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Joan Dillworth considers herself one of the lucky ones.
After an unsolicited phone call from a “debt settlement” firm that promised to reduce the interest rate on her credit card, Dillworth, 68, of Roseville, signed up for the service a few months ago.
Though she said she quickly changed her mind, a couple of months worth of following the company’s advice — which meant not making payments to creditors — meant the interest rate on her credit card bounced from 11.9 percent to 25.4 percent.
On Thursday, Minnesota Attorney General Lori Swanson filed suit against six debt settlement firms that have operated in the state, claiming they violated a 2009 law passed to regulate such businesses.
Debt settlement firms promise to reduce customers’ debts by negotiating with creditors. But that frequently doesn’t happen, Swanson said at a news conference Thursday. In the meantime, the companies advise consumers to stop paying their bills and put that money into a bank account. Supposedly, the debt settlement company will use the cash to negotiate a smaller debt load for the consumer.
“The reality is, the situation quickly becomes very bleak for the consumer,” Swanson said.
About 15 percent of Minnesotans either are unemployed or underemployed, Swanson said, and that “dysfunction in the economy has created a niche for these companies.”
Lawsuits filed in U.S. District Court in Hennepin, Scott and St. Louis counties name American Debt Settlement Solutions Inc. of Boca Raton, Fla.; Debt Rx USA and FH Financial Service Inc., both of Dallas; Pathway Financial Management of Garden Grove, Calif.; Morgan Drexen of Anaheim, Calif.; and State Capital Financial Inc. of Hallandale Beach, Fla.
An attorney for Morgan Drexen categorically denied Thursday that the company has violated any Minnesota law. Morgan Drexen is “a highly reputable company providing paralegal and paraprofessional assistance to attorneys who represent near-bankrupt consumers,” Jeffrey Katz, the company’s general counsel, wrote in an e-mail.
But there have been other signs of trouble with the firm. Searching the company’s name on the Internet delivers a long list of consumer complaint sites, including a report from the Better Business Bureau of Los Angeles. That BBB office gives Morgan Drexen an “F” rating — its lowest — and shows more than 100 consumer complaints.
Other companies could not be reached.
The 2009 Minnesota law requires debt settlement firms to be licensed by the state’s Commerce Department. The law also restricts fees the companies can charge and gives debtors the ability to cancel an agreement with a debt settlement firm with 10 days’ notice, along with a number of other protections.
“The entire business model is fraudulent as far as I’m concerned,” said Mary McKeague, a credit counselor with Lutheran Social Service in Minneapolis. She has worked with consumers in the aftermath of their dealings with debt settlement firms and said they’re typically worse off from the experience.
In many instances, the consumer’s credit score is ruined, and often they’re forced into bankruptcy to avoid garnishment of wages, she said.
Patricia Platt, 53, of Minneapolis, learned the hard way that debt settlement might not be the way to go. The full-time grocery store cashier and part-time school employee had $22,000 in debt when she saw an ad on television. In 2008, she signed up with a debt settlement firm to bring down that total and paid a $900 enrollment fee, plus monthly fees that ran up to $3,000.
The company ultimately did nothing for her, Platt said. She renegotiated one debt on her own but is still paying the full balance of another. “I’ve learned now it’s too hard to trust,” she said.
Dillworth, the Roseville woman who saw her credit card interest rate jump after signing up with Morgan Drexen, became suspicious after she wasn’t able to find a number for a Kansas City law firm she was told represented clients of Morgan Drexen.
“I said things are too fishy,” Dillworth said.
In the end, Dillworth was able to get back her initial $280 payment, but the interest rate on her credit card remains high.