David Giacalone at f/k/a has deconstructed the practice of lawyers who sell their services to people who are financially drowning with the promise that they can save them “up to” 50% by negotiating down their debt. We’ve all seen the TV commercials, noticeably more prominent in this time of recession economic downturn, holding out the promise of staving off bankruptcy and financial ruin.
While the smiling faces seem kind and sincere, and the possibility of avoiding disaster from profligate spending is certainly alluring, David has taken a hard look at the underbelly of this practice. And it’s not a very pretty sight.
David specifically looked at a for-profit entity called NetDebt:
I first heard of NetDebt on June 9th, when they tried to plant a link from f/k/a to their affiliated weblog, in order to increase NetDebt’s online profile. When the Comment showed up for “moderation,” my response was: “I just looked at your ‘NetDebt’ web site and have many questions about your services — especially the fees. Until I get a chance to review it more fully, I do not want a link from this weblog to yours, and have removed your URL.”
Having now looked more deeply into NetDebt, I want to present my continuing concerns about their fees — which are 15% of the amount of debt you bring to their program (regardless of results or the number of creditors it must deal with), plus a “small” monthly service fee of $50.
The fee structure has a few interesting features. First, it’s a flat fee based upon a percentage of outstanding debt, so that it bears no relation to the scope or depth of services to be provided. Whether the debt is owed to one lender or 50, the fee is the same.
Second, it is not a contingency fee. It’s 15% of the debt, win, lose or draw. If they accomplish nothing, obtain no reduction and leave the client in precisely the same position as when then came in, they still get 15% of the amount of the debt. Third, it’s front loaded, meaning that client has taken 15% that could have been used to pay off the debt and given it to the debt negotiation lawyer instead. David runs through the fee issues at far greater length and detail.
Then comes the big question, what service is provided for this fee.
Here’s how NetDebt describes its services in its FAQ :
“What does “debt settlement” mean? The term ‘debt settlement’ means negotiating with a creditor to reduce the amount of a delinquent debt down to a lower amount, that the debtor can then pay in order to fully satisfy (or pay off) the debt. The primary benefits of this strategy are to help you become debt free sooner, pay your debts on terms structured to your specific budget, avoid bankruptcy, and pay less than you would by making the minimum monthly payments.”
. . . “Once you enroll in the program, you will immediately stop paying your creditors, and instead start putting your monthly payments into a Trust Account the is established by the law firm. From that point on, the attorneys take over everything. Since your creditors will not be receiving monthly payments, your accounts will become past due, but in a controlled environment.”
. . . Once there is sufficient funds in your account, the lawyers will settle with the first creditor, and that process will continue until [you settle all accounts and your balance is zero].
There are only two major problems with this concept. First, there is no guarantee that creditors will settle for anything less than the full amount, together with interest that accrues while the debtor isn’t paying them and the attorney is holding the money. Second, there is nothing being done that a debtor couldn’t do on his own. If the debtor is sued by the creditor, NetDebt doesn’t defend. It’s a phone call.
I hadn’t given much thought to debt settlement practices since the days of Andrew Capoccia, a disgraced lawyer whose debt settlement practice gave rise to a huge scandal.
Capoccia charged what he called a “small part” of the savings (25 to 27%). His massive advertising campaign was aimed at people with significant unsecured debt, who wanted to avoid bankruptcy — and who had enough money to afford his fees. Capoccia took his fees upfront, before starting “negotiation” with creditors. Negotiation amounted to sending form letters and making phone calls requesting a large reduction in the client’s debt, while withholding payments and hinting at bankruptcy to increase leverage over creditors.
So what’s wrong with all this? Debt settlement lawyers prey upon desperate people, charging fees that are grossly disproportionate to the negligible services provided, guaranteeing that they get paid up front while providing slick suggestions but no assurances that they will accomplish anything on behalf of the clients. In the process, they destroy their clients credit by withholding payments, take monies that would otherwise be used to pay down the debt and provide a service that the client could accomplish on his own with a little guidance.
While this niche practice will no doubt bring a handful of lawyers a lot of money in this recession difficult economic time, it feeds into the public’s disgust for the profession. And with good reason. David’s done a great job of shedding light on this practice, and hopefully will save people with enough problems from one more.
Many thanks for this great summary of my posting, Scott. One point worth making: The debt settlers are NOT stealing from the poor — the poor don’t have thousands of dollars to hand over to them (and usually don’t have enough credit to get into tens of thousands of dollars of debt). They’re preying on middle class folks in financial distress who want to avoid bankruptcy and still have enough disposable income to hand it over to their supposed champions.
That’s an interesting point, David. How do we distinguish between the poor and the middle class whose debts match or exceed their income? If the criteria is net worth, they are both in similar boats, though one has plenty of worthless stuff that the other doesn’t to bring him comfort in his poverty.
I guess that my use of the word “poor” failed to recognize the difference, though I’m not sure that an essentially bankrupt individual has the right to claim middle class status under the circumstances. But I’ve changed the title to reflect your point.
Thanks for the response, Scott. My main point, of course, is that these lawyers have no interest in truly poor clients. That doesn’t distinguish them from the vast majority of Bar members, but that’s a topic for another day.
On that point there’s no dispute. They’re in it for the cash up front, before the other creditors get their hands on it.
Thanks again, Scott, for speaking out on this topic. No one has left any Comments yet at my weblog responding/reacting to the Debt Negotiation posting, despite my pleas for input from other lawyers. Nor have your usual gang of opinionistas yet commented here. I hope that’s because the posting is so long and they are taking the time for a careful perusal and thoughtful response. Of course, Prof. Yabut thinks the Pinstripe Wall of Silence might be at play again on the topic of excessive fees. Yabut is such an old cynic.
You know how many will join in your concern, but don’t want to go “on record” being critical. I like to think that some lawyers, maybe even most lawyers, will stand up and be heard on issues that are “critical” of other lawyers where it’s warranted. But when I see lawyers circle the wagons, justify unethical behavior or just hide in cowardice, I ask myself what I was thinking.
Of course, I could be the fool for my willingness to take a position and stand behind it publicly, something I do daily here. If so, I hope that others will be equally foolish by posting a comment at your blawg.
Scott, I think the more appropriate analogy is not to circling the wagons to protect one of their own. It’s to China or the old Soviet Union vetoing Security Council sanctions against the most bloody of rogue nations, because they do not want the same principle (and interference with their “internal affairs”) to be applied to their own actions at a later date. It’s similar to the silence after the $42 million Graubard fee, which f/k/a discussed last December.
That’s a much better analogy, Prof. Perhaps people in glass houses shouldn’t throw stones?
Like Papa G. used to say “everybody’s got a racket.” Present Company excluded, of course.