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Credit-repair scammers who have long clashed with government regulators have some new foes to deal with: private attorneys. With consumer debt at an all-time high-nearly $2 trillion-and hundreds of new credit-counseling firms popping up in recent years, many private lawyers say they are jumping into a legal arena that has long been dominated by government agencies: litigating against allegedly bogus credit-counseling agencies. Currently, more than a half-dozen private class actions against credit-repair and debt-management firms are pending in Alabama, California, Illinois, Massachusetts and New York. A new suit seeking class action status was filed in Texas on Feb. 18. And several more private suits were settled in the last two years. “Private attorneys are probably more aggressive at trying to make some recovery to consumers that have actually been damaged than the government regulators,” said Robert Green of San Francisco’s Green Welling, a class action litigation specialist who has handled several credit repair-related cases. Green added that private attorneys “like these kinds of cases . . . there’s the obvious issue of corporations taking advantage of people who are particularly vulnerable, and it’s nice to go and try to correct that.” In the last three years, attorneys general in California, Illinois, Minnesota, Missouri, Oregon and Texas have sought legal action against credit-repair firms. A half-dozen new suits were just filed in the last two months alone in Missouri and Illinois. Private attorneys step up Private attorneys allege that debt management is one of the fastest growing but least regulated industries in the country. They also charge that it is plagued by growing complaints of deceptive practices, poor advice and excessive fees. “The level of abuse that we’re seeing in the debt-management industry has never been quite as severe as it is now,” said Texas attorney Jeremi Young of the Rasansky Law Firm in Dallas. Young recently filed his first suit against a credit-repair firm in a Texas federal court and is seeking class action status. Alexander v. U.S. Credit Management Inc., No. 3-05CV 0339M (N.D. Texas). Officials with Credit Management Inc. did not return telephone calls seeking comment. According to the Better Business Bureau, complaints of abuses in the credit-counseling industry were up 75% between 2002 and 2003, but the demand for the services is still surging. Inquiries for credit-repair services shot up 88%, from 156,000 requests in 2002 to 294,000 in 2003, according to the bureau. And the industry is responding to the demand. According to a 2004 U.S. Senate report, over the last decade, 1,215 credit counseling agencies have filed for tax-exempt status-more than 800 of them applied in recent years. Attorney William MacLeod of Washington’s Collier Shannon Scott, defended the credit-counseling sector, calling it a “politically incorrect” industry that has taken some unfair hits from plaintiffs’ lawyers. “It is very unfortunate that this sector was singled out for practices that are perfectly legitimate and accepted throughout the nonprofit community,” MacLeod said. MacLeod asserted that lawyers have created an identity crisis for credit counselors by falsely portraying them as credit-repair firms, largely so they can sue them under the federal Credit Repair Organizations Act of 1997, which regulates the credit-repair industry. Attorneys defending the industry stress that there is a big difference between credit repair and credit counseling. The latter involves one-on-one, hour-long counseling sessions designed to help people better manage their money. The former involves attempts to improve credit scores and promises of cleaning up bad debt. MacLeod is currently defending DebtWorks, one of several defendants named in a Maryland class action in which plaintiffs allege that they were duped into giving money to a credit-counseling agency that falsely portrayed itself as a nonprofit and funneled their money to for-profit entities. Polacsek v. Debticated Consumer Counseling, No. 8:04 CV 631 (D. Md.). MacLeod would not comment on the specifics of the allegations, saying only that it is not illegal for a nonprofit to contract with for-profit organizations. “Every nonprofit contracts with profit-making companies, from the Red Cross to local churches,” MacLeod said. “The idea that contracting with a profit-making service should have a bearing on [a group's] nonprofit status has no basis in the law.” MacLeod also said the lawsuit has no merit because it relies on the Federal Credit Repair Organizations Act, which regulates credit-repair companies, not credit-counseling firms, which, he argues, is the category Debticated falls under. That’s just part of the defendant’s ploy to convince consumers that they’re a nonprofit, alleged David Vendler of Morris Polich & Purdy in Los Angeles, the plaintiffs’ attorney in the Maryland class action. Vendler also has a second class action against a credit-repair firm pending before an appeals court in Massachusetts. In the Debticated suit, Vendler alleges that the company induced people into believing that it was a nonprofit organization, used deceptive practices that masked high fees as “donations,” failed to pay creditors in a timely manner, and eventually funneled most of the donations to for-profit companies. “I think really what happened is that the [Internal Revenue Service] dropped the ball in granting all of these nonprofit companies their status without really taking a look at what they were doing,” Vendler said. “And it was really wrong what they were doing-they were preying on the sort of bottom rung of America’s consumers, the most vulnerable of them.” Despite the alleged abuse in the debt-management industry, there are still plenty of legitimate credit counselors to be found, asserted William Binzel, chief counsel for the 54-year-old National Foundation for Credit Counseling (NFCC), the nation’s oldest credit-counseling trade organization. Binzel said a key problem facing the industry is the emergence of a new breed of credit counselors who falsely portray themselves as nonprofits but operate as for-profit outfits. “The agencies getting sued are by far and large the new entrants,” he said. “There has been a flood of new entrants who are not NFCC members and who basically operate with marginal standards and have been very detrimental to consumers.” Attorneys are developing their own tactics as they become increasingly involved in credit-repair litigation. About one year ago, Green’s San Francisco law firm created a Web site, Consumer Credit Claims, which was specifically designed to monitor credit-repair abuses and seek fraud victims. In the last two years, Green has settled two lawsuits involving abuses by credit-counseling and debt-management services. In 2003, he secured an $8.6 million settlement on behalf of California residents who were involved in an alleged credit-repair scheme. Mitchell v. Bankfirst, No. C971421 (N.D. Calif.). Green and other lawyers note that credit-repair claims are only worth fighting on a class action basis. With most victims suffering damages of about $500 to $1,000, they say it’s not feasible to fight these cases individually. “That’s why class actions serve a purpose-if you rip off people just a little bit and rip off enough of them, you get really rich and there’s no one to stop them from doing it,” said James Smith, an attorney who is representing more than 1 million people in two separate class actions against a credit-repair company in Alabama. Brown v. Trilegiant, No. CV 02 BE0187W (N.D. Ala.); Barnes v. Trilegiant, No. 02-CV-TMP 2688W (N.D. Ala.). Trilegiant Corp.’s defense counsel, Kenneth Kliebard, a partner in the Chicago office of Howrey Simon Arnold & White, was unavailable for comment. Smith, of Tuscaloosa, Ala.’s Law Offices of James D. Smith, said he doesn’t hesitate to investigate a case of potential abuse by debt-management or credit-repair firms. “If they’re doing this to one person, they’re probably doing it to a lot of people,” said Smith, who also believes private attorneys may be better equipped to tackle the problem than the government. “The government has a lot of bureaucracy and red tape that they have to go through that sometimes we don’t have to,” he asserted. Private lawyers note, however, that federal regulators and government attorneys have made some progress in eliminating deceptive credit-repair firms. For example, last June, AmeriDebt Inc., one of the largest credit-counseling firms in the country with 100,000 clients, was forced to file for bankruptcy protection under Chapter 11 following a series of state and federal lawsuits. “There’s no purpose left for AmeriDebt to litigate . . . it would effectively suck the company dry of money,” said attorney Mark D. Taylor, a bankruptcy partner at Washington-based Arent Fox and Chapter 11 trustee handling AmeriDebt’s bankruptcy proceedings. The ‘end game’ Taylor said the litigation facing many credit-counseling agencies has put the entire industry in a tough spot. He said the biggest issue is, “What’s the end game?” “A lot of organizations facing this litigation are now in the position of having to decide if they should go into bankruptcy or reorganize,” Taylor said. “I think that it would be too much to say that [the government] wants to put the industry out of business entirely . . . but I think the industry is going to continue to go through a lot of transition. And at the end of the day, something will emerge that meets the approval of the IRS and [Federal Trade Commission].” Actions have been filed in an attempt to force credit-repair firms to reimburse customers’ fees they illegally charged, fully disclose to their customers what they’re getting into, inform customers of their options and explain how they can fix their problems on their own, and ultimately do what they say they’re going to do. “We’re trying to make sure that people understand that when they hire a service like this, what they’re really going to get is not what they’re really being promised,” said Mick Meagher, a San Diego-based solo practitioner who last month settled a case involving deceptive practices by a credit-counseling firm. Contreras v. Advanced Financial Debt Serv., No. 04CC03423 (Orange Co., Calif., Super. Ct.). Meagher alleged that “[i]t’s not a carefully regulated industry. It’s a quick buck. Like I’ve said, you can set up one of these companies up on the Internet for less than a hundred dollars.”

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