Lawsuit takes on debt-modification firm

A lawsuit filed in Georgia against an Indianapolis firm that helps consumers settle debt is just one in a parade of complaints targeting the industry.

The Indiana Attorney General’s Office says the number of complaints filed has soared from 17 in 2007, before the economy tumbled, to 69 in 2011. Most involve out-of-state companies offering to modify debt on credit cards and mortgages.

In Georgia, Indianapolis-based Preferred Financial Solutions, which offers to settle credit card debt at a discount through a network of attorneys, is alleged to have violated that state’s debt-adjustment law by charging excessive fees to desperate clients “for worthless services.”

Two former clients of the company, which operates as CCRnow Credit Card Relief, filed a complaint in U.S. District Court for the Middle District of Georgia.

They seek class action status on behalf of at least 100 ex-clients of the Indianapolis firm and a Georgia attorney and unspecified financial damages. They also allege fraud and breach of fiduciary duty.

Preferred contends it is exempt from the Georgia law and its strict fee caps. But Preferred’s insurer doesn’t appear so confident. On May 14, Allstate Insurance filed suit in federal court in Indianapolis seeking a declaratory judgment that it not be held liable for Preferred or its principals should plaintiffs prevail.

CCRnow—through Web, print and broadcast advertisements—offers to help financially struggling consumers here and in about 10 other states settle their credit card debt in months rather than years.

CCR’s website states that it has saved clients more than $200 million through services designed to “get out of debt safety, legally and with peace of mind … without bankruptcy.”

The company was founded in 1999. But like many companies involved in debt settlement, it has found more demand for its services since the economy tanked in 2008.

“Looking for a miracle, or at least an alternative to avoid the stigma of bankruptcy, these Georgia citizens are most vulnerable to [Preferred’s] siren song of virtually instant financial relief,” Athens, Ga., attorney James Hurt Jr. states in the complaint.

Preferred maintains its record is clean.

“They’re trying to throw as much as they can against the wall to see what sticks,” Preferred’s CEO, Jeffrey Brooks, told IBJ of the suit. “There have been no violations.”

According to CCR’s website, clients are matched with an attorney, who reviews the debtor’s financial situation and potential for success before preparing a plan.

Clients place funds in a trust account, to be tapped to pay creditors once enough money has accumulated.

‘Sweat it out’

The suit states that the apparent purpose of the program is to “sweat out” a debtor’s creditors by having clients stop paying on their debts for several months, causing default.

In some cases, the original creditor charges off the debt, selling it to a junk debt buyer at a fraction of its pre-default value, according to the suit. Then, attorneys partnering with Preferred will allegedly attempt to negotiate a settlement of the amount owed at a discount of the originally owed amount.

Preferred, in its response, denies that is the way it does business, but did not elaborate.

On its website, the company said offers are made to creditors “at the right time,” such as “prior to debt charge-offs.”

The lawsuit alleges that Preferred receives all its fees from the debtor before action is taken on his or her behalf. By diverting payments to Preferred rather than paying down debt, the clients are placed “in the crosshairs of multiple debt collection lawsuits, further widening the debtor’s financial chasm.”

The wait apparently became too much to bear for the plaintiffs. Preferred client Tina Gregory, who had $26,210 in debt, said she asked for her money back after six months.

A copy of the agreement shows she was charged an enrollment fee of $1,834, an amount equal to 7 percent of her outstanding debt. She allegedly also paid a $120 fee for the local participating attorney, a $49.95 monthly fee, and $475 monthly into the trust account for future debt settlement.

Georgia’s debt adjustment law caps fees at 7.5 percent of the amount distributed monthly to creditors.

Preferred contends it does not operate as a debt adjustment service but rather as a “back office service provider” to the trust.

“We don’t settle debt,” Brooks said.

Brooks characterized Preferred’s service more as one of a marketing arm gathering information and providing support for attorneys that perform the actual debt settlement with consumers in their home states.

Because clients are matched with a local attorney to work out their debt problems, Preferred contends it is exempt from the Georgia debt law.

The Georgia lawsuit contends all the parties collectively compose a debt-adjusting operation and have arrayed themselves in such a way to thwart a consumer from collecting a legitimate judgment.

Gregory says she never heard from an attorney.

Also named in the complaint against Preferred is Indianapolis attorney Tom Dakich, who has provided legal services to CCRnow, according to a client disclosure agreement.

Dakich said he’s not worked in earnest with the company since about 2009. He said debt settlement grew to be a huge industry in the late 2000s, creating more opportunities for firms to run afoul of regulators.

This isn’t the first time Preferred has found itself in hot water. The company and Dakich in 2010 reached a $175,000 settlement with West Virginia Attorney General Darrell McGraw, who alleged Preferred charged consumers more than that state’s 2-percent cap on the amount of money deposited by consumers for payment to creditors. He also said the company was not authorized to do business in West Virginia.

“They were just on a witch hunt,” Brooks told IBJ, adding that his company decided to settle because it wasn’t worth spending the money to fight McGraw.

Dakich said Brooks was trying to operate above board, hiring attorneys on a local basis to remain compliant with laws in states such as Georgia.

“Jeff is a gem of a person and a good entrepreneur,” Dakich said.

Complaints about settlers rise

Preferred has not been cited by regulators in Indiana in recent years, although it is currently under scrutiny.

“We do have an investigation pending,” said Terry Tolliver, deputy director of consumer protection for Attorney General Greg Zoeller. Tolliver said it would be premature at this point to say whether the company has violated any laws.

Tolliver said that, since 2006, the office has filed 110 lawsuits against mostly out-of-state companies offering to modify debt on credit cards and mortgages.

On May 15, Zoeller filed suits against Freedom Equity Savings of Ohio, Integrity Mortgage and Credit Solutions of Florida, Provident Law Group of California, Nationwide Mediation Services of California, and Global Equity Solutions/Peachtree Consultants of Georgia.

The firms allegedly violated Indiana consumer protection laws by collecting fees of more than $11,000 from Indiana customers and promising to reduce their home interest rates and monthly payments. But customers complained that little or no progress had been made on their home loans.

Last year, the Attorney General issued an $81,700 default judgment against Clearwater, Fla.-based Consumer Financial Advisory Board for deceptive sales practices involving debt-reduction services.

Indiana regulators alleged the company used demographic data to make targeted cold calls to Hoosiers. After securing verbal agreements, the company allegedly obtained fees in advance, charged to a consumer’s credit card.

Customers who later didn’t receive services and attempted to cancel the service complained they couldn’t get their money back.

In many such cases, consumers either deepen their debt by tapping credit cards or sometimes dip into savings to pay one-time fees, said Erin Reece, a spokeswoman for Zoeller. “They’re in worse financial shape than when they started.”

There are various companies and not-for-profits in the Indianapolis area offering to work with a consumer’s creditors to arrange better terms so they can pay off their debt.

Some have found it more difficult in recent years to get creditors to work with them, however.

Momentive, which was better known as the not-for-profit Consumer Credit Counseling Services of Central Indiana, in 2010 merged with Ohio-based Apprisen Financial Advocates.

Momentive officials said creditors over the years had reduced what they pay credit counseling agencies as a percentage of client debt—to about 4 percent from 15 percent during better times.

Larger Apprisen had more resources to secure grant funding, which is becoming a larger share of revenue for such agencies as creditor reimbursements shrink.

Many consumers buckling under credit card debt aren’t aware such services exist or are attracted to private companies promising faster and sometimes dramatic debt-reduction services.•