2 Firms Accused of Fraud in Debt Settlement

The New York attorney general, Andrew M. Cuomo, sued two large debt settlement companies Tuesday, saying they had engaged in fraudulent and deceptive business practices and false advertising.
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Dan Cappellazzo for The New York Times

The suits seek to enjoin the companies, Nationwide Asset Services and Credit Solutions of America, from many of their business practices, including charging customers before any settlement work is done. They also seek restitution and damages for dissatisfied customers.

“These companies claim to be the light at the end of the tunnel, but time after time they have shown that they only add to the burdens of Americans dealing with debt,” Mr. Cuomo said in a statement.

Credit Solutions enrolled 18,000 customers in New York State in the last five years, earning $17 million in fees, but settled the debts of fewer than 2,000 of them, the attorney general said.

Nationwide signed up 1,981 New York residents in three years, the suit against it says, but only 64 completed the program. Twenty-seven of those ended up paying more than they originally owed because of Nationwide’s fees, the suit alleges.

Mark Walling, a lawyer for Phoenix-based Nationwide, said he had not seen the suit. “My client denies any wrongdoing,” he said.

Credit Solutions, based in Richardson, Tex., disputed liability over the complaints and practices in the suit, saying in a statement that they had largely occurred when the company was under different ownership in 2007.

The suits are part of an effort by Mr. Cuomo to control the debt settlement industry, which has mushroomed as the economy has worsened. This month he sent subpoenas to 15 major companies that do settlements, seeking details about business practices.

As unemployment rises, many people can no longer afford to pay the minimum on their credit cards. The Federal Reserve said this week that delinquencies rose in the first quarter to 6.5 percent, the highest since it began tracking them in 1991. Citigroup and Wells Fargo said April defaults were more than 10 percent.

For consumers on the verge of default, debt settlement companies promise relief. In voluminous radio and late-night television advertisements, the companies say they can shrink those onerous balances by striking deals with creditors.

Credit Solutions, which was founded in 2003 by an entrepreneur named Doug Van Arsdale, initially said it could shrink a customer’s credit card debt by as much as 75 percent. “There’s more to life than paying bills,” its Web site said, promising “honest and sincere” evaluations.

Such claims powered it to a leading position in the industry. Mr. Van Arsdale said he sold the company in December 2006, but, unhappy with how it was being run, bought it back a year later. The Web site now says the company has served 200,000 people with a combined debt of $2.25 billion.

An early flashpoint was its practice of charging, in advance, a fee of 15 percent of the customer’s total enrolled debt. Credit Solutions had to refund $700,000 to customers in South Carolina in 2007 after the state accused it of violating local credit counseling laws.

It had to pay $588,000 to Idaho customers in 2008 for operating in the state without a license. In March, the Texas attorney general sued Credit Solutions, alleging “false, deceptive and misleading acts.”

The Better Business Bureau of Dallas gives Credit Solutions a grade of F, citing 1,679 complaints against the company.

A Credit Solutions spokeswoman, Genie Hayes, called that number relatively small, “given the difficulty and length of the settlement process.” She said all the complaints had been resolved except for six cases where the consumers had disappeared.

Typically, debt settlement companies tell consumers to stop paying any amount on their bills and start accumulating money in a special account. Eventually, the company promises, it will use that money to negotiate settlements with creditors.

But Mr. Cuomo contends that many people leave the Credit Solutions program because it is too hard for them to save, especially after paying the company’s fees. Even when they stick it out, the promised deals often do not materialize. “Credit Solutions frequently fails to obtain settlement offers at all,” the suit says.

Evelyn Mazzella, who lives in Westchester County, signed up with Credit Solutions after a friend recommended it. “I ended up paying them a couple of thousand dollars, but they only settled one card,” with Best Buy electronics, she said. She complained to the attorney general’s office.

Credit Solutions used to send customers a 60-item list of ways to raise money. First is “refinance home,” followed by “get a second mortgage” — the two things that got many people in over their heads in the first place. Among the other tips are: “Baby sit,” “Sell plasma,” “Ask for raise,” “Get off the station before your usual stop and walk,” “Cut down your drinking,” “Drink tap water,” “Buy frozen.”

Nationwide Asset is less known than Credit Solutions. Doreen and Barry Melton, a retired couple who live in Lewiston, N.Y., became clients in 2007. They had about 13 credit cards, Mrs. Melton estimates. After Mr. Melton had back surgery, then eye surgery, then heart surgery, the bills got out of hand.

“I thought settlement was an answer to my prayers,” said Mrs. Melton, who appeared Tuesday at a news conference with Mr. Cuomo in Buffalo. “They were going to take care of all my debt in a year and a half.”

Before she knew it, however, she had paid Nationwide $1,400, and then was paying $56.65 monthly. The company told her not to answer the phone, which only redoubled the creditors’ zeal. “Our phone was ringing constantly from morning to 9 or 10 at night,” she said.

A few bills were settled, and each time Nationwide charged her another fee. Most were not settled. Now, she said, “our credit is destroyed.”