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Federal Deception Law: 11.5.3.2 Escrowing Fees

Even though debt relief service providers may not seek payment until they deliver results, they are allowed to require customers to regularly pay into an account to cover the provider’s fee and to fund anticipated settlement agreements with creditors.218 These payments may be required before the provider performs any work on the contract, but the Telemarketing Sales Rule imposes a number of restrictions on the provider’s ability to impose such a requirement:219

Federal Deception Law: 11.5.3.5 Unsubstantiated Claims

An important TSR requirement is that debt relief providers must have a reasonable basis to substantiate any claims regarding specific savings or other results.240 The FTC’s Statement of Basis and Purpose provides extensive guidance about the evidence providers must possess before they make such claims.

Federal Deception Law: 11.5.4 Recordkeeping Requirements

The Telemarketing Sales Rule (TSR) requires those subject to the rule to maintain a list of records that should be discoverable in litigation. Even when an aggrieved consumer has no right of action under the TSR, records maintained pursuant to the Rule may prove invaluable to establishing other causes of action.242

Federal Deception Law: 11.6.1.1 Registration and Licensing Requirements

Most states have enacted legislation requiring at least certain debt relief agencies to be registered or licensed.256 This subsection generally uses the term “licensed” to also include “registered” and similar concepts. These statutes are significant because debt settlement or other debt relief agencies often do not obtain the necessary licenses, or may not even be capable of doing so, and thus are in violation of the state statute.

Federal Deception Law: 11.6.1.2 Other Substantive Requirements

A number of states prohibit debt management and debt settlement outright but provide that nonprofits and sometimes attorneys are exempt from this prohibition.261 A few states do not license or register debt adjustment agencies, and do not prohibit them outright, but do regulate them extensively.262 And, of course, states that require licensing also include substantive requirements.

Federal Deception Law: 11.6.2.1 Introduction

State debt relief legislation typically covers credit counseling agencies offering debt management plans (DMPs). A critical issue is whether these statutes also apply to debt settlement, debt negotiation, and debt elimination services, as these agencies’ business models are often inconsistent with requirements set out in these state statutes.

Federal Deception Law: 11.6.2.2 ULC Debt Management Act Applies to Debt Settlement

In 2005, the Uniform Law Commission enacted a model debt management law (ULC Debt Management Act), amended it in 2008, and again in 2011.272 The basic coverage of the law remains unchanged in all three versions. The model law applies to “debt management services,” broadly defined as intermediary services between an individual and one or more creditors of the individual for the purpose of obtaining concessions.

Federal Deception Law: 11.6.2.3 When Coverage of Debt Settlement Is Unclear

State statutes may be ambiguous as to whether debt settlement is covered. Often courts will be asked to determine if a debt settlement company is covered by a “debt adjuster” law that applies to agencies that collect payments from consumer for distribution to creditors, sometimes called prorating debt; these statutes typically apply to entities that escrow, handle, manage, or otherwise control client funds.275

Federal Deception Law: 11.7.1 UDAP Claims

Abuses by credit counseling, debt settlement, debt negotiation, and debt relief services are actionable under state unfair and deceptive acts and practices (UDAP) statutes.315 Every state has a UDAP statute, and every state affords consumers a private cause of action for violations.316 UDAP precedent concerning debt relief is detailed in NCLC’s Unfair and Deceptive Acts and Practices.317

Federal Deception Law: 11.7.3 RICO Claims

Federal and state RICO claims should be considered for fraudulent debt services transactions.341 Mail or wire fraud will often provide the predicate acts. For example, the principals behind one debt elimination scheme were convicted of over thirty counts of mail fraud.342

Federal Deception Law: 11.7.5 Consumer Bankruptcy

While some consumers are attracted to debt relief services because they hope to avoid bankruptcy, for-profit debt relief programs often force consumers deeper into debt, leaving bankruptcy as the only source of relief. Filing bankruptcy may be a particularly attractive option to recover funds lost to a debt relief program.

Federal Deception Law: 11.7.6 When Debt Relief Agency Is Insolvent or Files for Bankruptcy

In any action against an insolvent but licensed or registered debt relief service, one source of funds to pay for a judgment may be a bond. State licensing laws typically require the agency to purchase a bond to cover consumer claims. Another way to reach deep pockets is to sue third parties involved with the scheme, such as the party holding consumer accounts in a debt settlement scheme355 or any other party aiding and abetting the scheme.356

Federal Deception Law: ALABAMA

Telemarketing Statute: Ala. Code §§ 8-19A-1 to 8-19A-24 (Telemarketing); Ala. Code §§ 8-19C-1 to 8-19C–12 (Do-Not-Call List).

Federal Deception Law: ALASKA

Telemarketing and Robocall Statute: Alaska Stat. § 45.50.475.

Robocall-Related Definitions: None.

Scope: Excludes calls in response to called party’s request; certain calls from charitable organizations or their volunteers; calls limited to soliciting the expression of ideas, opinions, or votes; business-to-business calls; and certain calls to recent customers.

Registration Requirements: None.

Federal Deception Law: ARIZONA

Telemarketing and Robocall Statute: Ariz. Rev. Stat. Ann. §§ 44-1271 to 44-1282.

Robocall-Related Definitions: No relevant definitions, but statute refers to “automatic terminal equipment that uses a random or sequential number generator.” § 44-1278(5).

Federal Deception Law: ARKANSAS

Telemarketing Statute: Ark. Code Ann. §§ 4-99-101 to 4-99-408.

Scope: Defines specific types of telemarketing that are covered, and excludes persons selling securities, insurance, newspapers, magazines or memberships in book or record clubs, sales to previous customers, sales that involve face-to-face contact, and sales made by supervised financial institutions or burial associations, or public utilities. § 4-99-103(9).

Federal Deception Law: CALIFORNIA

Telemarketing Statute: Cal. Bus. & Prof. Code §§ 17511 to 17514 (West); Cal. Bus. & Prof. Code §§ 17591 to 17594 (West).

Scope: Defines specific types of telemarketing that are covered, and lists twenty-two exceptions such as the sale of securities, sales made to previous customers, and sales that involve face-to-face contact. Exception for solicitations by certain tax-exempt organizations.

Federal Deception Law: COLORADO

Telemarketing Statute: Colo. Rev. Stat. §§ 6-1-301 to 6-1-305; Colo. Rev. Stat. §§ 6-1-901 to 6-1-908.

Scope: Defines telemarketing broadly but lists twenty exceptions, such as the sale of securities, newspapers or insurance, sales involving face-to-face contact, sales made by supervised financial institutions, and catalog sales.