State of Minnesota
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Attorney General
Lori Swanson

Minnesota Attorney General's Office

1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101

(651) 296-3353
(800) 657-3787

M - F 8 am - 5 pm

TTY:(651) 297-7206
TTY:(800) 366-4812

Press Release

February 18, 2010

Companies Charged Cash-Strapped Consumers Fees Far In Excess of Legal Limits

Minnesota Attorney General Lori Swanson today filed six lawsuits against separate out-of-state companies that were hired by Minnesota consumers to help them manage their debt in the bad economy, leaving them in worse financial shape after sometimes charging hundreds or thousands of dollars in unlawful fees. The lawsuits are the first filed under a state law passed last year to regulate so-called “debt settlement” firms doing business in Minnesota. The suits accuse the six companies—based in Florida, Texas, and California—of signing up Minnesota consumers without being licensed by the State, in some cases charging cash-strapped people fees of hundreds or thousands of dollars more than allowed under state law.

“Many people owe money on their credit cards and are struggling to keep up with their bills because of the bad economy. People who are swimming in debt are often desperate for a life preserver, but they should know that debt settlement companies usually just anchor them down with even more financial problems. No consumer should ever do business with an unlicensed debt settlement company,” said Attorney General Swanson.

According to the Federal Reserve, American consumers owed nearly $2.5 trillion in credit card and other consumer debt (not including home mortgages) as of November, 2009. The debt settlement industry took off a few years ago as consumers faced high levels of credit card and consumer debt and a recession that made it difficult for many people to keep up with their bills. Debt settlement companies tell consumers to stop paying their creditors and instead place the money that would have gone to creditors in a bank account, which the debt settler will supposedly use to negotiate a reduction in the consumer’s debt.

The Better Business Bureau calls the debt settlement industry one fraught with “inherent problems.” Debt settlement companies often ask consumers to pay origination and monthly fees of thousands of dollars, but their recommendations often leave consumers in even worse financial shape. For example, debt settlers typically recommend that consumers stop paying their bills so that the debt settler can negotiate reduced payments with the creditors. Consumers who stop paying their bills, however, usually end up with ruined credit and often face collection lawsuits, garnishment, and debt collection calls. In addition, when a consumer stops making payments on their credit card and other bills, late fees and interest accrue, and the amount of the loan swells. Meanwhile, the debt settlers are profiting from fees that could have been used by the consumer to pay bills.

Today’s lawsuits were filed against American Debt Settlement Solutions, Inc. of Boca Raton, Florida; Debt Rex USA, LLC of Dallas, Texas; FH Financial Service, Inc. of Dallas, Texas; Morgan Drexen, Inc. of Anaheim, California; Pathway Financial Management, Inc. of Garden Grove, California; and State Capital Financial, Inc. of Hallandale Beach, Florida.

The lawsuits allege that the companies signed up Minnesota consumers for debt settlement contracts after August 1, 2009 (the effective date of the new state law) without being registered with the Minnesota Department of Commerce, as required by state law.

Minnesota law limits the origination and monthly fees that may be charged by licensed debt settlement firms. Depending on the amount of the consumer’s debt and the method they choose to pay the debt settler, state law generally caps the origination fee that may be charged by the debt settler at between $200 and $500 and caps the monthly fee that may be charged by the debt settler at between $50 and $75. (For more details, see attachment, “Highlights of the 2009 Minnesota Debt Settlement Law”).

The lawsuits allege that the companies charged consumers fees of hundreds or thousands of dollars in excess of those allowed by Minnesota law. For example, Debt Rx USA charged an origination fee of $1,978 and State Capital Financial charged an origination fee of $1,808, when the law capped the fee at no more than $400. Similarly, American Debt Settlement Solutions charged a monthly fee of up to $322 and FH financial charged a monthly fee of up to $183, when the law capped the fee at no more than $50.

The lawsuits allege that the companies violated numerous other provisions of the 2009 Minnesota law by, among other things:

  • Entering into written contracts with consumers that do not satisfy the requirements of Minnesota law.
  • Failing to prepare a written individual financial analysis for borrowers reflecting the debt settler’s determination that the proposed debt settlement plan is suitable for the debtor, that the debtor can reasonably meet the requirements of the plan, and that there is a tangible benefit to the debtor into entering into the plan, and failing to first make a determination as to which creditors are reasonably likely to participate in the debt settlement services plan.
  • Not providing debtors with the statutory notice that explains that a debtor’s wages or bank accounts may still be garnished; that creditors may continue to contact the debtor or sue the debtor; that fees and other charges will continue to accrue during the term of the debt settlement program; and that the debtor’s credit rating may be adversely affected by participating in the program.
  • Failing to post a surety bond with the State.

All six lawsuits seek injunctive relief, civil penalties, and restitution and allege violations of the State’s debt settlement law.

Last year, the Attorney General’s Office testified in favor of the 2009 law (authored by Senator Sandra Pappas and Representative Jim Davnie) to regulate the debt settlement industry, which went into effect on August 1, 2009. Under the new law, a debt settler may not do business in Minnesota without first becoming registered as a debt settlement company with the Minnesota Department of Commerce. According to the Department of Commerce website, only one debt settlement company is registered with the Commerce Department.

Attorney General Swanson warned consumers not to do business with a debt settlement company that is not licensed with the State: “Unlicensed debt settlement companies leave people in worse financial shape after charging hundreds or thousands of dollars in fees. People should never do business with an unlicensed debt settlement company. Not ever. Period.,” said Attorney General Swanson.

As many as 2,000 debt settlement companies may operate in the United States. Attorney General Swanson noted that the six companies sued by her office are all out-of-state companies. On September 22, 2009, the Attorney General wrote a letter to the Federal Trade Commission asking it to promulgate national regulations to prohibit debt settlement companies from charging advance fees until the promised services have been performed.

Minnesota law defines a “debt settlement services” provider as any company that “offer[s] to provide advice, or offer[s] to act or act[s] as an intermediary between the debtor and one or more of the debtor’s creditors, where the primary purpose of the advice or action is to obtain a settlement for less than the full amount of debt” or that “advise[s], encourage[s], assist[s], or counsel[s] a debtor to accumulate funds in an account for future payment of a reduced amount of debt to one or more of the debtor’s creditors.”

The Attorney General’s Office has a publication available online at entitled “Beware of Debt Assistance Scams,” which has advice for consumers on how to steer clear of trouble with debt settlement companies.

To file a complaint, consumers may contact the Attorney General’s Office at (651) 296-3353 or (800) 657-3787. Consumers may also download a complaint form by clicking here and return the completed form to: 1400 Bremer Tower, 445 Minnesota Street, St. Paul, MN 55101-2131.