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Suing Debt Relief Companies: Legal Recourse for Victims of Fraud and Abuse

Debt relief companies promise struggling consumers an appealing deal – lower or eliminated debt balances in exchange for large upfront fees. However, many of these companies engage in fraudulent, deceptive, and abusive practices, leaving their victims in even worse financial shape. If you have been victimized by a predatory debt relief company, you may have legal options to fight back and recover damages. This article provides an overview of common fraudulent practices, applicable laws, and potential lawsuits against debt settlement companies.

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Understanding Debt Relief Scams

The debt relief industry targets consumers struggling with significant credit card or other unsecured debt. Companies promise to negotiate with creditors to settle accounts for a fraction of the balance owed. Many charge large upfront fees before providing any services.

However, as the Federal Trade Commission and Consumer Financial Protection Bureau have found, many debt relief companies engage in illegal conduct, including:

  • Misrepresenting affiliations: Companies may falsely claim affiliation with government agencies or programs. For example, the CFPB sued Federal Debt Assistance Association for posing as a government program.
  • Charging illegal upfront fees: Federal law prohibits charging fees before settling any debts. However, companies routinely violate this.
  • Failing to deliver promised services: After collecting large fees, companies often fail to negotiate settlements or provide other services as promised.
  • Harming credit: Rather than improving credit as claimed, companies often leave victims with lower credit scores, more judgments against them, and even bankruptcy.
  • Abusive collection practices: Companies may harass consumers to collect fees or other payments.

These fraudulent practices often leave financially struggling consumers in even worse economic shape. However, victims do have legal options to fight back.

Applicable Laws and Regulations

Several federal and state laws prohibit deceptive conduct and provide enforcement mechanisms against debt relief scammers:

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Federal Trade Commission Act

The FTC Act bans “unfair or deceptive acts or practices” affecting commerce. This covers a wide range of conduct, including the debt relief scams described above. The FTC enforces this law by suing violators in federal court and obtaining injunctions, consumer redress, and civil penalties. For example, in 2017 the FTC sued a debt relief operation targeting Spanish speakers.

Telemarketing Sales Rule

The TSR implements the 1994 Telemarketing Act. It prohibits deceptive telemarketing practices and bans charging advance fees for debt relief services. Violators face FTC enforcement actions seeking injunctions, consumer refunds, and civil penalties up to $43,280 per violation.

Credit Repair Organizations Act

The federal CROA regulates credit repair services sold to consumers. It prohibits deceptive claims and requires written contracts clearly explaining consumer rights. Debt relief companies promising improved credit scores or credit reports may qualify as “credit repair organizations”. CROA violations enable consumer lawsuits and FTC enforcement.

State Consumer Protection Laws

Every state has some version of a consumer protection statute prohibiting unfair and deceptive trade practices. For example, the Minnesota Attorney General used state law to stop an abusive student loan debt-relief operation. These laws often enable state attorneys general to sue violators on behalf of victimized state residents.

Suing Debt Relief Companies for Damages

In addition to government enforcement actions, victims can often sue debt relief companies for financial compensation under various legal theories:

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Fraud and Misrepresentation

Companies that engage in fraudulent conduct – i.e. intentional deception – may face fraud lawsuits. Victims can potentially recover economic damages suffered due to the fraud. Punitive damages may also be available for egregious conduct. For example, a New York woman sued a debt settlement firm for fraud after it failed to secure any settlements despite collecting fees. She won a $10,000 default judgment.

Breach of Contract

If a debt relief company fails to provide promised services after signing a contract and collecting fees, it may constitute breach of contract. Victims can potentially recover fee payments and even additional damages. Written agreements required under CROA may help prove contractual breaches.

Violations of Federal/State Consumer Laws

As discussed above, various federal and state laws enable consumer lawsuits for violations. For example, CROA includes a private right of action with minimum statutory damages of $1,000 per violation. State consumer protection laws also often allow victim lawsuits.

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Illegal Debt Collection Practices

If a company engages in harassment or threats to collect fees or other payments, victims may have claims under federal and state debt collection laws. The federal Fair Debt Collection Practices Act prohibits abusive collection conduct and enables statutory and actual damages claims.

Finding Legal Help Against Debt Relief Scammers

Suing a debt relief company requires navigating complex consumer protection laws. Having an experienced attorney can help victims maximize potential compensation. Consider contacting consumer law attorneys with expertise in areas like fraud, debt collection defense, breach of contract, and consumer litigation. Many lawyers offer free consultations to discuss case options.

Non-profit consumer advocacy groups also often provide guidance for victims of debt relief schemes. For example, the National Consumer Law Center has resources on fighting back against debt settlement scams and finding legal assistance. State consumer protection divisions may also help connect consumers to legal resources.

Reporting Debt Relief Scams

If you have been victimized by an abusive debt relief company, consider reporting it to assist law enforcement efforts against similar schemes:

The more complaints accumulated against a particular company or tactic, the more likely regulators and law enforcement will take action to protect other consumers. However, also consider promptly consulting an attorney about your own legal options in case statutes of limitations apply to potential private claims. Acting quickly when suing debt relief scammers improves the chances of holding them accountable and recovering damages.

Conclusion

Predatory debt relief companies target desperate consumers hoping for financial relief. However, many operators commit outright fraud, taking large upfront payments but never delivering promised services. Their victims often end up in even more dire financial straits.

If you have become a victim of an abusive debt settlement scheme, understand that you have legal rights to fight back. Consult consumer protection attorneys to discuss lawsuits for fraud, misrepresentation, breach of contract, violations of federal and state laws, illegal debt collection, and other potential claims. Successful legal action can result in recovered damages, halted operations, and even criminal penalties against the worst actors.

Suing debt relief scammers poses many challenges. But holding companies accountable for fraudulent practices provides the best chance at justice for victims. Prompt legal action also helps prevent more consumers from getting cheated. If you have been defrauded by false promises of debt relief, explore your options for fighting back soon.

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