New York – The New York attorney general, Andrew M. Cuomo, sued two large debt settlement firms Tuesday, saying they engaged in fraudulent and deceptive business practices and false advertising.
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The suits seek to enjoin the two firms, Nationwide Asset Services and Credit Solutions of America, from many of their business practices, including charging customers before any settlement work is done, and seeks 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 over the last five years, earning it $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 over three years, according to its suit, but only 64 completed the program. Twenty-seven of those ended up paying more than they originally owed, because of Nationwide’s fees.
Mark Walling, a lawyer for Phoenix-based Nationwide, said he had not seen the suit yet. “My client denies any wrongdoing,” he said.
Credit Solutions, based in Richardson, Tex., said in a statement that it was “committed to the highest standard of customer service,” and that it was cooperating with the investigation.
The suits are part of a larger effort by Mr. Cuomo to rein in the settlement industry, which has mushroomed as the economy has worsened. Earlier this month he sent subpoenas to 15 major settlement firms, seeking details about their 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 level since it began tracking the data in 1991. The situation is continuing to deteriorate. Citigroup and Wells Fargo both said April defaults are over 10 percent.
For consumers on the verge of default, debt settlement promises relief. In voluminous radio and late-night television ads, the companies say they can shrink those onerous balances by striking a deal with the creditors.
Credit Solutions, which was founded in 2003, began by saying it could shrink a customer’s credit card debt by up to 75 percent. “There’s more to life than paying bills,” it said on its Web site, noting that it was “honest and sincere.”
Such claims powered it to a leading position in the industry, with 200,000 customers who have a combined debt of $2.25 billion. But its policy of charging a fee in advance of 15 percent of the total debt drew the attention of state regulators.
Credit Solutions had to refund $700,000 to customers in South Carolina in 2007 after violating the state’s 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 company was sued by the Texas attorney general for fraud.
Over time, the dissatisfaction with the company’s actual programs has mounted. The Better Business Bureau of Dallas gives the company a grade of “F,” saying it has received 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 6 cases where the consumers had disappeared.
Debt settlement is always difficult and often impossible. 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, Ms. Mazzella said.
The more indebted someone is, the greater the appeal of debt settlement. But the more indebted someone is, the less likely he or she is able to set money aside for settlement while simultaneously paying the settlement company.
“In practice,” Mr. Cuomo’s lawsuit asserts, “Credit Solutions frequently fails to obtain settlement offers at all.”
Credit Solutions used to send its customers a 60-item checklist 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 suggestions are:
No. 14: “Babysit.”
No. 16: “Sell plasma.”
No. 20: “Ask for raise.”
No. 22: “Mow lawns.”
No. 32: “Get off the station before your usual stop and walk.”
No. 33: “Cut down your drinking.”
No. 43: “Drink tap water.”
No. 47: “Buy frozen.”
Nationwide Asset has a lower profile than Credit Solutions. Doreen and Barry Melton, a retired couple who live in Lewiston, N.Y., near Niagara Falls, became clients of the firm in 2007. They had many credit cards — about 13, 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,” Mrs. Melton said. “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 a regular $56.65 a month. 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,” Mrs. Melton 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.”