File/Consumer%20Complaint%20
survey%20Report%20PR%207-30-09.pdf.
---------------------------------------------------------------------------
    It is abusive to charge fees in advance for services when most 
consumers do not benefit.
    The information that the FTC and state agencies have gleaned from 
enforcement actions against debt relief companies revealed extremely 
low success rates. The vast majority of consumers who signed up for 
those services derived absolutely no benefit in exchange for the fees 
they paid. For example, in the case against National Consumer Council, 
the court-appointed receiver found that only 1.4 percent of consumers 
obtained the promised results.\43\ In recent New York cases against 
debt settlement companies, the state attorney general alleges that only 
1 percent and \1/3\ percent of consumers received the services they 
were promised.\44\
---------------------------------------------------------------------------
    \43\ See FTC press release at http://www2.ftc.gov/opa/2005/03/
creditcouncel.shtm.
    \44\ See press release at www.oag.state.ny.us/media_cetner/2009/ma/
may19b_09.html.
---------------------------------------------------------------------------
    The Center for Responsible Lending (CRL) testified in Congress in 
2009 that the debt settlement business is inherently problematic 
because it specifically targets consumers who are least likely to 
complete their programs. CRL said that the business model which 
requires consumers to pay between 14 and 20 percent of their debt in 
fees before they can reach a settlement means that few were likely to 
benefit and most were likely to drop out because they could not keep up 
the monthly payment to the debt settlement company and save funds for 
settlements at the same time.\45\
---------------------------------------------------------------------------
    \45\ Testimony of Kathleen Keest on behalf of CRL, CFA and NCLC 
before the House Committee on Energy and Commerce, Subcommittee on 
Commerce, Trade and Consumer Protection, May 12, 2009, 
www.responsiblelending.org/credit-cards/policy-legislation/congress/
ftc-ccdp-testimony-5-12-2009final.pdf.
---------------------------------------------------------------------------
    In case after case against various types of for-profit debt relief 
services, the FTC has found that very few, if any, consumers got real 
help with their debt problems after having paid hundreds, even 
thousands of dollars in fees. We agree with the FTC that it is an 
abusive practice to charge consumers in advance for debt relief 
services that they are likely never to receive. Not only do financially 
distressed consumers lose what little money they have left to the high 
fees charged by these companies, but they are left worse off than they 
were before when the promised results are not achieved, facing higher 
debts, further damage to their credit records, and the possibility of 
lawsuits and wage garnishment. In this respect, the consumer harm is 
more severe than in situations involving recovery services, credit 
repair, and advance fee loans.
    Furthermore, even in the minority of situations where the results 
are achieved, that is often long after the consumer first enrolled. In 
the meantime, it is not clear what services have been provided for 
which the firms should be compensated beyond a de minimus amount, as we 
will discuss later. This situation is very similar to that of credit 
repair, in which there is little evidence of success and a long lag 
time before results, if any, are achieved. The approach that Congress 
took in addressing this problem was to enact the Credit Repair 
Organization Act, which bans advance fees.\46\ That is the correct 
approach here.
---------------------------------------------------------------------------
    \46\ 15 U.S.C.  1679 et. seq.
---------------------------------------------------------------------------
    Industry has not provided reliable, credible empirical evidence of 
the value or success of for-profit debt relief services.
    There has been no reliable, credible empirical evidence from 
industry of the value or success of for-profit debt relief services. In 
researching the debt settlement industry for a 2005 report, NCLC found 
that it was very difficult to obtain information from companies or 
industry associations and was forced to conclude that ``Unfortunately, 
it is not easy to determine what the companies actually do to earn 
these fees.'' \47\ As the FTC has noted, what little information has 
been provided by the debt settlement industry fails to show the success 
rate--that is, the number or percentage of consumers who pay for 
services and fully achieve the promised results.
---------------------------------------------------------------------------
    \47\ ``An Investigation of Debt Settlement Companies: An Unsettling 
Business for Consumers,'' National Consumer Law Center, March 2005, 
http://www.nclc.org/issues/credit_counseling/content/
DebtSettleFINALREPORT.pdf.
---------------------------------------------------------------------------
    A recent study \48\ released by Americans for Consumer Credit 
Choice (ACCC) does not provide this evidence. There is no list or other 
information about the ACCC's members on its website, but it appears to 
be a debt settlement industry group.\49\ The study is based on data of 
4,500 customers from only one debt settlement company, which is not 
identified. The author contends that this is a ``very significant 
sample of consumers in this industry.'' \50\ However, there is no 
information about what percentage of the company's customers, or of the 
industry as a whole, this represents to support that contention. There 
is also no information about the company's fee structure.
---------------------------------------------------------------------------
    \48\ ``Economic Factors and the Debt Management Industry,'' Richard 
A. Briesch, PhD, Associate Professor, Southern Methodist University, 
August 6, 2009, available at http://www.consumercreditchoice.org.
    \49\ The August 7, 2009 press release states that ``ACCC, with 
other industry and interested groups'' requested the study, see http://
www.consumercreditchoice.org/node/4.
    \50\ Id. page 15.
---------------------------------------------------------------------------
    The author points to other limitations--for instance, the company 
does not retain information regarding offers and settlements for 
consumers who dropped out of the program--and acknowledges that the 
results from this company may not be applicable to the industry as a 
whole.
    We also note that there is no explanation of how this company was 
selected for the study, or by whom. While the data cannot be taken as 
representative of all debt settlement companies, if this is an example 
of the industry at its best, it reveals some serious shortcomings. For 
example, a shocking 60 percent of customers canceled their 
participation in the program before completing it. The author touts 
this drop-out rate as better than the 80 percent \51\ or more that some 
have described as typical of debt settlement and compares it favorably 
with the churn rate for subscription services such as mobile phones.
---------------------------------------------------------------------------
    \51\ ``Look Out for That Lifeline, Debt Settlement Firms are Doing 
a Booming Business--And Drawing the Attention of Prosecutors and 
Regulators,'' BusinessWeek, March 6, 2008.
---------------------------------------------------------------------------
    We would not characterize the majority of customers dropping out of 
a debt settlement program before completing it as a good result, 
especially when there is no evidence that any of the drop-outs settled 
even one of their debts through the company's efforts. Furthermore, the 
comparison to the churn in the wireless phone industry does not fit. 
Cell phone customers don't usually pay in advance of receiving the 
service, as debt settlement customers do. And many undoubtedly switch 
their wireless service provider because another one has offered them a 
better deal. It's unlikely that debt settlement customers drop out 
because another debt settlement company has offered them a better deal.
    Given the predominant front-loaded fee structure in the debt 
settlement industry and the fact that the customers of this company who 
canceled had been in the program for a median of 5 to 6 months (and 
some for much longer), we can assume that many paid a substantial 
portion of their fees before dropping out. The report provides 
explanations for why some customers canceled (13.5 percent of the drop-
outs filed for bankruptcy, 6.8 percent were unable to save, 9.2 percent 
had ``buyer's remorse'' within the first 2 or 3 months, and 14 percent 
settled on their own or were going to try to do so), but there is no 
explanation for why more than half (56 percent) of those who dropped 
out did so. Some may well have been discouraged after paying fees for 
months and getting no satisfactory results. It also seems clear that, 
with such a high cancelation rate, the settlement firm was enrolling 
customers in the program for whom it was not appropriate in the first 
place. In fact, it seems likely that this company made little or no 
effort to determine suitability at all, which we believe should be a 
requirement for all debt relief services.
    Of the 40 percent still in the program, the report does not make 
clear how many had actually settled even one of their debts. The report 
provides results only ``conditional on'' settlement of one debt or 
receipt of one settlement offer. No statistics are provided in the 
published report for the people who had no debts settled. CFA asked the 
author and was told orally that 55.7 percent of those who did not drop 
out had settled at least one debt. That means that 44.3 percent of 
those still in the program had not settled any debts at all. And of the 
total of 4,500 customers in the study, only 22 percent had settled even 
one debt.
    The 40 percent remaining in the program at the time of the study 
had been in it for at least 12 months; some had been in for 18 months 
and some for 24. It is possible that more of these customers may 
eventually settle at least one debt, and that those who have already 
settled at least one debt may settle more. It is also possible that 
more customers may drop out without settling any debts.
    Since there are no statistics based on customers actually 
completing the program, which supposedly takes 36 to 48 months, the 
study does not answer the fundamental question that the FTC has long 
posited--what is the number or percentage of consumers who pay for debt 
relief services and fully achieve the promised results of the 
elimination of debt?
    Furthermore, the fact that the rate of offers was higher than the 
rate of settlements (for those who had settled at least one debt) shows 
that not all offers are acceptable. Some offers may be for more money 
than the consumers can afford, and some may be rejected because they 
are not as good as consumers were led to expect. At any rate, the 
percentage of offers made, which is highlighted in the report to 
demonstrate the value of this company's services, cannot be used as a 
real measure for success.
    The author of that study argues that prohibiting any fees until 
debt relief services have actually been provided is analogous to 
forbidding insurance companies from collecting premiums until a claim 
is filed. But when consumers buy insurance they receive a legally 
binding commitment that the company will pay in the event of specific 
future events. For-profit debt relief services cannot make similar 
promises of specific results, even if they attempt in good faith to 
help consumers. First, creditors are under no obligation to agree to 
settle debts, reduce interest or enter into payment plans. Indeed, as 
some creditors say they choose not to deal with for-profit debt relief 
services at all.\52\ Second, these services have no control over 
whether their customers will be willing or able to accept and fund any 
offers that creditors may make.
---------------------------------------------------------------------------
    \52\ See comments made at the FTC's September 2008 public workshop 
on debt settlement by American Express (Flores), Tr. 142-43, and the 
ABA (O'Neill), Tr. at 96-97; see also comments by Bank of America in 
``Look Out for that Lifeline, Debt-Settlement Firms are Doing a Booming 
Business--and Drawing the Attention of Prosecutors and Regulators,'' 
BusinessWeek, March 6, 2008.
---------------------------------------------------------------------------
    Nonprofit credit counseling services have ongoing relationships 
with creditors and understand what their payment requirements are. They 
determine in advance if consumers can afford acceptable payment plans 
and, if not, provide advice about other alternatives such as 
bankruptcy. There may be a modest consultation fee or set-up fee, but 
the charges for administering debt management programs are usually 
assessed on a ``pay as you go'' basis for the services provided. From 
the information available about for-profit debt relief services, it 
appears that they charge significant fees early on in the programs 
without any reasonable assurance that they can help consumers and 
without providing real educational or other services. There is no 
reliable, credible evidence that even a majority of their customers get 
the relief they have paid for.
    The advance fee ban must not be weakened by preconditioning its 
application on guaranteeing or representing a high likelihood of 
success.
    The FTC's questions ask whether there is another formulation of the 
advance fee ban that would be more appropriate than a ban conditioned 
on the provision of the promised goods or services. The answer is no.
    Limiting the ban only to instances of a guarantee or representation 
of a high likelihood of success has been made would create numerous 
opportunities for evasion. First, an impression or expectation of 
future success could be created by the lead generator, rather than the 
representations of the direct seller or telemarketer. Once an 
impression of likely success has been created, it could be very hard to 
dispel. Furthermore, and most fundamentally, the very reason that a 
consumer would use a debt relief service is to get their debt problems 
resolved. A rational consumer would not sign up without the expectation 
of a high likelihood that he or she would get satisfactory results.
    In essence, the expectation of a high likelihood of success is 
inherent in the customer's acceptance of a debt relief service. A 
representation of success should not have to be shown as a separate 
requirement for application of an advance fee ban. Such a limitation 
would very significantly undercut the value of a ban. In fact, we 
believe that representations of success should not be allowed at all, 
for reasons that we will explain later.
    The FTC also asks whether there are alternatives to an advance fee 
ban that would sufficiently address the problem of low success rates in 
the debt settlement industry. There are not.
    A small initial fee may be acceptable in limited circumstances.
    Some claim that for-profit debt relief services are entitled to 
front-loaded fees because of they provide assistance to the customer or 
provide value at the onset. This is not supported by the facts. There 
is no evidence that these companies provide meaningful consumer 
education, and even if they did, that would not justify charging 
hundreds, let alone thousands of dollars. Until satisfactory outcomes 
for customers are actually accomplished--setting up a debt management 
plan, settling the debts, or negotiating changes to the debts--the 
basic service that is promised is not rendered even if some minor 
preliminary steps to provide a possible future agreement have been 
taken. The concerns expressed by some companies about how to get 
customers to pay their fees are somewhat ironic--how can they represent 
with confidence that customers will be able to pay off their debts 
through their programs when they are not confident that the customers 
will have sufficient funds to pay them? At any rate, those concerns are 
outweighed by the concerns about substantial injury to consumers when 
they pay in advance for debt relief services that may never be 
provided.
    A small initial fee could be reasonable when a debt relief service 
performs substantial work at the onset such as conducting a real, 
individualized financial analysis to determine if the program is 
suitable for and will result in a tangible net benefit to that 
consumer. Such a fee should be capped at $50, to avoid reintroducing 
the market incentive to sign up people who are unlikely to benefit from 
the service. Several states have enacted laws that limit the set-up fee 
that debt settlement services can charge to $50 or less.\53\ Set-up or 
enrollment fees for debt counseling services are also limited in some 
states; for instance, Arizona caps them at $39.\54\
---------------------------------------------------------------------------
    \53\ Florida, Oregon, Iowa, North Carolina, and Kansas.
    \54\ National Consumer Law Center, Fair Debt Collection, section 
12.3, 6th edition 2008 and Supp.
---------------------------------------------------------------------------
    Adequate proof of results must be provided before fees may be 
requested or paid.
    It is essential that consumers be provided with adequate 
documentation that their debts have been renegotiated, settled, 
reduced, or otherwise altered before payment can be requested or 
received. The FTC's proposal describes the types of documentation that 
would be acceptable but does not specify the form in which it should be 
provided. This portion of the proposed rule should be clarified to 
specify that the documentation be provided to the consumer in writing 
and be from and binding on the creditor.
    Furthermore, for debt settlements, it is extremely important that 
the documentation show that debt has been fully settled for a specific 
dollar amount. A fully executed debt settlement agreement is the 
preferred document. Other documents should be considered only if they 
are equally binding. This is particularly important in order to avoid 
any confusion about what can trigger an allowable fee--actual 
settlements, not unaccepted offers to settle, and not preliminary 
conversations between a debt settlement service and a creditor.
    Finally, we are concerned that debt relief services may assert that 
they should be able to charge fees if they have obtained offers from 
consumers' creditors, even if the consumers do not accept them. As the 
ACCC study of one debt settlement company illustrated, not all offers 
are accepted. Allowing fees to be collected based on offers could 
provide incentives to negotiate offers that do not reduce or alter the 
debt in any significant way and that do not benefit consumers. We do 
not believe that this is what the FTC intended and the amendment should 
make clear that the fee payments are contingent upon, and payable no 
earlier than, on consumers having accepted binding settlement offers 
made by creditors.
    Fees should not be disproportionate to the results achieved.
    The proposed ban on advance fees for debt relief services would 
mean that fee payments could no longer be disproportionate to the 
results that are actually achieved in terms of the elimination of the 
debts. For instance, if a consumer asked a debt settlement company for 
help with three debts, a fee would be paid for each debt as it is 
settled; the consumer could not be asked to pay a fee based on the 
total amount of all three debts when only one has been settled and the 
other two are still outstanding.
    In the case of debt management plans, payments to creditors are not 
made in a lump sum but are spread out in monthly installments. If we 
understand the FTC's intentions correctly, under the proposed amendment 
the debt management company would take a portion of the fee each month 
when it makes the payments to the consumer's creditors. However, the 
language in the proposed amendment does not make this clear. We are 
concerned that consumers could be required to pay the entire amount or 
a significant portion of their fees at the time that they are enrolled 
in a debt management plan, giving them no protection if the service 
stopped forwarding their payments to their creditors.
    To address this and other issues we have raised, we suggest that 
proposed  310.4 (5) be revised to read:

        Requesting or receiving payment of any fee or consideration 
        from a person for any debt relief service until the customer 
        has agreed to the creditor's offer and the seller has provided 
        the customer with written documentation in the form of a 
        settlement agreement, debt management plan, or other such valid 
        contractual agreement, from and binding on the creditor, that 
        the particular debt has, in fact, been renegotiated, settled, 
        reduced, or otherwise altered and that shows the specific 
        dollar amount, interest rate, or other terms as applicable, and 
        in the case of debt settlement, that shows that the debt has 
        been settled and released. With respect to a debt management 
        plan that calls for making payments over time to a creditor, no 
        fee may be received earlier than the proportional amount of 
        progress made toward reducing the debt.

    The advance fee ban as structured will not prohibit consumers from 
using legitimate escrow services.
    We agree that the ban on advance fees will not prohibit consumers 
from using legitimate escrow services that they control in order to 
save money in anticipation of a settlement, including money that may 
eventually be used to pay a debt service provider. However, it is 
crucial that no fees can be deducted by or on behalf of the debt relief 
company until the services have been provided and consumer has been 
given the required documentation. We are concerned about business 
models in which the consumers open accounts with third-party services 
and give the debt settlement services a power of attorney to remove the 
fees from those accounts. This arrangement is described in some detail 
in a California case involving Nationwide Asset Services.\55\
---------------------------------------------------------------------------
    \55\ California Department of Corporations vs. Nationwide Asset 
Services, Inc., No. 38300, 4-5, August 4, 2006, http://www.corp.ca.gov/
OLP/pdf/oah/N2005120755.pdf.
---------------------------------------------------------------------------
    Any escrow arrangement must give the consumer, and only the 
consumer, the right to withdraw the funds at any time. Furthermore, the 
consumer should be able to choose the escrow service and not be obliged 
to use one that assesses higher fees than other bank accounts of the 
same type.\56\
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    \56\ Taking a power of attorney over any bank account held in the 
name of the consumer or held by any third-party should be determined to 
be an unfair business practice. It is inherently deceptive to encourage 
the consumer to open a bank account and then take the right to remove 
funds directly out of that bank account by a power of attorney. If the 
consumer wishes to authorize an electronic debit from his or her bank 
account, the Federal Electronic Fund Transfer Act provides the 
framework for that transaction, including a right to cancel an 
authorization for preauthorized periodic payments.
---------------------------------------------------------------------------
2. Other abusive practices should be prohibited.
    In addition to banning fees in advance of actually providing debt 
relief services, there are other abusive practices that should be 
addressed by the TSR in order to provide adequate protection for 
consumers.
    Changing the addresses on consumers' accounts so that the debt 
relief company receives the bills and notices, not the consumer, should 
be prohibited.
    This prevents consumers from receiving notices about penalties, 
referral to collection, and other impending actions--information 
consumers need in order to protect their interests pending any 
reduction, settlement or other negotiated resolution of the debt.
    Instructing or advising consumers to have no further contact with 
their creditors should be prohibited.
    This prevents consumers from responding to notices and offers for 
direct negotiations from their creditors and could worsen their 
situations by prolonging their debt problems and increasing the fees 
that they must pay to the debt relief services and the likelihood of 
lawsuits and other adverse actions. It may also prevent the consumer 
from receiving information about how high the debt has grown during the 
delay for debt settlement/negotiations.
    Instructing or advising consumers not to make any payments to their 
creditors directly should be prohibited.
    This prevents consumers from making even minimum payments to their 
creditors in order to forestall or reduce the risk of penalties, damage 
to their credit reports, lawsuits, and other adverse actions while they 
are waiting for the debt relief services to be rendered.
    Making any representations about the percentage or dollar amount by 
which debts or interest rates may be reduced should be prohibited.
    This is inherently misleading because each person's debts and 
capacity to pay them is different. Furthermore, there are varying 
levels of cooperation among creditors; some will not even deal with 
for-profit debt relief services at all. Even if a debt relief service 
has a high rate of success overall, the success rate does not guaranty 
that every customer will achieve the same results. Moreover, fine-print 
disclaimers do little to dampen the expectations created by such 
claims.
    Representations of results are also misleading when they are not 
regularly achieved for all of the debts for a significant majority of 
the customers. For example, suppose that a debt settlement company 
regularly settles half of the debts for half of the initial debt 
amount--an assumption which we believe is very optimistic in light of 
high drop out rates. If half of the debts are settled, that means that 
the debt settlement company's customers still owe the full amount, plus 
new creditor interest charges, on the remaining unsettled half of their 
debts. It would be very misleading to claim: ``We settle debts for 50 
cents on the dollar,'' in this circumstance. A consumer who had started 
debt settlement with two debts of $12,000 each and had one debt settled 
for $6,000 would have paid the $6,000 settlement and still owe 
$12,000--that consumer would be on the hook for 75 cents on the dollar 
in remaining debt and the payment for the settlement, not even counting 
the amount of the debt settlement company's fees.
    We believe that a prohibition against making any representations 
about the percentage or dollar amount by which debts or interest rates 
may be reduced is the best way to protect consumers from expectations 
that may not be fulfilled. If this recommendation is not adopted, we 
suggest as an alternative a ban on making any representation about the 
percentage or dollar amount at which a debt may be reduced or the 
amount a consumer may save unless the provider maintains evidence that 
the represented result was achieved for all debt enrolled in the 
program for at least 80 percent of the clients who began the service in 
the most recent two calendar years. Evidence supporting claims of 
results should be verified by an independent audit.
    However, if any representations about the percentage or dollar 
amount by which debts or interest rates may be reduced are allowed, 
there should also be a required disclosure that those results cannot be 
guaranteed for each individual customer. Furthermore, debt relief 
companies should be required to submit their audits to the FTC so that 
the information is publicly available.
    Failing to provide a ``money-back'' cancelation period of at least 
90 days in the contract, plus more time if there has been a material 
breach of the contract or a material violation of law should be 
prohibited.
    A cancelation period gives consumers time to assess whether a 
product or service is right for them. In the case of debt relief 
services, a minimum of 90 days to cancel with return of all monies paid 
except for payments that have already been made to creditors would 
enable consumers to make that assessment and provide a disincentive for 
debt relief services to market to and contract with consumers who are 
not likely to benefit from the services.
    We also suggest that consumers should have the right to cancel in 
the event of a material violation of law or breach of contract by the 
seller. This would protect consumers from the worst actors and give a 
competitive advantage to sellers who honor the law and comply with 
their contractual promises.

3. Inbound calls for debt relief services must be covered by the rule.
    We strongly support the extension of the existing telemarketing 
sales rule's disclosure and misrepresentation provisions to inbound 
calls to debt relief services. Limiting the coverage only to outbound 
calls would ignore the marketing realities and allow a very large 
loophole in the TSR to continue. For-profit debt counseling, debt 
settlement, and debt negotiation services are commonly advertised on 
the Internet, on television, and by other means which are designed to 
induce the consumer to make an inbound call. Protecting the consumer 
from misrepresentation and requiring disclosure of key information only 
for those potential debt relief customers who receive a phone call, 
rather than also for those who are induced by an advertisement to make 
a phone call, would make no policy sense, leave a large loophole in 
place, encourage evasion of the rules, and give a competitive advantage 
to those who use advertising to induce inbound calls.
    An additional reason that inbound calls must be covered is the role 
of lead generators. For example, National Consumer Council used pre-
recorded messages left on consumers' answering machines as well as 
direct mail to induce consumers to call in order to generate leads for 
several other companies. Both the representations used to induce calls 
from consumers and those made during the calls should be covered. The 
TSR should make clear that it applies to lead generators. Furthermore, 
we believe that the debt relief providers who accept those leads to 
should be held responsible for the representations made to generate 
them, including those made during inbound calls.

4. We support the disclosures required in the proposed amendments.
    Consumers must be told the truth about the debt relief services. It 
is very important that the current general disclosure requirements 
under the TSR apply to inbound calls for debt services as well as 
outbound calls, as the FTC has proposed. We also agree that the 
additional disclosures pertaining to debt relief services are needed. 
They will help consumers understand exactly how these services work, 
what to expect from them, and whether they are likely to serve their 
needs. Combined with the advance fee ban, the disclosures would provide 
strong consumer protection.
    The disclosures will also help consumers understand their own 
obligations and the impact that the services may have on them. For 
example, it is crucial for consumers to know that contracting with a 
debt relief service will not necessarily prevent their creditors from 
taking collection action, that their credit ratings may be affected, 
and that the savings they may realize may be considered taxable income, 
and that the debt balance increases when payments are not being made.
    We understand that payments for debt relief services are often 
debited from consumers' bank accounts within a few days after they have 
enrolled in the programs. However, if the disclosures are designed to 
help consumers make informed decisions about whether to sign up or not, 
they need the information before making the contractual commitment even 
if the payment will be later. Therefore, we suggest that  310.3 (a)(1) 
could be improved to provide greater protection to consumers, not just 
for debt relief services but in other types of telemarketing sales as 
well, if it required the disclosures to be made before the earlier of 
payment or an obligation to pay. The revised subsection would read:
    Before the earlier of payment or an obligation to pay for goods or 
services offered, and before any services are rendered, failing to 
disclose truthfully, in a clear and conspicuous manner, the following 
material information:

5. Prohibitions against specific misrepresentations are useful.
    We agree with the FTC that it is useful to add a specific 
prohibition in  310.3 (a)(2)(x) against misrepresenting any material 
aspect of a debt relief service, such as the amount of money or 
percentage of debt that consumers must accumulate before negotiations 
with their creditors are initiated, the effect of the service on 
collection efforts, how many consumers attain certain results, and 
whether the service is nonprofit. This provides greater clarity to debt 
relief service providers about what they can and cannot do.

6. The exemption for transactions that are not concluded until after a 
        face-to-face sales presentation should not apply to debt relief 
        services.
    We believe that the exemption under  310.6 (a)(3) should not apply 
to debt relief services. Even if the exemption may have made sense for 
certain types of telemarketing sales, in the sale of services to be 
delivered in the future such as debt relief, the fact of a face-to-face 
meeting simply does not create a sufficient safeguard. It would be far 
too easy for the real sales process to occur by phone or other remote 
means and then a simple signing meeting to be used to escape all 
application of the rule.
    Furthermore, a face-to-face exemption could create the anti-
competitive result in which industry players who deal with potential 
customers only via the Internet or phone must adhere to standards of 
disclosure, non-misrepresentation, and the very important advance fee 
restriction, while those who arrange for a face-to-face meeting do not.
Conclusion
    The ``police the marketplace'' approach taken by the FTC will 
protect not only consumers but any legitimate debt relief services that 
actually provide real benefits to consumers. Those debt relief services 
will be entitled to fees, and should have a better chance of succeeding 
in the marketplace when their competitors are stopped from taking 
significant fees without achieving real debt relief.
    We agree with the FTC that additional measures must be taken to 
address America's debt problem, including continued enforcement, 
consumer education, and more flexibility in the options that creditors 
provide to consumers. There should also be obligations for debt relief 
services that may go beyond the scope of the TSR. For example, debt 
relief providers should be required to conduct an individual financial 
analysis for all potential customers to determine whether the service 
is suitable for and will provide a tangible net benefit to them before 
enrolling them.
    Furthermore, there should be similar rules to protect debt relief 
customers when the use of the telephone is not involved in the 
transaction, such as when they are solicited for and enroll in debt 
relief services entirely through the Internet.
    The FTC has not included mortgage foreclosure rescue and 
modification services in the proposed amendments to the TSR because it 
has received authority from Congress to promulgate separate rules in 
that regard. However, the issues are very much the same and the FTC 
should address them with equally strong rules.
    We believe that the proposed amendments to the TSR are a good and 
necessary step to protect debt relief customers from false promises and 
financial injury. We appreciate the opportunity to provide our comments 
and will be happy to answer any questions that the FTC may have in 
regard to our views and suggestions.
            Submitted by:
                                               Susan Grant,
                                   Director of Consumer Protection,
                                        Consumer Federation of America.
On behalf of:

Consumer Federation of America
Consumers Union
Consumer Action
The National Consumer Law Center on behalf of its low income clients
The Center for Responsible Lending
The National Association of Consumer Advocates
The National Consumers League
U.S. PIRG
The Privacy Rights Clearinghouse
The Arizona Consumers Council
The Chicago Consumer Coalition
The Consumer Assistance Council
The Community Reinvestment Association of North Carolina
The Consumer Federation of the Southeast
Grassroots Organizing
Jacksonville Area Legal Aid, Inc.
The Maryland Consumer Rights Coalition
Mid-Minnesota Legal Assistance
The Virginia Citizens Consumer Council
                                 ______
                                 

           Economic Factors and the Debt Management Industry

     Richard A. Briesch, Ph.D.--Associate Professor, Cox School of 
                Business--Southern Methodist University

                                                     August 6, 2009
Executive Summary
    The current economic climate makes the need for debt management 
programs even more acute. More consumers are finding themselves in 
financial hardship due to high unemployment, low home equity rates, 
lack of access to bankruptcy protection, and the ``credit crunch'' so 
well documented in the press and by legislators. This economic climate 
implies that many consumers are one emergency away from financial 
hardship. There is no question that the multitude of people currently 
in financial distress need programs that reduce the principal of their 
debt to stave off bankruptcy (Manning 2009, Plunkett 2009).
    Debt management programs (DMPs) come in several forms, but their 
basic structure is similar: they require some sort of consumer 
education if they are accredited by national trade associations 
(Keating 2008, USOBA 2008), consumer participation is voluntary (Hunt 
2005, Plunkett 2009) and a plan is set up to make the consumer debt-
free in two to 5 years. The key differences in the organizations are 
the mechanisms they use to finance the organization and to help 
consumers pay off their debt (Hunt 2005, Plunkett 2009). In this paper, 
I refer to organizations that help consumers pay off their debt by 
reducing interest rates as consumer credit counseling services (CCCSs) 
and organizations that help consumers pay off their debt by reducing 
principal as Debt Settlement Programs (DSPs). The efficacy of these 
different approaches has been discussed by a variety of authors, but 
these discussions have lacked a clear and detailed consumer welfare 
analysis, which is provided in this research.
    One of the most important findings of this research is that the 
different approaches (CCCS or DSP) help consumers by increasing their 
economic welfare as compared to paying off the debt under the original 
conditions. However, the consumer welfare analysis suggests that DSPs 
create the greatest consumer welfare of any approach. In fact, consumer 
welfare is higher under DSPs than under the 60-60 rule (repay 60 
percent of the debt principal in 60 months) suggested in the literature 
(see e.g., Keating 2008, Manning 2009). If consumers are allowed to 
repay their debt over 3 years, the affordability of the DSPs (as 
measured by monthly payments) is similar to the affordability of a 
program based upon the 60-60 rule. Additionally, creditors are helped 
by both CCCSs and DSPs as their losses are lower when consumers use 
DMPs as opposed to other alternatives.
    This research empirically examines the efficacy of one DSP company 
in this industry. Key findings, which are consistent with the 
observation that programs which reduce the principal of the debt may be 
the only means to keep a growing number of consumers out of bankruptcy, 
include:

        1. Accurate measures of consumer completion and cancellation 
        cannot be calculated from the data, as almost 30 percent of the 
        cancellations are due to the consumers either directly paying 
        off the debt or being forced into bankruptcy. Further, the 
        cancellation data does not contain information regarding offers 
        received or debt repaid, so it does not accurately reflect 
        value generated by the company. That said, the raw cancellation 
        rate (60 percent over 2 years) is much less than speculated (85 
        percent within 1 year) and is similar to or better than other 
        subscription-based service industries (e.g., mobile telephone 
        and cable television companies) that have Better Business 
        Bureau certified members.

        2. Conditional on the consumer receiving an offer or 
        settlement, the firm had mean, median and mode settlement 
        offers at or below 50 percent of the original debt. This number 
        beats the 60-60 rule and suggests that the firm is generating 
        significant consumer benefits.

        3. The debt settlement company generates tremendous value to 
        its clients, as more than 57 percent of the clients have offers 
        to settle at least 70 percent of their original debt, and the 
        most common situation (almost 30 percent of the clients) having 
        settlement offers for at least 90 percent of their original 
        debt.

        4. The debt settlement company has an increasingly higher value 
        to customers with higher account balances and higher total 
        debt, but lower number of accounts.

        5. Once ``fair share'' payments are taken into account, CCCS 
        fees and payments for a consumer account can exceed 29 percent 
        of the consumer debt, levels which Plunkett (2009) calls 
        ``exorbitant.'' This finding suggests that regulation is 
        required to ensure transparent reporting of all fees and 
        payments is required for all companies offering Debt Management 
        Programs.

        6. Reasonable upfront fees by DSPs (before settlement) should 
        be allowed because DSPs generate value for consumers and incur 
        expenses generating this value. This fee structure is similar 
        in nature to the one used by CCCSs, attorneys and other 
        service-providing firms.

    These findings suggest that a ``common sense'' approach should be 
used with the DMP industry. A common sense approach implies that 
regulatory and other consumer advocacy groups focus on ensuring that 
there is sufficient regulation to be able to identify and, if 
necessary, prosecute bad actors without harming economic competition 
which increases consumer welfare. The industry analysis also suggests 
several regulatory recommendations which could further benefit 
consumers:

        1. Focus on making alternatives transparent so consumers can 
        make better decisions: disclose total fees including ``fair 
        share'' and all other consumer fees, success metrics of offers 
        received, settlements accepted and percent of debt settled. 
        This disclosure has the additional benefit of allowing 
        interested third parties, e.g., consumer advocacy groups and 
        government agencies, to calculate the economic impact of this 
        industry on consumers and other industries.

        2. Provide guidance for handling of client monies in 
        ``fiduciary'' accounts, especially in terms of timing between 
        audits, what happens if a consumer cancels service, appropriate 
        interest rates, and whether or not (and under what 
        circumstances) companies can make payments on behalf of 
        consumers. The regulators should allow DSPs to establish trust 
        accounts with their clients, which would include:

                a. Requiring consumers to save money every month as one 
                condition of making ``satisfactory progress'' in the 
                program. DSPs should have the ability to monitor, but 
                not control (or make disbursements from) these funds.

                b. Proving regulatory protection for consumers from 
                litigation and creditor calls while consumers are 
                making ``satisfactory progress.'' Other protections to 
                ensure that consumers are protected from cancellation 
                fees paid to DSPs and unethical business practices, 
                e.g., ensure that the financial institutions holding 
                the funds are independent of the DSPs and no fees are 
                disbursed from the accounts without full disclosure and 
                regulatory oversight and approval.

                c. Allowing disbursements from these accounts only with 
                consumer and DSP approval and for payment to creditors, 
                approved fees, and to the consumer if they cancel the 
                program or for new financial hardships.

        3. Require financial education of consumer, and require 
        specific metrics in terms of meeting short-term and long-term 
        education and outcomes (see, e.g., Clancy and Carroll 2007, 
        Keating 2008, Staten and Barron 2006).

Introduction
    While the current economic climate (discussed below) provides 
strong support for programs which help consumers get out of debt, the 
strongest arguments for programs which take the approach of reducing 
the principal comes from organizations and individuals who are either 
antagonistic or agnostic to this approach. For instance, the 2005 
Bankruptcy Abuse Prevention and Consumer Protection Act (or BAPCPA) 
suggests a ``60-60'' standard for debt repayment outside of bankruptcy, 
where the 60-60 refers to the consumer entering into an agreement with 
their creditors 60 days prior to bankruptcy to repay 60 percent of 
their debt within a ``reasonable'' timeframe. Additionally, both 
Plunkett (2009) and Keating (2008), who use pretty strong rhetoric in 
denouncing companies using this approach, support a 60-60 rule that 
allows consumers to repay 60 percent of their debt within 60 months and 
acknowledge that a growing number of consumers may be forced into 
bankruptcy without access to ethical and proconsumer companies offering 
this alternative. For the remainder of this document, the term ``60-60 
rule'' refers to repaying 60 percent of the debt within 60 months, not 
the BAPCPA plans.
    Within the debt management industry, firms have taken two different 
approaches in their debt management programs (DMPs). The first 
approach, called Consumer Credit Counseling Services (or CCCSs), helps 
consumers by reducing the interest payments and, potentially, fees on 
the debt, but still has consumers pay 100 percent of the principal. The 
second approach, called Debt Settlement Programs (or DSPs), helps 
consumers by reducing the principal on the debt (Hunt 2005, Plunkett 
2009). These approaches also differ in how the firms are funded and 
their taxable status. CCCSs are generally nonprofit firms and are 
funded by both account maintenance fees from consumers as well as 
``donations'' from creditors which may take the form of ``fair share'' 
payments and/or direct grants (Boas et al., 2003, Plunkett 2009). DSPs, 
on the other hand, are generally for-profit firms, and are funded 
through fees charged directly to consumers without any payments from 
the creditors (Hunt 2005).
    Before proceeding further, I acknowledge that both types of 
organizations have had firms which have taken advantage of vulnerable 
consumers (US Senate Hearings 2005, Clancy and Carroll 2007, Plunkett 
2009), so some of the heated rhetoric directed at different approaches 
by organizations with vested interests is not only self-serving, but is 
also counterproductive. The focus of legislative efforts should be to 
protect consumer welfare by ensuring that the goals of the industry 
(consumer education and debt relief) are met, to ensure that 
organizations act in ethical and transparent ways and to impose 
appropriate sanctions on any company that willfully take advantage of 
consumers, i.e., ``bad actors.''
    One of the reasons that I argue that the heated rhetoric and trying 
to use regulation to eliminate other approaches are counterproductive 
is based on the notion that competition produces efficiencies, which, 
in turn, increase consumer welfare and economic growth. A fundamental 
principal of the Federal Trade Commission is that competition benefits 
consumers through lower prices and increased variety. This philosophy 
is summarized as:

        Competition in America is about price, selection and service. 
        It benefits consumers by keeping prices low and the quality and 
        choice of goods and services high (FTC 2009a).

    Therefore, rather than take the position of being an advocate for a 
specific approach to helping consumers to get out of their situation, 
this research is focused on understanding the different approaches and 
calculating the consumer benefits associated with each approach. The 
benefits are measured in terms of both total consumer welfare (i.e., 
how much will consumers pay in total for different approaches) consumer 
affordability (how much must the consumer pay each month), and how much 
are firms collecting as a percentage of the original debt from the 
consumers and creditors. It is important to include payments from 
creditors to the firms, as they represent indirect fees charged to 
consumers because the creditors should be indifferent between giving 
consumers a discount of the same amount that they pay the firms in 
``fair share'' payments or any other way the firm is compensated.
    Probably the most important finding of this research is that both 
CCCSs and DSPs increase consumer welfare over the alternative of the 
consumer paying off their debt using a fixed payment of 2 percent of 
their original debt every month (the recommended minimum payment). 
However, DSPs increase consumer welfare much more than CCCSs and have 
similar affordability to CCCSs when the payments can be made over 3 
years (instead of 5 years for CCCSs). Given the findings in the extant 
literature that creditors are also better off when consumers use DMPs, 
it appears that DMPs are a ``win-win'' for both consumers and 
creditors, so regulators should be encouraged to use a common sense 
approach to this industry: protect the vulnerable consumers while 
supporting competition among the different approaches to getting rid of 
consumer debt. This competition is consistent with the Federal Trade 
Commission's approach to other industries and would result in increased 
consumer welfare over the long term.
    Some of the key recommendations for regulatory agencies include: 
(1) protecting consumers from litigation and calls/threats from 
creditors while they are making ``satisfactory progress'' in accredited 
DMPs. Satisfactory progress needs to have measurements related to 
educational goals as well as financial goals (i.e., being current on 
payments for CCCSs and saving enough for DSPs); (2) providing DSPs with 
the ability to set up trust accounts for their clients that have very 
specific limitations on disbursements (i.e., approved payments to 
creditors, approved fees to DSPs, payments to consumers for 
cancellation or new hardships, etc.); (3) require full disclosure of 
all fees consumers directly or indirectly (e.g., ``fair share'' 
payments, grants from creditors, etc.) pay; and (4) provide guidance of 
how companies can accurately measure program effectiveness, e.g., does 
receiving offers for all enrolled debt constitute program completion?
    The remainder of this document is organized as follows. In the next 
section, the economic factors which are increasing the necessity of 
this industry are briefly reviewed. Next, the different alternatives 
are provided with an eye toward understanding the economics and 
limitations of the alternatives. In section three, the performance of a 
specific DSP is analyzed. This firm provided a significant dataset, the 
details of 4,500 randomly selected clients. In analyzing the clients, 
we use a stratified sampling approach, also called a ``strata 
approach.'' The clients are combined into different groups, based upon 
their debt levels. These different stratums are then analyzed to see if 
consumer behavior or firm performance differs between the groups. As 
far as we know, this type of analysis of the efficacy of Debt 
Settlement Programs has not been published.
    In the next section, the economics (both for consumers and the 
firms) of the debt management programs is analyzed in more detail. 
Specifically, consumer welfare is estimated and compared under a 
variety of assumptions. This paper concludes with public policy and 
industry recommendations.

Current Economic Climate
    The importance of the consumer debt management industry has become 
increasingly important as the U.S. economic recession continues. Table 
1 shows the seasonally adjusted unemployment rate in the United States, 
which has reached 9.4 percent as of May 2009.

                     Table 1--U.S. Unemployment Rate
------------------------------------------------------------------------
         Year                    Month                   Percent
------------------------------------------------------------------------
2008                    May                     5.5
                        Jun                     5.6
                        Jul                     5.8
                        Aug                     6.2
                        Sep                     6.2
                        Oct                     6.6
                        Nov                     6.8
                        Dec                     7.2
2009                    Jan                     7.6
                        Feb                     8.1
                        Mar                     8.5
                        Apr                     8.9
                        May                     9.4
------------------------------------------------------------------------
Source: U.S. Bureau of Labor Statistics (http://www.bls.gov/opub/ted/).

    Even worse, the long-term unemployment rate (those unemployed more 
than 27 weeks), rose in May by 268,000 to 3.9 million U.S. Households, 
roughly triple the number at the start of the recession (U.S. Bureau of 
Labor Statistics 2009). Note that employment is generally a lagging 
indicator (e.g., it improves after the economy improves), an uptick in 
the U.S. economy will not provide immediate relief for these 
households.
    The high unemployment rate coupled with the fact that the average 
credit card balance at the end of 2008 was more than $10,000 for 
approximately 91 million households (158 million individuals or 78 
percent of all households) who have credit cards (Woolsey and Schulz 
2009). A silver lining is that in April of 2009, seasonally adjusted 
total consumer debt was decreasing at a 7.5 percent annual rate 
(Federal Reserve 2009). However, household leverage (total debt to 
disposable income), while decreasing, still remains at 130 percent from 
a high of 133 percent in 2007. This number can be contrasted to the 55 
percent leverage in the 1960s and 65 percent leverage in 1980s 
(Zuckerman and Todd 2009).
    An implication of these statistics is that many consumers are 
barely able to pay their debts and are one emergency away from 
financial hardship--a recent study found that medical bills were a 
contributing factor in more than 60 percent of all bankruptcy filings 
(Himmelstein et al., 2007). From this hypothesis, one would then expect 
consumer credit card and personal loan default rates to be increasing. 
Figure 1 confirms this belief, as consumer default rates on credit 
cards stands at 7.49 percent in the first quarter of 2009, and consumer 
defaults on personal loans stand at 2.93 percent in the same period. If 
anything, these numbers understate the problems consumers are having. 
In a report prepared for the National Foundation for Credit Counseling, 
Harris Interactive (2009) found:

   26 percent of households admitted to not paying their bills 
        on time. Minorities may be more severely impacted, with this 
        number rising to 51 percent for African American households.

   In the last 12 months, 15 percent of individuals were late 
        paying a credit card and 8 percent admitted to missing at least 
        one payment, and 6 percent have their debts in collection.

   32 percent admit that they have no savings, and only 23 
        percent state that they were saving more than a year ago.

   57 percent of households do not have a budget, and 41 
        percent give themselves a grade of C, D, or F in their 
        financial knowledge.

    One may conclude that given the financial turmoil in this market, 
credit card companies may be hurt as well. However, a recent study 
found that since the bankruptcy law was reformed in October 2005 (2005 
Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA), the 
credit card industry has recorded record profits, although more factors 
(e.g., interest rate spreads, increased fees, etc.) enter into this 
profitability than simply the increased difficulty of entering into 
bankruptcy (Simkovic 2009).
    A recent study estimated that as many as 800,000 households have 
been precluded from entering bankruptcy due to BAPCPA (Lawless et al., 
2008). Therefore, the need for a service which helps consumers manage 
and pay down their debts and to work with the credit card companies is 
more acute than ever. In fact, recent legislation requires credit card 
companies to recommend credit counseling education and debt management 
programs to consumers in financial trouble (Reddy 2009). So what are 
consumers' alternatives when they find themselves in financial 
hardship? Their alternatives are grouped into four broad categories 
(Hunt 2005) that vary in terms of a continuum of how much of the debt 
can the consumers afford to repay (all, partial or nothing):

        1. Bankruptcy--either chapter 7 or chapter 13.

        2. Debt Management Programs--This includes any service which 
        tries to help the consumers pay off their debts (outside of 
        bankruptcy) either through reduction in interest rates, debt 
        reduction or other means.

        3. Other financing--This includes raising money through sales 
        or refinancing of current assets (e.g., home equity loan).

        4. Repayments on original terms.

Figure 1--Bank Charge Off Percentages



    Source: U.S. Federal Reserve Bank.

Overview of Consumer Alternatives
    This section provides an overview of the different alternatives 
that are available to consumers who are in financial hardship. Before 
discussing the alternatives, a brief discussion of the process or 
stages involved is provided (based on Mojica 2009).*
---------------------------------------------------------------------------
    \*\ Sources: Bank of America 2008 10K; page 127--Table 15, page 
128--Table 16, page 172--Table 37; American Express 10K; page 50, page 
56; Chase 2008 10K; page 155, page 81, page 128; CapitalOne 2008 10K; 
page 73--Table C, page 76--Table F.
---------------------------------------------------------------------------
1. Financial Hardship
    First, consumers have some financial hardship which limits a 
family's ability to continue paying their debts. For instance, 
Himmelstein et al. (2007) found that medical bills were a contributing 
factor in more than 60 percent of all bankruptcy filings and that 
medical portion of the debt was more than $5,000 or 10 percent of 
family income. A creditors willingness to work with a consumer, e.g., 
give grace periods, reduce interest rates and/or debts, is directly 
linked to the consumer's ability to demonstrate that a true hardship 
was the cause of the household's financial crisis (Dash 2009).

2. 30 Days
    Once the consumer is at least 30 days late in payment, and for 
every 30 days thereafter, a notice is sent to credit bureaus indicating 
delinquency. At this point the consumer usually starts receiving calls 
from the creditors requesting payment. Eventually, credit cards and 
other revolving credit are canceled for the consumer. Once the account 
is delinquent, credit card fees may be dramatically increased, although 
new Federal legislation has put curbs on credit card companies in terms 
of fees and interest rate changes (Reddy 2009). Reddy did cite a 
consumer whose interest rate jumped from 12 percent to 24 percent due 
to late payments even though the credit card company did agree to work 
with the consumer.
    In the current economic crisis, credit cards are willing to extend 
the grace periods for consumers who have true hardships, even reducing 
the total debt amount. However, these deals come at a price--a 
consumer's credit score may drop 70 to 130 points as a result (Dash 
2009).

3. Six Months
    The creditor writes off the debt. At this point, the account may be 
sold, sent to a collections agency or a law firm. Generally, the amount 
of debt collected by these agencies varies, but examination of 10K 
reports from various creditors indicates that credit card companies are 
receiving about 10 percent of the outstanding debt when it is sold.
    More recently, credit cards have become more willing to negotiate 
terms with consumers, but they generally require that consumers be at 
least 90 days delinquent and are accepting ``dimes if not pennies on 
the dollar'' (Dash 2009). Given the relatively low recovery rate, it 
suggests that other alternatives (e.g., lawsuits, selling debts to 
collection agencies) provide even lower returns for the creditors.

4. Lawsuit as Option
    Creditors may sue consumers to collect bills. From a consumer 
standpoint, this option adds legal fees to the debt they already cannot 
afford. Assuming that the creditor gets a judgment, it may be enforced 
by garnishing wages, sales of assets, etc.
    From a consumer standpoint, there is a mine field waiting for them 
once they get into financial trouble. Generally, the creditors will not 
work with a consumer until they are at least 90 days delinquent, and 
they may increase interest rates or fees simply because the consumer 
contacts the creditor for help (Dash 2009). Further, creditors are more 
likely to help consumers who do not have a history of financial 
troubles, so they are less likely to help those most in need (Dash 
2009). Under a practice known a ``global default'', creditors can move 
an account that is current into default because the consumer is 
delinquent to a different creditor, (see, e.g., testimony U.S. 
Committee on Financial Services 2007). Once the credit card is in 
default, legislation limiting harassing calls really does not apply to 
the original creditors, only third party collectors. One would expect 
very high dropout or cancellation rates for the first 6 months a 
consumer is enrolled in a program, until the regulatory protections 
take effect. Therefore, some sort of protection for consumers who want 
to settle their debt and have enrolled in certified debt management 
programs is required. Ironically, studies have found that credit card 
losses are 32 percent lower for the clients who enter DMPs before fair 
share payments are included (Hunt 2005), so it is against the creditors 
own best interests to force the consumer into litigation. England has 
solved this problem for their consumers in financial difficulty using 
the insolvency act of 1986. In this act, if enough creditors (generally 
75 percent) agree to the debt reduction plan, the other creditors are 
legally bound by the repayment plan even if they did not agree to the 
plan.
Bankruptcy*
---------------------------------------------------------------------------
    \*\ Source: Fair Debt Collections Practices Act (FDCPA) at http://
www.ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf. See http://
www.insolvency.gov.uk/insolvencyprofessionandlegis
lation/legislation/uk/insolvencyact.pdf, for a description of the 
insolvency act of 1986 which established this system.
---------------------------------------------------------------------------
    Both Chapter 7 and Chapter 13 bankruptcy are legal means of 
settling debts. Chapter 7 is a liquidation of assets, and the reform 
act of 2005 (2005 Bankruptcy Abuse Prevention and Consumer Protection 
Act or BAPCPA) placed many hurdles for consumers to use Chapter 7 (and 
instead force them to use Chapter 13). These hurdles includes means 
testing, higher fees and increased costs and risks for those assisting 
consumers filing Chapter 7 (Simkovic 2009). Once a consumer uses 
chapter 7, they cannot file again for 8 years and are limited in filing 
for other legal remedies for several years. Additionally, the filing 
stays on their credit report for 10 years (Hunt 2005). One unfortunate 
side effect of filing bankruptcy is that many employers check potential 
employee credit history, so this may have an effect on future income 
and job prospects.
    Chapter 13 filings on the other hand are considered ``wage earner 
plans'' where the debt amount is reduced based on the consumer's 
ability to pay, and a plan is set up so that consumers pay their debts 
in three to 5 years (Hunt 2005). Hunt (2005) suggests that attorney and 
trustee fees amount to approximately 14 percent of the debt, and 
creditors' average about 35 percent recovery of the debt. However, he 
also suggests that only 33 percent of consumers finish the program, 
less than the average for voluntary debt management programs. In a 
white paper, the United States Organization for Bankruptcy Alternatives 
suggests that the completion rate is much lower, only 20 percent to 25 
percent (USOBA 2008). As with Chapter 7, Chapter 13 filings go on a 
consumer's credit report (although for a shorter period of time), and 
their ability to file in later years is limited.
    Bankruptcy as an alternative for most consumers has become much 
more limited since BAPCPA was passed in 2005 (Lawless et al., 2008). 
They estimate that as many as 800,000 U.S. households have been 
prevented from filing bankruptcy in the last few years.
    However, this does not mean that total bankruptcy filings are down, 
only that consumers are being moved from Chapter 7 (liquidation) to 
Chapter 13 (partial payment) to move this option away from paying 
nothing toward paying something. When these settlements are sold on the 
open market, they generally receive only 18-21 cents on the dollar 
(Manning 2009). Given the above estimates that the judgments only 
return 35 cents on the dollar, the net effect to the creditors is that 
they only receive pennies on the dollar through this route. One would 
expect that creditors would attempt to stay away from this alternative.
    However, once there is more than one creditor, they face a classic 
``prisoner's dilemma'' (Poundstone 1992). The basic idea is that even 
though all of the creditors are better off by avoiding bankruptcy and 
legal judgments, each individual creditor is better off by cheating 
(e.g., initiating legal judgments to be the first one in line). This 
problem has also been called the creditor's dilemma (Bainbridge 1986). 
Therefore, some regulatory guidance is required beyond BAPCPA, which 
suggests the 60-60 (pay off 60 percent of debt in 60 months) as a 
standard, and would limit creditors to 80 percent of the debt principal 
if they do not reach an agreement (Manning 2009). Assuming that they 
collect on the judgment, this 80 percent rule provides the wrong 
incentive to the creditors, as they are better off using litigation. 
Therefore this 80 percent standard should be lowered to 60 percent to 
match the 60-60 rule.
    Consumers must also go through counseling services (regardless of 
whether or not they enroll in debt management programs) prior to filing 
for bankruptcy. The National Foundation for Credit Counseling estimated 
that their members provided 1.26 million education sessions for 
bankruptcy in 2007 (Keating 2008). Some recent research has suggested 
that the educational component may be important for consumers (Staten 
and Barron 2006). Staten and Barron find that consumers who enter 
counseling are significantly less likely to file for bankruptcy in 
later years, and have significantly lower risk scores than consumers 
who choose to not enter counseling.
    A nagging concern is whether the reason for the good outcomes is 
self-selection (e.g., motivation of consumers) or efficacy of the 
program (Clancy and Carroll 2007; Hunt 2005). That said, academic 
arguments over the source of the outcomes of these programs miss the 
key point. Regardless of the underlying cause, if consumers are more 
successful once they enter the programs, shouldn't those programs be 
encouraged and protections for consumers who are making satisfactory 
progress enacted, so that their chance of finishing the programs and 
gaining their benefits are enhanced? This is a classical agency problem 
where the credit card companies (and public policy) should not care 
about why clients are more successful, only that they are more 
successful once they enter into the educational programs. While it may 
be difficult to determine measures of the program outcomes, an approach 
similar to that used in Stanten and Barron (2006) where consumers are 
surveyed years after exiting the programs to determine financial health 
through risk scores, credit scores, bankruptcy rates and other measures 
would seem to be a good start and should be required for all 
organizations offering counseling services.

Refinance
    Refinancing the debt using assets is a viable alternative for only 
a few consumers, as it requires consumers to receive appropriate 
interest rates and to have sufficient equity in their home or other 
assets to pay down the debt. The second criteria can be a very high 
hurdle given that the median household filing bankruptcy has a negative 
$25,000 net worth (Lawless et al., 2008) and that household home equity 
is at historic lows--below 50 percent--and economists expect this trend 
to continue (AP 2008, Keating 2008).
    The other problem is that some consumers may have already used this 
option to pay off debts or to get needed cash for ongoing expenses, 
even education (Chu and Achohido 2008). Given the current crisis in 
getting loans, declining home values and variable interest rate 
mortgages that are getting ready to reset, this option is becoming less 
viable for most consumers (Manning 2009).
    The problem is that the credit cards use risk assessment to set 
interest rates, implying that consumer interest rates increase once 
delinquencies are noted on their credit reports (Chu and Achohido 2008, 
Plunkett 2009). A clear consequence is that consumers may not receive 
good interest rates, even on a home equity loan due to the credit 
problems. In addition, by refinancing, a consumer can lose their assets 
(e.g., their homes and cars) if they default on the loan as they have 
converted unsecured debt into secured debt.

Debt Management Programs
    Debt management programs (DMPs) come in several forms, but their 
basic structure is similar: they require some sort of consumer 
education if they are accredited by national trade associations 
(Keating 2008, USOBA 2008), consumer participation is voluntary (Hunt 
2005, Plunkett 2009) and a plan is set up to make the consumer debt-
free in two to 5 years. The key differences in the organizations are 
the mechanisms they use to finance the organization (consumer fees vs. 
``fair share'' payments from credit card companies) and to pay off 
consumer debt (reduce interest rates and fees vs. reduce debt 
principal) (Hunt 2005, Plunkett 2009). In this paper, I refer to 
organizations that reduce interest rates as consumer credit counseling 
services (CCCSs) and organizations which reduce principal as Debt 
Settlement Programs (DSPs). It should be noted that neither of these 
organizations can force the creditors to accept their terms. It is the 
case that some creditors do not work with DMPs (of either type) or only 
make very small concessions (Hunt 2005). Given the national 
organization's call for debt principal reduction as part of DMPs, it 
appears that, over time, the distinction between these two types of 
organizations may blur (Keating 2008), making a stronger case for the 
strong value of DSPs to consumers.
    The importance of full disclosure of the funding sources cannot be 
overstated. Because the CCCSs receive some of their funding from the 
creditors (Keating (2008) estimates that about 50 percent of the 
funding for CCCSs come from creditors), there is a conflict of interest 
for these organizations, especially when the funding is tied to the 
amount of debt under management (Boas et al., 2003, Hunt 2005, Manning 
2004). Second, because the CCCSs receive some of their fees indirectly, 
there may be an impression that they are less expensive than DSPs. 
However, the economic welfare of the creditors is unchanged if they 
give these fees to consumers as a reduction in the debt principal 
instead of to the CCCSs in the form of grants or ``fair share'' 
payments. Therefore, consumers are paying increased and undisclosed 
fees in their monthly payments. Further, the FTC recommends consumers 
ask about the funding sources as part of their consumer protection 
program (FTC 2009c). I believe that stronger action should be taken, 
requiring disclosure of the fees, as information is the basis of 
education, and education is the first line of defense against fraud and 
deception, it can help you make well-informed decisions before you 
spend your money (FTC 2009b).

Consumer Credit Counseling Services (CCCSs)
    CCCSs generally try to get rid of a consumer's debt over 5 years 
and generally receive the majority of their funding from credit card 
companies (Boas et al., 2003, Hunt 2005), although the terms of the 
agreements have been evolving over time. Hunt states that the average 
account set up fee is $25 and monthly maintenance fee is $15. Over 5 
years, this translates into $910 paid directly to the CCCS. 
Additionally, he notes the firms receive ``fair share'' payments (or 
even grants) from the credit card companies which average 6 percent of 
the amount that the credit card receives--which is more than 6 percent 
of the debt. For instance, assuming equal payments over 5 years and a 
10-percent interest rate, a consumer with $10,000 in debt will pay 
$12,748.23 to the credit card company, which implies that the 
consolidator would receive another $764.89 in fees (for a total of 16.7 
percent of the debt). The levels of the fees in this example appear to 
be similar to those in Chapter 13 bankruptcy noted above.
    It should be noted that CCCSs collect the money from the consumers 
and distribute the money to the creditors (Boas et al., 2003), which 
implies a fiduciary duty is accepted by these organizations. However, 
they implicitly assume that consumers will pay back 100 percent of the 
debt, only at a reduced interest rate and potential reduction of some 
or all of the fees.
    Therefore, not only do they not conform to the 60-60 rule noted 
above, but this alternative may not be viable for some consumers who 
could pay back the debt under the 60-60 rule, forcing them into 
litigation and/or bankruptcy (Manning 2009).
    From a consumer welfare standpoint, the key drivers of consumer 
welfare are the terms of the agreement: how much are the interest rates 
reduced, and how many payments are required? Plunkett (2009) suggests 
that these terms vary widely by creditor and by CCCS, so one area of 
needed disclosure are median terms negotiated by the CCCS for each 
creditor, as well as median consumer fees and ``fair share'' payments 
and/or grants from creditors. Clearly, the CCCS would need to disclose 
to their customers if a creditor did not accept the terms presented and 
would need to adjust the required payments.
    In terms of calculating efficacy of the programs, both measures and 
approaches for the educational component are discussed above, so I 
focus on the debt reduction portion of the business. One set of 
measurements relate to the terms negotiated with the creditors. For 
instance, in the settlement offers and final settlements, how much is 
the original debt amount reduced? And how much of the original debt 
receives settlement offers? A second set of measurements are the 
successful completion rates of the program, although without some 
regulatory protection of consumers enrolled in these programs, these 
are not accurate measurements of firm performance because consumers can 
always be forced out of the programs through litigation by one or more 
creditors.

Debt Settlement Programs (DSPs)
    For DSPs, the general idea is to have the consumers save money and 
pay the creditors in one or a few payments (depending upon the size of 
the debt) with the goal of paying off the debt in two to 4 years. 
Instead of focusing on interest rates, DSPs negotiate to reduce the 
principal of the debt, which implies one set of metrics is their 
ability to meet or beat the 60-60 rule noted above. Details of the size 
of the principal reduction are missing in the literature (although they 
are examined in the next section for one company), but companies claim 
to be able to reduce up to 50 percent of the principal. Instead of 
taking money from the credit card companies, these organizations 
generally receive their fees from consumers. Plunkett (2009) writes 
that these fees average somewhere between 14 and 20 percent, and 
Manning (2004) claims that these fees can include a set up fee ranging 
from 2-4 percent, and service fees range from 15-25 percent.
    Without defending the veracity of the assumptions, if we take the 
same consumer above, who has $10,000 in debt, receives a 20 percent 
reduction in the debt principal and pays a lump sum at the end of 2 
years? The consumer would end up paying $8,000 to the Credit Card 
Company or $4,748 less than they would have under the CCCS example 
above. Whether or not the consumer is better off would then depend upon 
the fees charged--the consumer would be indifferent (i.e., pay the same 
amount) if the fees were $4,748+$910 or $5,658 (56.6 percent of the 
original debt).
    As with the CCCSs, consumer welfare is strongly influenced by the 
key assumptions of the model, i.e., number of years before lump-sum 
payment, interest rate and the principal reduction amount. This example 
also shows where some confusion may enter into marketing and other 
communications: the consumer received a 20 percent reduction from the 
initial debt, but did they still have to pay interest on the debt while 
saving for the payment (note the results are the same as making 
payments for 2 years). So, a consistent method of communicating the 
principal reductions is required, where the amount of the final payment 
in relation to the initial debt is reported. Similar to CCCSs, 
transparency implies that median settlements for different creditors 
and credit status (e.g., in litigation) would have different principal 
reductions and would need to be disclosed.
    This model has some unique difficulties as well as common problems 
with the CCCSs. A key difference would be that consumers (or clients) 
are not required to accept settlement offers from the creditors. 
Therefore, any metric which attempts to only look at settlements would 
tend to underestimate (i.e., bias) the effectiveness of DSPs, meaning 
that a second set of metrics related to offers received from creditors 
would also be required.
    A second problem for DSPs is whether or not they should put client 
money into fiduciary accounts. In the data provided by the DSP analyzed 
in the next section, 6.8 percent of the cancellations gave the 
inability to save as the reason that they canceled the service. On one 
hand, one could argue that the consumer must learn how to handle their 
savings to really get out of the cycle of debt, so no fiduciary 
accounts should be necessary. However, one could use the analogy of 
learning to crawl before learning to walk to analyze this situation. 
The end goal of the program is to have consumers self-sufficient, but 
they may need to learn how to save, and how to not dip into these 
savings for luxury items while paying off their debt. Therefore, it 
seems, at least at the beginning, the companies should at least monitor 
the savings of their clients to ensure that they are making progress.
    In a similar vein, one could argue that the companies should 
establish fiduciary accounts for their clients to ensure that they can 
actually pay off the offers once they are received. Otherwise, what 
should the company do with their clients who are not saving? However, 
the extant literature is ripe with examples of abuses for these 
accounts (see, e.g., Plunkett 2009). Therefore, guidance from 
regulatory, consumer advocacy and industry groups would be helpful in 
this area.
    My recommendation in this area is to strike a balance from the 
different approaches. First, allow DSPs to set up ``trust'' accounts 
where monies can only be released to pay creditors (with a signed 
letter from the creditor and consumer), to pay agreed upon reasonable 
program fees (agreed upon on the creation of the account) or refunded 
to the client upon termination of the program or upon demonstration of 
a new financial hardship (e.g., medical bills). Second, the DSPs should 
be allowed to monitor these accounts to ensure that their client is 
saving, and consumer saving being one condition of making 
``satisfactory progress'' in program. If the protections noted above 
were in place for consumers making ``satisfactory progress,'' the 
effect of not saving would remove their protections from creditors and 
litigation, creating a very strong incentive to save. It would be an 
interesting area for future research to investigate the savings rates 
for consumers who are enrolled in programs which have trust funds as an 
aspect of their programs.
    Finally, both CCCSs and DSPs suffer from the same problem where the 
original creditors (but not third parties) can continue calling them 
after they have signed up for a program and have asked (or the DMP has 
asked) for the creditors to stop calling (source: Fair Debt Collections 
Practices Act or FDCPA). Even worse, even though the consumer is trying 
to avoid bankruptcy and litigation, it can be forced upon the consumer 
by only one out of many creditors. This phenomenon has been called the 
``creditor's dilemma'' (Bainbridge 1986). In conversations with the DSP 
analyzed below fully 20.5 percent of the consumers who canceled the 
service gave bankruptcy as the reason for canceling the program, and 
another 19.3 percent who canceled the service gave a reason that was 
categorized as an ``outside influence.''
    The problem is that consumers may be acting in good faith and 
trying to climb out of debt, the DMP may be acting in good faith to 
help the consumer and most of the creditors can be acting in good faith 
working with the DMP and the consumer, but one creditor can force 
failure of the entire process. To be honest, I can't see a way out of 
this problem without regulatory action, as similar problems (called 
``prisoner's dilemmas'') have been extensively studied and the 
solutions generally require modifying incentives of the actors 
(Poundstone 1992). The clear implication is that consumers need 
regulatory protection from litigation and harassing calls while they 
are making satisfactory progress in these programs.

Timing of Fees
    Throughout the above discussion, the issue of when DMPs should 
receive fees has not been addressed, so this issue is addressed in this 
section. This issue is one of the most contentious for DSPs where 
Plunkett (2009) and others have suggested that other than small account 
set up fees, DSPs should not receive any fees until the debt is 
settled. A general response to this recommendation is that this 
requirement is analogous to forbidding insurance companies from 
collecting premiums until a claim is filed, or forbidding attorneys 
from collecting fees until the matter is settled or forbidding doctors 
or hospitals from collecting fees until the patient is healthy.
    The recommendation also ignores when value is created for the 
customers and when expenses are incurred by the DSPs in creating the 
value. DSPs create value for their clients in multiple ways. First, 
they offer financial education, budgeting, etc. as part of the program. 
Given that CCCSs charge consumers for this education (and receive 
Federal funding to support the education) (Keating 2008), there can be 
no argument that this provides value to the customers. Also, DSPs 
create value for the customers (and incur expense) when offers are 
received from creditors to reduce their debt (see empirical section 
below for quantification of this value) whether or not the consumers 
actually accept the offers. As shown in the next section, offers are 
received on some accounts within 2 months of enrollment in the program.
    This recommendation is also inconsistent with the way that CCCSs 
receive their fees. An analogous situation would require that CCCSs 
receive no fees (including grants and ``fair share'' payments from 
creditors and monthly account maintenance fees) until the debt is paid 
off (generally in 5 years), which would make the business economically 
unviable without massive government funding. Given the current Federal 
and state deficits, this funding is unlikely.
    Finally, the fact that consumers have to make payments, in and of 
itself, is educational. It forces consumers to get in the habit of 
saving and making payments. If the DSP has a ``trust'' account or is 
otherwise monitoring the savings of the client, similar expenses to 
those of CCCSs are incurred.
    Therefore, DSPs should be allowed to charge consumers fees prior to 
the final settlement because value is generated for the clients and 
expenses are incurred by the DSP to generate that value. That said, to 
help protect consumers, any fees before settlement should reflect 
actual value generated and expenses incurred. As noted above, full 
disclosure of fees is required for consumers to make good choices.

Repayment on Original Terms
    The problem with this alternative is that consumers are already 
delinquent and cannot afford the payments. The delinquency may be 
temporary, but even under the new credit card rules, consumers would 
still have 6 months of increased interest rate payments due to the late 
payment (Reddy 2009).

Analysis of Debt Settlement Program
    In this section, we analyze data from a DSP firm. The purpose of 
this section is to analyze specific performance metrics for the firm to 
establish as a basis for estimating consumer welfare in the next 
section. Given that the firm has not tracked education and financial 
health after a consumer leaves the program, these metrics are not 
analyzed. The remainder of this section is organized as follows: the 
next part provides a brief description of the data. Next, specific 
performance metrics are analyzed taking care to control for when a 
consumer enters the program.

Description of Data
    The firm provided three cohorts of random, stratified samples of 
their data. The data was stratified into the lowest quartile, middle 50 
percent and top quartile in terms of total indebtedness of the client 
with a random sample of 500 clients drawn from each stratum. Three 
cohorts were also drawn from the data: clients entering 24 months, 18 
months and 12 months prior to the date of the data being accessed. 
Therefore, the database contains 4500 clients--a very significant 
sample of consumers in this industry. The client confidentiality is 
maintained through no identifying information (e.g., demographics, 
names, credit card account numbers, etc.). One limitation of this data 
is that once a consumer cancels their account, no information is 
retained regarding offers, settlements, etc. That said, the sampling 
methods imply that the results can be applied to the entire database of 
clients for this firm. While the results may not be applicable to the 
industry as a whole without some strong assumptions, they are likely 
applicable to similar firms in industry and allow several conjectures 
to be examined in detail.
---------------------------------------------------------------------------
     Credit Solutions.
---------------------------------------------------------------------------
    All creditor accounts, offers to settle (whether or not the client 
accepted the offer), offer amounts, date of the offer, whether or not 
the offer was accepted and if/when the client canceled the account are 
included in the data. In addition, the original creditor was provided 
so the question of whether or not there are differences in settlement 
offers due to the volume of accounts could also be tested. Table 2 
provides simple descriptive statistics for the data.

                                   Table 2--Descriptive Statistics for Strata
----------------------------------------------------------------------------------------------------------------
                                   Stratum 1 (Lowest 25%)     Stratum 2 (Middle 50%)      Stratum 3 (Top 25%)
                                --------------------------------------------------------------------------------
                                   Mean    Median  Std Dev    Mean    Median  Std Dev    Mean    Median  Std Dev
----------------------------------------------------------------------------------------------------------------
Total Debt                         7,927    8,000    1,223   16,966   16,138    6,788   47,404   40,201   21,884
Num Accts                            3.7      3.0      1.7      4.6      4.0      3.3      6.3      6.0      3.3
Weeks in Program                    49.9     49.0     33.4     49.4     50.0     46.1     46.9     46.0     32.4
Pct Cancelled                       59.1                       58.1                       64.5
----------------------------------------------------------------------------------------------------------------

    Several points are obvious in the table. First, the median weeks 
are similar for the three stratums. Therefore, from a time in program 
standpoint, it appears the strata are identical. Second, as expected, 
the number of accounts increases as the total debt increases. Finally, 
the cancellation percentages are roughly similar across the different 
stratums. However, the top stratum appears to cancel at a much higher 
rate. We can calculate the weighted average cancellation rate to be 
approximately 60 percent, this rate is comparable to cell phone 
companies that average 2-3 percent monthly churn, or cancellation, 
rates (Mozer et al., 2000). Clearly, this rate is high, but it does 
compare very favorably with the 84 percent yearly churn rate (Plunkett 
2009). However, further analysis of the reasons for cancellation point 
to the difficulty in calculating accurate cancellation and/or 
completion rates.
    The reasons for cancellation for the customers in the database are 
summarized in the five reasons provided in Table 3. There are several 
striking results from this table. First, if the outcome of paying off 
debts is considered a success, then the cancellation rate is overstated 
because 14 percent of the consumers included as cancellations actually 
paid off their debt.

                   Table 3--Reasons for Cancellations
------------------------------------------------------------------------
                           Reason                             Percentage
------------------------------------------------------------------------
Bankruptcy (Chapter 7 or 13)                                       13.5%
Can't Save                                                          6.8%
Buyer's Remorse a                                                   9.2%
Settle/try to settle on own                                        14.0%
Other                                                              56.5%
------------------------------------------------------------------------
Note: a Buyers remorse is limited to those customers who cancel within
  30 days of the initial payment to the DSP, which can be 30-60 days
  from the initial enrollment date.

    Second, a significant portion of the consumers (13.5 percent) are 
being forced out of the program due to litigation. Therefore, 
protection of consumers from litigation is required for those consumers 
making satisfactory progress in the program. Third, a significant 
amount of the cancellations (6.8 percent) are due to consumers not 
being able to save. Because the DSP does not monitor/require savings, a 
significant portion of the cancellations could have been prevented by 
significant incentives for the consumers to save.
    Therefore, the aggregate cancellation rate is a poor measure of the 
quality of the service provided. To help put the cancellation rate into 
context, Table 4 provides yearly and monthly churn rates across a 
variety of industries, companies and time periods (selected sample from 
Kohs 2006) and shows that the churn rate is lower than or comparable to 
some companies and subscription-based industries which also have Better 
Business Bureau (BBB) certified members.

                Table 4--Churn rates in other industries
------------------------------------------------------------------------
  Annual     Monthly                                                Data
   Churn      Churn              Company               Industry     Year
------------------------------------------------------------------------
7.20%          0.62%  Sirius                        Satellite       2006
                                                     Radio
10.00%         0.88%                                Web Hosting     2003
10.00%         0.88%  Western Wireless              Wireless        2001
11.00%         0.97%  Alamosa PCS                   Wireless        2001
15.00%         1.35%  Nascar.com (premium           Sports Media    2004
                       subscribers)
16.00%         1.45%  Nextel                        Wireless        2005
17.00%         1.55%  Colorado teachers in          Education       2004
                       ``excellent'' schools
17.00%         1.55%  Schnader Harrison (lawyers)   Legal           2003
17.00%         1.55%                                DBS TV          2002
18.00%         1.65%  DirecTV                       DBS TV          2003
19.00%         1.76%  Alltel                        Wireless        2005
22.00%         2.07%  Analog cable subscribers      Cable TV        2002
23.00%         2.18%  Cingular                      Wireless        2005
23.00%         2.18%  Colorado teachers in          Education       2004
                       ``unsatisfactory'' schools
26.00%         2.51%  Sprint                        Wireless        2005
26.00%         2.51%  Subscribers                   Cable TV        2002
31.00%         3.09%                                Pagers          1998
34.80%         3.56%  T-Mobile                      Wireless        2005
35.00%         3.59%  Maricopa County (anglers)     Recreation      2002
45.00%         4.98%                                E-mail          2004
                                                     addresses
46.00%         5.13%                                Prepaid         2004
                                                     Calling
                                                     Cards
46.00%         5.13%  Digital cable subscribers     Cable TV        2002
51.00%         5.94%  Globe                         Prepaid         2004
                                                     Wireless
52.00%         6.12%  Florence (AL) Times Daily     Newspapers      2005
                       (readers)
58.00%         7.23%  Snowball.com                  E-mail          2000
                                                     newsletter
78.00%        12.62%  Touch Mobile                  Prepaid         2004
                                                     Wireless
93.00%        22.16%  VOOM                          HD TV           2004
93.00%        22.16%  Runoff at time of sale        Home Mortgage   2002
------------------------------------------------------------------------

Analysis of Data
    In this section, different performance metrics are examined for the 
firm at the client-level.
    The first set of metrics in Table 5 provides performance metrics 
that can be used to calculate consumer welfare. The first column 
represents the conditioning of the metric: Settle--did the client 
settle at least one account, Offer--did the client receive at least one 
offer on the account, Cancel--did the client cancel all of their 
accounts. Note that the company did not retain offer and settlement 
information once the accounts were canceled.

                                        Table 5--Consumer welfare metrics
----------------------------------------------------------------------------------------------------------------
                                     Stratum 1 (Lowest 25%)    Stratum 2 (Middle 50%)      Stratum 3 (Top 25%)
                                   -----------------------------------------------------------------------------
     Condition          Metric                          Std                       Std                       Std
                                      Mean    Median    Dev     Mean    Median    Dev     Mean    Median    Dev
----------------------------------------------------------------------------------------------------------------
                    % Debt             51.0     48.8    0.19     48.5     46.7    0.27     49.2     47.5    0.19
                    % Total Debt       54.7     50.7    0.30     54.1     50.6    0.45     53.1     49.4    0.32
Settle              % Accounts         52.0     50.0    0.27     51.5     50.0    0.39     53.0     50.0    0.29
                    Days first        211 a      189     116  196 a,b      177     154    183 b      163      99
                     settlement
                    % Debt             62.2     64.2    0.29     56.6     52.2    0.39     56.8     55.7    0.17
                    % Total Debt     56.5 b     51.5    0.18  63.7 a,     67.8    0.43   67.7 a     72.1    0.29
                                                                    b
Offer               % Accounts       57.3 b     50.0    0.28   59.6 b     50.0    0.40   64.7 a     66.7    0.28
                    Days first        210 a      188     126    186 b      172     148    168 c      148      95
                     offer
Cancel              Days Cancel         196      168     145      197      163     207      202      171     155
----------------------------------------------------------------------------------------------------------------
Notes: Superscript a>b>c with probability less than or equal to 5 percent than they are the same. Values with
  same letter are not significantly different.

    The second column represents the metric and the remaining columns 
report the mean, median and standard deviations for the metrics. 
Medians are included as a second measure of central tendency. The 
percent debt metric measures what percentage of the original debt the 
consumer paid when the account was settled. There are not significant 
differences between the strata, although the results indicate that the 
median is less than 48 percent, or that the households received an 
average discount more than 50 percent. The percent of total metric 
indicates the percentage of the original debt that has a settlement 
(conditional on the client settling at least one account). Once again 
there are no significant differences between the strata, but the median 
across the three stratums is around 50 percent. The percent of accounts 
settled is not different between the strata, and hovers around 50 
percent. This indicates that the size of the debt is not a driving 
factor in getting the account settled. Interestingly, the only 
significant effect conditional on settling one account is the number of 
days until the first settlement, where the smaller accounts take longer 
than the other two. However, the medians for all three strata hover 
around 6 months. Note that, conditional on settlement, this 
organization beats the 60-60 rule noted above.
    But when the offers are examined, they suggest a slightly different 
story. First, there are no significant differences in the average 
amount offered (% Debt) for the three strata. However, the median offer 
is around 56 percent, much higher than the 48 percent settlement, 
although both numbers beat the 60 percent of debt rule noted in the 
introduction. Hence, it can be concluded that the negotiations work for 
the clients. In terms of the percent of the original enrolled total 
debt (% total debt) that receives an offer, the highest quartile 
(median 72%) is significantly different than the lowest quartile 
(median 51.5%), but neither quartile is significantly different from 
the middle 50 percent (median 67.8%). This result (as well as the 
differences between means and medians) suggests high variance in the 
percent of debt settled, and that the significance on this metric may 
be spurious. If it is not spurious, it then appears that the creditors 
are more willing to make offers on higher debts, which is consistent 
with the analysis of Dash (2009). The results for the percent of 
accounts and days until the first offer support this hypothesis, where 
the highest quartile receives their first offer sooner than the lowest 
quartile and median strata, and the highest quartile has a larger 
percentage of accounts receiving offers than the other two strata.
    Figure 2 provides a histogram of the percent of total debt that has 
either been settled or offered combining all three strata. There are a 
couple of striking elements to this figure. First, the most frequent 
value (also called the ``modal value'') for both settlements and offers 
is between 90 and 100 percent, indicating that the firm is generating 
value for their customers. Second, the distribution for both appears to 
be uniformly distributed (ignoring the mode). This seems to imply that 
consumers are progressing through the program; otherwise I would expect 
to find another mode where the clients get ``stuck'' in their progress. 
That said, the firm should strive to have 100 percent of the debt with 
offers. This figure also points to the difficulty in calculating a 
completion rate. Given that consumers are receiving offers on their 
debt but not accepting all of the offers, how should the accounts be 
counted?

Figure 2--Histogram of Percent of Debt Settled and Offered



    Figure 3 provides a histogram of the percent of the enrolled debt 
(i.e., original debt amount) that was either paid during settlement or 
had a settlement offer, conditional on settlement or receiving an 
offer. The settlement data appears to be normally distributed with the 
mean, mode and median slightly less than 50 percent, much better than 
that 60-60 rule noted above. A striking feature is that the average 
offers are almost normally distributed, but have a positive skew. This 
positive skew implies that the creditors tend to make more offers above 
the mode than below the mode. Given the distribution of the settlements 
is more balanced; it implies that the firm does a good job in 
negotiating better terms for their clients. Specifically, we see that 
the absolute frequency (not just percentage) is much higher for 
settlements below the mode than for offers. Similarly, the frequency 
for offers above the mode (and median) is much higher for offers than 
for settlements. The mean, median and mode (all measures of central 
tendency) appear to be the same, suggesting that the firm generates 
value to their clients by beating the 60-60 rule. However, to manage 
client expectations about possible benefits from the program, the firm 
should be transparent about the median and 75 percent quartile (i.e., 
25 percent quartile in terms of discount) when calculating savings for 
the consumer. Given the convergence of mean, median and modes, a 
standard deviation should also be reported.

Figure 3--Histogram of Percent of Debt Paid for in Settlements and 
        Offers

        
        
    Next, we look at the cancellation data. There are no significant 
differences between the three strata. However, the median time to 
cancel hovers between five and 6 months. Even though there is no data 
on the offers and settlements for these clients, I find it highly 
unlikely that this group received no offers in this time, as the median 
time approximates the median time for offers and settlements. It is 
much more likely that other, unobserved factors were more influential 
in this decision. Figure 4 combines the data from the three strata, and 
provides a histogram of the time it takes an account to be settled or 
the time it takes for an account to receive the first offer. For both 
settlements and offers, a negative skew is observed for the 
distribution.

Figure 4--Histogram of Time for Settlement or Offer to be Received



    Interestingly, this implies that the creditors are generally very 
interested in settling the account, with the modal offer time being 
between 6 and 8 months. The firm can clearly improve in their 
performance by reducing the right tail of the offer distribution, i.e., 
ensuring that all accounts receive offers in a timely manner. This 
graph also depicts how the firm generates value for their customers in 
the negotiations. By receiving many offers quickly, they can make the 
creditors compete against each other for the lump sum payment from the 
consumer. This competition is in the form of reducing the principal of 
the debt.
    A problem with this distribution is that, without some sort of 
regulatory protection, the spurned creditors (i.e., those who do not 
offer good enough discounts on the debt, so they are not selected for 
the lump sum payment) can initiate litigation that would drive the 
consumer into bankruptcy, creating unnecessary cancellations for the 
firm. A second challenge for this firm is that the savings plan ought 
to require their clients to save enough in the first 6-8 months to pay 
off one of their creditors, potentially the creditor with the smallest 
balance. This finding supports the call for protection of consumers 
making ``satisfactory progress'' in paying their debts through Debt 
Management Programs.
    In summary, this analysis has several key findings:

        1. Creditors seem to make lower offers sooner to consumers with 
        higher balances,

        2. The median cancellation time is between 5 and 6 months, 
        implying (due to a lack of data) that the clients likely 
        received offers, as the median is not very different than the 
        median offer time. However, it is very difficult to calculate 
        accurate cancellation rates (often used as a measure of 
        ``failure'' of the programs) due to the fact that almost 30 
        percent of the clients cancel due to paying off their debts or 
        going into bankruptcy.

        3. Both the median offer (approximately 56 percent of debt) and 
        median settlement (48 percent) are better than the proposed 60 
        percent rule, so the firm is offering value vis-a-vis the 
        proposed 60-60 rule. Further, the difference between the 
        settlement and offer percentages implies differences between 
        households (potentially due to hardship) and that some 
        households receive tremendous value from the negotiations and 
        relationships of the firm.

        4. Conditional on a client settling at least one account, the 
        client seems to settle more than 50 percent of their debt and 
        50 percent of their accounts. This statistic is impressive as 
        the program lasts 36-48 months, whereas the data only captures 
        the first 12-24 months for the client. One would expect that at 
        the end of the program, the settlement rate would increase.

        5. Conditional on receiving at least one offer, clients seem to 
        receive offers for more than 67 percent of their accounts and 
        debts.

        6. The figures seem to indicate that clients are progressing 
        and paying off their debt, as the mode for the number of offers 
        and settlements is between 90 and 100 percent of the enrolled 
        debt. However, the firm does have room for improvement, as the 
        optimal graph would have 100 percent of the debt with offers.

Calculation of Consumer Welfare
    In this section, the empirical results are used to calculate 
consumer welfare under a variety of assumptions and conditions.
    Table 6 provides the initial base-line estimates for consumer 
welfare. We use assumptions of 18 percent annual interest rate and 
minimum fixed monthly payments of 2 percent and 3 percent for debts of 
$4,000 and $10,000 (for similar assumptions, see, e.g., Warnick 2005). 
The fixed monthly payment of 2 percent is similar to current minimum 
monthly payments as noted in Warnick (2005). Affordability is measured 
using monthly payments, and consumer welfare is measured by the length 
of time required to pay off the debt and total amount paid by the 
consumer. By doubling their payment, consumers are able to cut the time 
to repay the loan in half and increase their total welfare by paying 
less to the credit card company.

    Table 6--Baseline Consumer Affordability and Welfare Calculations
------------------------------------------------------------------------
           Payment                2%         3%         2%         3%
------------------------------------------------------------------------
Debt Level                       $4,000     $4,000    $10,000    $10,000
Annual Interest Rate                18%        18%        18%        18%
Fixed Monthly Payment               $80       $120       $200       $300
Years to Pay                        7.8        3.9        7.8        3.9
Total Payments                   $7,488     $5,616    $18,720    $14,040
Percent of Original Debt           187%       140%       187%       140%
------------------------------------------------------------------------

    The first scenario examined is when the same consumer receives help 
from a CCCS, and the firm is able to cut the interest rate to 10 
percent from 18 percent, and has 5 years to repay (this may be an 
optimistic assumption, as Plunkett (2009) says that creditors are 
becoming less willing to reduce interest rates). The results of the 
consumer welfare calculations are provided in Table 7. In order to 
calculate total payments (to credit card and the firm), we assume the 
industry average of $15 per month and a fair share payment of 5 percent 
of the payments to the credit card company (Hunt 2005).

      Table 7--Consumer Affordability and Welfare Calculations for
                            hypothetical CCCS
------------------------------------------------------------------------

------------------------------------------------------------------------
Debt Level                                          $4,000      $10,000
Annual Interest Rate                                   10%          10%
Years to Pay                                             5            5
Fixed Monthly Payment                                  $85         $212
Monthly Account Fee                                    $15          $15
Total Monthly Payments                                $100         $227
% Baseline Payments                                   125%         114%
Total Payments                                      $5,999      $13,648
Percent of Original Debt                              150%         136%
Percent of Baseline                                    80%          73%
Firm Fees                                             $900         $900
% Fair Share                                            5%           5%
Fair Share Fees                                       $255         $637
Total Revenue to firm                               $1,155       $1,537
% Original Debt                                        29%          15%
------------------------------------------------------------------------

    In terms of affordability, both cases are less affordable, i.e., 
have higher monthly payments than the base case of paying off the debt 
using with fixed monthly payments of 2 percent of the original debt. 
However, consumers are better off with this solution as they end up 
paying much less overall (range from 73 percent to 80 percent of the 
base case payments), even when the monthly account fees are included. 
We can conclude that this alternative does help consumer welfare, but 
it is a generally less affordable solution. If we examine total fees 
paid, they range from 15 percent to 29 percent of the total debt. Given 
Plunkett's (2009) description of 30 percent fees as exorbitant, his 
standard suggests that the CCCS charges exorbitant fees to lower debt 
consumers. Additionally, if it is assumed that lower income consumers 
have lower debt then CCCS charges higher fees as a percentage of the 
debt to lower income consumers than to higher-income individuals. In 
fairness, they can argue that cost of education is the same, regardless 
of the debt level, but it does not change the fact that they have a 
regressive fee structure.
    The 60-60 rule is analyzed in the next scenario.
    In this case, we assume 40 percent reduction in the debt principal, 
the interest rate remains at 18 percent and the firm has varying fees 
of 15 percent and 20 percent of the original debt balance. Table 8 
provides the results of this analysis. This scenario is more affordable 
than both the base case and the hypothetical CCCS firm. Further, 
consumer welfare is highest where the consumer is paying 57-60 percent 
of the original base case scenario, even though the consumer ends up 
paying more than the original debt. The fees are now neutral in terms 
of percentages versus debt and/or income levels, and are progressive in 
terms of the total fees with respect to debt/income.

      Table 8--Consumer Affordability and Welfare Calculations for
                         hypothetical 60-60 rule
------------------------------------------------------------------------

------------------------------------------------------------------------
Debt Level                $4,000       $4,000      $10,000      $10,000
Annual Interest Rate         18%          18%          18%          18%
Reduction                    40%          40%          40%          40%
Years to Pay                   5            5            5            5
Fees as percent of           15%          20%          15%          20%
 Debt
Monthly Credit               $61          $61         $152         $152
 Payment
Monthly Fee                  $10          $13          $25          $33
Total Monthly                $71          $74         $177         $186
 Payment
Total Payments            $4,257       $4,457      $10,642      $11,142
Percent of Original         106%         111%         106%         111%
 Debt
Versus baseline              57%          60%          57%          60%
Fee Payments                $600         $800       $1,500       $2,000
------------------------------------------------------------------------

    The next scenario is a simplified version of the DSP analyzed in 
the empirical section above. It is assumed that the fees on the account 
are 15 percent of the total debt, debt is reduced to 40, 50 or 60 
percent of the original debt amount and the household makes a balloon 
payment at the end of 1 year (much shorter than normal estimates of 3 
years). Table 9 provides the results of this analysis. First, this 
option creates the highest amount of consumer welfare among all of the 
different options: it is the only option where the consumer pays less 
than the original debt amount. It is also the least affordable of the 
options, with monthly payments three times the base case scenario. 
Therefore, we can conclude that the firm should carefully screen 
consumers for their ability to save and make this payment within 1 
year. However, this finding is highly dependent upon the assumption 
that the consumer will repay the debt in 1 year, much less than the 
above scenarios.

                  Table 9--Consumer Affordability and Welfare Calculations for hypothetical DSP
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Debt Level                              $4,000       $4,000       $4,000      $10,000      $10,000      $10,000
Reduction                                  40%          50%          60%          40%          50%          60%
Years to Pay                                 1            1            1            1            1            1
Fees as percent of Debt                    15%          15%          15%          15%          15%          15%
Monthly Credit Payment                    $200         $167         $133         $500         $417         $333
Monthly Fee                                $50          $50          $50         $125         $125         $125
Total Monthly Payment                     $250         $217         $183         $625         $542         $458
% Baseline Payments                       313%         271%         229%         313%         271%         229%
Total Payments                          $3,000       $2,600       $2,200       $7,500       $6,500       $5,500
Percent of Original Debt                   75%          65%          55%          75%          65%          55%
Versus baseline                            40%          35%          29%          40%          35%          29%
----------------------------------------------------------------------------------------------------------------

    Therefore, we analyze a scenario with a more reasonable time-frame 
of 3 years, consistent with Manning's (2009) assumptions, but still 
shorter than the CCCS or the 60-60 rule. Table 10 provides the results 
of this final scenario where the only change from the previous scenario 
is that the time to repay the debt is increased from one to 3 years. 
Not surprisingly, consumer welfare has not changed from the previous 
scenario.
    However, the affordability has increased to the point where it is 
comparable or better than the base-case and 60-60 rule scenarios, even 
though the consumers pay their debt in 3 years instead of 5 years. This 
result once again suggests that it would increase consumer welfare if 
they have protection from creditors and litigation while they are 
making satisfactory progress in a DSP. It also suggests that DSPs need 
a mechanism in their program to monitor client savings to demonstrate 
to the creditors that clients are making progress toward being able to 
afford settlements.

Conclusions and Discussion
    Similar to most studies, this research has several limitations. 
First, the empirical analysis only examines a single company over a 
single time period and does not contain educational measurements or 
other behavioral measurements after the clients exit the program. 
Therefore, it is unclear whether or not the findings can be generalized 
beyond this firm to the industry as a whole. Second, the data does not 
include information on settlement offers for canceled accounts, so it 
is very difficult to determine if value was generated for these 
customers. However, given that the median cancellation time is similar 
to the median time until the first offer, I find it unlikely that all 
of these clients received no offers if they stayed in the program long 
enough.
    Probably the most important empirical finding is that this firm 
adds significant value to their customers where the median and modal 
settlement offers are less than 50 percent of the original debt, much 
better than the 60-60 rule. This finding confirms the assumptions in 
Manning (2009) and calls for programs which reduce the debt principal 
as an effective means of helping consumers (Plunkett 2009). Given the 
high rate of cancellations due to bankruptcy (13.5 percent), this 
finding also suggests that consumers need regulatory protection from 
creditors (i.e., the ``creditor's dilemma'') while they are making 
satisfactory progress in the program.
    A second important empirical finding is that the upper bound for 
the cancellation rate is much lower than speculated (Plunkett 2009). 
However, accurate cancellation and completion rates cannot be 
calculated from the data, as consumers who cancel due to paying off 
their debt and who cancel due to entering bankruptcy are included in 
the cancellation rates. Further, completion of the program requires 
consumers to accept the offers. The data indicate that many more 
accounts have offers than are settled, with the modal client having 
more than 90 percent of their debt with offers. Even without adjusting 
the cancellation rate for these factors, the rate is comparable to or 
lower than other subscription-based businesses which have BBB-certified 
members. Therefore, excessive cancellation rates cannot be used as a 
rationale for excluding DSPs from certification.
    Finally, a large portion of the consumers who cancel (6.8 percent) 
indicate that they are not able to save enough. This implies that the 
DSPs need to monitor consumer savings as part of their program. One 
effective means for doing this would be to establish third-party trust 
accounts that have consumer protections in place:

        1. Require periodic audits of the accounts,

        2. Require arms-length relationship with the DSPs,

        3. Only allow disbursements to creditors (with signed letter 
        from creditor and consumer), to DSPs (for pre-approved fees), 
        to consumers who cancel the program or encounter new financial 
        hardships.

    If appropriate savings are pre-conditions for consumer protection 
from litigation and harassment from creditors, consumers will have very 
strong incentives to save and pay off their debts. The policy 
simulations have strong implications as well. First, both CCCSs and 
DSPs increase consumer welfare versus the consumer paying off their 
debt. However, DSPs are the only option where consumers end up paying 
off less than 100 percent of their debt, so they create the greatest 
amount of consumer welfare of any option considered. Not surprisingly, 
the affordability of the DSP is dependent upon the length of time the 
consumer has to save to pay off their debt. If a three-year period is 
used, the DSP is comparable in affordability to the 60-60 rule and can 
be more affordable than CCCSs. This finding adds support to the 
recommendation of protecting consumers in the programs to ensure that 
they have enough time to build their savings to pay off their debts. 
This finding also supports the regulatory recommendation of 
establishing fiduciary accounts that can be monitored by the DSPs to 
ensure that consumers are saving enough.
    The policy simulations also suggest that CCCSs may be overcharging 
some of their clients, where CCCSs receive 29 percent or more of the 
original debt amount in consumer fees and ``fair share'' payments. Even 
worse, their fee structure is regressive: where lower debt (and income) 
clients pay a larger percentage of the original debt amount in fees 
than higher debt (and income) clients. This finding suggests regulatory 
action to require CCCSs to disclose all fees, including fair share 
payments to consumers, is required to ensure transparency and that 
consumers can make good decisions. This finding also suggests that DMPs 
need to ensure that their fee structures are at least neutral or 
progressive in terms of the percentage and amount of the original debt 
amount to ensure lower income consumers are not paying unnecessarily 
large fees.
    While not discussed in the empirical or policy sections, the extant 
literature suggests that education should be required to be provided as 
part of any certified DMP due to the positive outcomes. However, 
``satisfactory progress'' in DMPs should also include satisfactory 
progress in the educational programs, which implies firms need to 
monitor and measure educational attainment. Technologies for this 
already exist, where consumers can already take driving educational 
courses over the Internet.
    Finally, we find that charging consumers reasonable ``up-front 
fees,'' i.e., fees before settlement, is consistent with practices in 
other industries, e.g., legal industry, and can be justified based on 
value provided to consumers as well as expenses incurred generating 
this value. Any attempt to ban these fees would have a chilling effect 
on the industry and is inappropriate for this industry.

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Appendix A: Definition of Acronyms
    BAPCPA--Bankruptcy Abuse Prevention and Consumer Protection Act
    CCCS--Consumer Credit Counseling Service.
    DMP--Debt management program--this term refers to a program that is 
intended to help a consumer pay off their debt, so it refers to both 
CCCSs and DSPs.
    DSP--Debt Settlement Program.
    Settlement--refers to when the consumer and creditor agree to terms 
(may be one or more payments, could be all or only some of the 
principal, fees and interest) to repay the debt.
About the Author
    Richard A. Briesch is Associate Professor of Marketing. He received 
his BS degree in Applied Mathematics from Carnegie Mellon University, 
MBA from Rice University and PhD from Northwestern University. His 
research interests include: modeling consumer decisionmaking, sales 
promotions, and econometric methods, including non-parametric 
techniques. His articles have appeared in journals such as: Marketing 
Science, Journal of Marketing Research, Journal of the American 
Statistical Association, Journal of Consumer Research, Journal of 
Retailing, Marketing Letters and Journal of Business and Economic 
Statistics. He has won the Davidson award for the best paper in the 
Journal of Retailing in 2002, the Cox School's research excellence 
award in 2009, and outstanding teaching award in 2007.
    For more information, visit: http://www.cox.smu.edu/academic/
professor.do/briesch