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A Study of the Credit Repair and

Debt Settlement Industries,

Complaints, Laws & Enforcement



Better Business Bureau Serving Eastern Missouri & Southern Illinois

211 N. Broadway Ste. 2060 St. Louis MO 63102 314.645.3300 | |




A Study of the Credit Repair and

Debt Settlement Industries,

Complaints, Laws & Enforcement

As outstanding consumer debt in the country soared to $2.5 trillion in January 2012 at an annual rate of increase of 8.6 percent, consumers are seeking ways to reduce their debts or improve their battered credit scores. Amid this scramble, unscrupulous companies and individuals are taking advantage of beleaguered consumers. Sharply rising complaints filed with Better Business Bureaus (BBBs) around the country reflect this. Consumers seeking help from BBBs to resolve their credit and debt problems with a multitude of companies have increased more than 800 percent in five years, from 930 in 2006 to 8,070 in 2010. The complaints tailed off in 2011 to 6,096.

Federal and state authorities have enacted laws in the past few years to counter the increased activity on the part of questionable operators. In this study, the St. Louis BBB explores the rea-sons for the surge in complaints and actions taken by authorities to counter the activity, and makes recommendations for changes.

There are many terms describing activity in this area, such as debt relief, debt settlement, debt negotiation, credit counseling, credit repair, debt consolidation, debt management plan, and the

lines separating the terms are often blurred. This study will use primarily the following two

terms—credit repair to describe the activity in which a consumer seeks the aid of a company to improve his or her credit report or score, and debt settlement in which a consumer seeks a company’s help in lowering his or her debt or monthly payments.

Sources used in this study include the following : St. Louis and national BBB databases; the Federal Trade Commission (FTC); state attorneys gen-eral; the Federal Reserve Bank; states’ laws; the U.S. Code; U.S. Supreme Court; mainline news media; company Web sites; and trade associa-tions.

They Provided No Services

For someone who is hampered by a bad credit score, the ads that flood the Internet are enticing. A Google search of “credit repair” brings up 16.4 million hits. Among them are these ads: “Fast Credit Repair - $29 – Raise Credit Score up to 130 pts,” or “Powerful Credit Score Analysis. One




Million Negatives Removed in 2010” and “Get Approved for Things You Want. 100 percent Guaranteed, Get Started Today!”

In its brochure, “Knee Deep in Debt,” issued in February 2011, the FTC warned: “You should be cautious of claims from so-called credit repair clinics. Many companies appeal to consumers with poor credit histories, promising to clean up credit reports for a fee. But you already have the right to have any inaccurate

information in your file cor-rected. And a credit repair clinic cannot have accurate information removed from your credit report, despite their promises.”

A study of complaints filed with the St. Louis BBB underscores this statement. Although consumers paid credit repair companies an average of $816, 85 perecent of the complainants said no services were provided by the companies. The companies refused refunds to most of the complainants, while two consumers said they received partial refunds.

The credit repair industry has boomed alarm-ingly in the past few years. BBBs processed 133 complaints against credit repair companies in 2006 and 1084 in 2010. A Web site that promises to help others in setting up their own credit repair company promises earnings up to $88,000 per month. Other Web sites offer software for credit repair companies.

The public perception of the industry is often unsavory. Even trade associations reflect this in their names. There is the National Association of Responsible Credit Repair Advisors

(NARCRA) which says it is “dedicated to im-proving the reputation and quality of the credit repair industry.”

The Ethical Credit Repair Alliance (ECRA) says

it “was born of the urgent need in the industry for a regulating body that would serve to sepa-rate member credit repair companies from the scammers and fly-by-night businesses who masquerade as professionals.”

There Are Laws

While the growth of credit repair activity has increased dramatically, which may be because of

the downturn in the

economy, the questionable practices of some compa-nies prompted Congress to enact a law regulating the industry 15 years ago. In enacting the Credit Repair Organizations Act (CROA), Congress noted, “Certain advertising and business practices of some companies engaged in the business of credit repair services have worked a financial hardship upon consumers, particularly those of limited economic means and who are inexperi-enced in credit matters.”

Consumers Paid an

Average of $816 for

No Services

BBB Complaints vs.Credit Repair Companies

(The figures reflect complaints closed nationally.)


A key element in the Act states: “Payment in Advance. No credit repair organization may charge or receive any money or other valuable consideration for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.” However, an examination of complaints filed with the St. Louis BBB shows that 97 percent of the complainants paid the company before services were provided. In one of its lawsuits, the

FTC alleged that a company violated the law by charging advance fees and noted that the company “has called its credit repair sales contract a ‘Membership Agreement.’

The Membership Agreement attempts to disguise the advance fee for credit repair services by stating that the agreement includes “a twelve month credit repair program free to our mem-bers.”

The CROA also requires a credit repair company to provide the consumer with a contract setting out the cost of services to be provided, and a written statement of the consumer’s rights under state and federal laws.

While states have the right to enforce the CROA, several also have their own laws regulating the credit repair industry. Missouri, as part of its Merchandising Practices Act, requires credit repair companies to be licensed and prohibits them from charging advance fees unless they have a surety bond or surety account.

In Missouri, a company also is prohibited from “guaranteeing to ‘erase bad credit’ or words to that effect unless the representation clearly discloses that this can be done only if the credit history is inaccurate or obsolete.” The Illinois Credit Service Organizations Act mirrors CROA and in some places uses verbatim the phraseology

of the federal statute.

They’re Clamping Down

In 2006 and 2008, several states, including Mis-souri and Illinois, joined the FTC in sweeps of credit repair organizations, filing numerous lawsuits alleging violations. The action in 2006 was called Project Credit Despair and in 2008 it was Operation Clean Sweep. The 2006 effort targeted 20 credit repair operations, which charged hundreds of dollars in advance with

promises to remove accurate information from consumers’ credit reports.

A spokesman said the FTC wanted to put “credit repair firms on notice that we are on the beat,” and “to alert consumers that there is absolutely no reason to pay for credit repair – ever.”

In 2008 the FTC and 24 state agencies announced a “crackdown on 33 operations that deceptively claim they can remove negative information from consumers’ credit reports, even if that informa-tion is accurate and timely . . .Companies that promise they are able to scrub your credit re-ports of accurate, negative information for a fee are lying - plain and simple.

“Under federal law, accurate, negative informa-tion can be reported for up to seven years, and some bankruptcies can be reported for up to 10 years.” In the cases in which the FTC filed suit, the defendants allegedly made statements in advertising that negative items on credit reports “CAN BE LEGALLY ERASED!.” Another promised: “You WILL see results in 60 days, or your money will be refunded in full . . .” (but refund requests were almost always denied.) Another stated the company could remove “ANY or ALL Negative Accounts From Your Credit Report.”

‘The Membership Agreement

attempts to disguise the advance


Enforcement actions by both federal and state authorities have continued since then.

However, consumers who would use the CROA in class action suits were dealt a setback in Janu-ary 2012 when the U.S. Supreme Court ruled that compulsory arbitration clauses in credit card contracts, which advertised improvement of a consumer’s credit rating, prohibited consumers from filing suit under the CROA.

Although the CROA requires credit repair companies to provide a consumer with a docu-ment stating the consumer’s right to sue, that statement was trumped by laws governing arbi-tration clauses, the court held. “The only con-sumer right (the document) creates is the right to receive the statement,” it noted.

Monthly Fee, Little Results

Financial losses incurred by consumers who are scammed by some debt settlement companies are significantly higher than losses incurred in the credit repair industry. While consumers who filed complaints with the St. Louis BBB against credit repair companies lost about $816 on average, those that complained against debt settlement companies lost about $2,000 each on average. One consumer said he had lost $17,000 and another, $15,000. Nationally, complaints filed against debt settlement companies with BBBs shot up from 86 in 2006 to 6,096 in 2011. Consumers using debt settlement companies usually are required to pay a monthly fee which the company is supposed to use to pay down the consumer’s debts after negotiating lower out-standing balances with the creditors. But the non-refundable fees often outweigh the reduction in debt. In half of the complaints filed with the St.

Louis BBB, consumers said no services were provided by the company, and 68 percent said the company refused to provide a refund. A few consumers received partial refunds averaging $256, far below what they had paid for the alleged services. After he had paid $400 a month for four months with no action in settling his debts, one consumer told the BBB that the company said “they couldn’t negotiate any debts with those companies until those balances go into collec-tions.”

The FTC warned in February 2011: “Some debt settlement companies may claim that they can arrange for your debt to be paid off for a much lower amount, anywhere from 30 to 70 percent of the balance you owe . . .The firms usually tell

you to stop making payments to your creditors, and, instead, send payments to the debt negotia-tion company . . . There is no guarantee that the services debt settlement companies offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legiti-mate debt.”


New Twist in FTC Rule “Starting on Oct. 27, (2010) debt relief telemarketers are on notice – if you charge consumers before actually helping them, you will find the FTC and state enforcers knocking at your door to enforce the Rule.” So stated Jon Leibowitz, chairman of the FTC, in hailing the revised telemarketing rule governing debt settlement companies (the FTC

uses the term debt relief to de-scribe debt settlement compa-nies). A major change in the rule is that it applies not only to companies that offer debt settlement programs over the telephone, but it also applies when consumers call a company in response to its advertising.

The FTC noted that over the past decade, the FTC and state enforcers have brought over 250 law enforcement actions to stop deceptive and abusive practices by debt settlement companies that have targeted consumers in financial distress. States have the authority to enforce the rule. The new advance fee ban specifies that fees for debt settlement services may not be collected until the company settles or changes the terms of at least one of the consumer’s debts, there is a debt management plan in place, and the consumer has made at least one payment to a creditor as a result of the agreement with the company. Rules that took effect a month earlier require debt settlement companies to disclose to poten-tial clients: Its fees and any conditions on its services; how long it will take to get results; how much money you must save before it will make an offer to each creditor; and the possible nega-tive consequences of stopping payments to creditors.

Although they can enforce the federal regula-tions, several states have their own laws.

Missouri’s Debt Adjusters and Collection Agen-cies law requires debt settlement companies to operate under a Debt Management Plan (DMP) and post a bond. It limits setup fees to $50 and monthly fees to $35 or eight percent of the amount distributed to creditors. A violation of the law is a misdemeanor and lawyers are exempt from the law.

Illinois requires a debt settlement operator to be licensed and to provide a contract with the client. Companies are allowed to charge an enrollment fee of $50, and a settle-ment fee of 15 percent of the savings. Companies may not advise consum-ers to stop making payments to their creditors. But while federal and local authorities are adopt-ing new or tightenadopt-ing existadopt-ing regulations, the debt settlement companies are hard at work also. The Association of Settlement Companies (TASC) boasts on its Web site that it has “stopped legislation that would have seriously impacted the ability to perform debt settlement in” eight states including Missouri, and that it “has been working through local lobbyists in” seven states. The trade group announced it had recently hired “a Federal lobbyist to promote the understanding of debt settlement within both the U.S. Congress and the Executive Branch, particu-larly the Federal Trade Commission.”

Not All Are Winners

Suits seeking redress for consumers are being filed continuously by federal and state officials. The FTC notes in its 2011 Annual Report: “Over the last several years, the FTC has filed 27 actions

‘You Will Find the FTC and

State Enforcers


against advertisers and providers of phony debt relief services. States also have been active in pursuing debt settlement companies that violate the law.”

But the suits have not always resulted in victories for the authorities. In March 2012, a federal judge in Dallas dismissed a lawsuit instigated by the Federal Trade Commission against three Dallas debt settlement companies, saying the agency failed to prove its case.

The FTC accused the companies of making deceptive claims about the results they achieve for debt-laden consumers. According to the FTC, the three companies told consumers who enrolled in their programs that they could elimi-nate 30 percent to 60 percent of their credit card debt and be out of debt in 18 to 36 months. But, the FTC noted, the companies “rarely negotiate settlements for all accounts entered into the debt relief service by consumers.”

U.S. District Judge David C. Godbey countered that the savings claims and the timing claim were true for a majority of the customers of the companies who completed the program.

It has been noted that there are scammers who feed on consumer greed and those who feed on consumer need. In the case of unscrupulous credit repair and debt settlement companies, it is the latter. Beset by the fallout of a weakened economy, thousands of consumers have found themselves deeper in debt than their means can handle. Lured by attractive ads on the Internet and elsewhere, consumers have paid thousands of dollars for services that weren’t provided. It is a great irony that in the case of credit repair companies, consumers have paid these sums for

actions that they themselves could have com-pleted at little or no cost. The laws, some re-cently enacted or enhanced, are strict. And authorities have been active in pursuing law violators. But they won’t keep up with the tide until consumers themselves are much more cautious in vetting companies with which they do business.

Based on its findings in this study, the BBB recommends the following:

• That consumers follow the FTC advice and

not hire credit repair companies. Only out-dated or inaccurate information can be re-moved from a credit report.

• That consumers consider a trustworthy

not-for-profit organization to resolve their debt and credit problems.

• That consumers scrutinize a debt settlement

contract and thoroughly check out a company with which he or she is considering doing business with the BBB, FTC or attorney general’s office.

• That federal and state authorities increase

their efforts in rooting out the unscrupulous operators in both the credit repair and debt settlement industries.

• That Congress amend the CROA to

specifi-cally rule out compulsory arbitration in law-suits alleging violations of the Act.

• That consumer-oriented agencies increase

their efforts to educate consumers of the pitfalls in seeking help with their debt or credit.

Robert H. Teuscher, Researcher St. Louis BBB April 2012