Chicago Law: Debt-settlement firm to wind down business

A Chicago-based law firm specializing in consumer debt settlement that was sued by Illinois Attorney General Lisa Madigan plans to wind down its business nationally, its general counsel confirmed Thursday.

Legal Helpers Debt Resolution LLC agreed to refund $2.1 million to its Illinois customers under a settlement announced this month after the attorney general had alleged the company was not living up to its name. Rather than providing legal help, the lawyers were a "front" to collect hefty fees from struggling consumers, Madigan said.

Legal Helpers denied wrongdoing but also agreed to stop accepting more Illinois clients under the settlement.

Jason Searns, the firm's general counsel, said publicity surrounding the lawsuit and settlement has made it hard for Legal Helpers to attract new customers outside Illinois, and the decision was made to cease operations after servicing its existing clients. The company operates in about 38 states.

"Once you have something like this, it's very difficult to get your message out," Searns said.

While consumer advocates applauded the news, the problems with Legal Helpers also expose chronic and systemic abuses in the for-profit debt settlement industry despite recent state laws and federal regulations meant to protect consumers.

"I have never seen one successful debt settlement program," said Claire Ann Resop, a bankruptcy attorney in Madison, Wis. "What I see is consumers paying a lot of fees upfront and ending up in a situation where their debts are not reduced because of the interest charged by creditors and the fees charged by debt settlement companies."

In 2010, Illinois lawmakers passed legislation that banned charging upfront fees for helping consumers negotiate relief from creditors. The law was crafted in response to a sharp rise in complaints that Madigan's office had received alleging abusive practices by debt settlement operators. Madigan filed seven lawsuits beginning in 2009 against debt settlement companies targeting Illinois consumers.

But debt counseling is a complicated area that sometimes blurs the line between legal and nonlegal services. Several nonprofits help consumers by working out budgets and negotiating with credit card companies to extend payment terms. Debt counseling also is at the core of what bankruptcy lawyers do.

So the loophole for lawyers who provide debt counseling has had some unintended consequences.

Firms like Legal Helpers sprung up, promising to help consumers cut their debts in half. They claimed they were exempt from restrictions on upfront fees because they offered legal advice about bankruptcy matters in addition to debt settlement.

But law enforcement authorities are finding that some of the attorney-driven debt settlement firms are not practicing law but copying the same shady business practices that led to an industry crackdown in 2010.

Clients are instructed to stop paying their bills and set aside the money for a future lump-sum repayment. But all that does is anger creditors and increase account balances because of interest and late fees. Consumers often end up being sued by creditors or land in bankruptcy.

North Carolina's attorney general won a consent decree in January from the Florida-based Consumer Law Group that stopped the firm from providing debt management services in the state.

Madigan's office alleged that Legal Helpers contracted out the debt settlement service to non-lawyer, third-party companies. The firm charged nonrefundable fees that included a $500 retainer, a $49 monthly charge and 15 percent of the total debt, according to the lawsuit.

Legal Helpers has more than 2,000 clients in Illinois, which means the $2.1 million settlement will provide an average of about $1,000 in restitution to customers.

Despite the enforcement action, Searns on Thursday continued to defend the business model of Legal Helpers.

"We know we have helped a number of consumers," he said.

Two of Legal Helpers' partners are not out of the woods yet. Thomas Macey and Jeffrey Aleman face disciplinary action related to their debt settlement business. Their attorney, George Collins, denied any wrongdoing.

"This was a business built on defrauding people, not providing real legal help," said Natalie Bauer, a spokeswoman in Madigan's office. "When you expose that conduct for what it is, it's not surprising that a business can't survive."