Debt Deception?

Published — July 20, 2011 Updated — May 19, 2014 at 12:19 pm ET

Borrower Nightmares: Small town teacher seeks help for big debt, ends up in bankruptcy

Mary Linville, center, with her son, Jamie, and daughter, Ronna. The West Virginia attorney general sued Morgan Drexen, Inc. on behalf of the retired schoolteacher and 400 other consumers who paid up-front fees for debt relief and say they did not receive the promised services. Linville family photo

Illinois, W.Virginia accuse some debt settlement companies of using legal loophole to charge high up-front fee


Retired schoolteacher Mary Linville looked around the dinner table and smiled. It was an evening late in November 2008, and she was surrounded by friends who had come to unwind after the hectic Thanksgiving holiday. To her left sat her husband, and to her right were friends from church with whom she often went horseback riding. Her son Jamie, a county sheriff’s deputy, sat across from her.

The dinner at Linville’s middle-class home in the rural West Virginia town of Alkol was interrupted by a knock on the door. One of her son’s co-workers, armed and wearing his badge, stood awkwardly at the door and served Linville with a lawsuit filed by Discover for failing to pay off her credit card.

The court summons alarmed Linville, who seven months earlier had hired what she calls a “debt settlement firm” that promised to cut her $72,000 debt in half by negotiating repayments to creditors. Instead, Linville became one of many Americans who have found themselves even deeper in debt after seeking help through debt settlement services, an industry the new Consumer Financial Protection Bureau aims to regulate.

More than 500,000 Americans with about $15 billion of debt are currently enrolled in debt settlement programs, said Andrew Housser, executive board member of the American Fair Credit Council. The industry group represents about 45 debt settlement companies which together handle about $2 billion in consumer debt.

“People in debt have several options,” Housser said. “They can file bankruptcy, seek debt settlement, or do nothing. Debt settlement is appropriate for those people who have the desire to do something about their debt, who have the ability and willingness to slowly pay it off.”

Seven months before that memorable November dinner, Linville had hired California-based Morgan Drexen, Inc. when a telemarketer called to advertise the firm’s services.

Linville said the company told her it would charge her monthly installments of $771.25, and the initial payments would be applied toward Morgan Drexen’s engagement fee of $4,101.53, and fees for maintaining Linville’s checking account. In return, Morgan Drexen promised to deal with her creditors directly and settle her debt for less than half of the original amount, she said.

“I was so surprised, I had no idea I was in trouble,” said Linville, 63, recalling the court summons that turned her financial world upside down. “I thought they were doing what they promised to be doing for me.”

But Morgan Drexen did not deliver the promised services, Linville claims. Instead, the firm took — and kept — about $7,000 from her checking account but never paid a cent to Discover, Bank of America, Lowes and most other creditors, she said. Shortly before the Christmas holiday in 2008, she filed for personal bankruptcy.

‘Head over heels’ in debt

“By the time I realized what was going on, I was head over heels, way over my head in debt,” Linville said. “I was falling behind in payments, and interest kept collecting. There was no way I could get caught up.”

Linville, who taught elementary school for 36 years until she retired, complained to the West Virginia state attorney general, which filed a lawsuit against Morgan Drexen two months ago on behalf of her and other consumers.

The company describes itself on its website as a software and support service provider to 35 U.S. law firms. Morgan Drexen is “NOT a debt settlement company,” wrote Raychel Harvey-Jones, vice president of media relations, in an email to iWatch News. “Morgan Drexen provides a platform where attorneys, clients and businesses can reach amicable solutions together. Clients and their attorneys use this platform in a variety of situations including bankruptcy, personal injury and resolution of claims by creditors.”

While the company may not call itself a debt settlement company, the West Virginia attorney general and Linville allege that for all intents and purposes, it is. Defining exactly what constitutes a debt settlement company is one of the early challenges for the federal Consumer Financial Protection Bureau to tackle in regulating the industry.

Just last month, the bureau announced debt relief services were among a half-dozen high-priority areas it was targeting with its new powers under the Dodd-Frank financial reform law. As a first step, the Consumer Financial Protection Bureau said it must clarify which debt settlement companies are “a larger participant” in the industry.

“Statistics on the size of [the debt counseling and debt settlement] industries, as well as the size of other debt relief services, are not readily available. The CFPB will need to consider carefully how to define any debt relief provider market or markets included in an initial rule,” the agency said in its announcement.

Linville is not alone in claiming that Morgan Drexen’s work failed to bring results.

The Better Business Bureau, which said it has received some 217 customer complaints in the past three years about Morgan Drexen, gives the company an ‘F’ rating. Customers complained that as Morgan Drexen automatically deducted monthly fees from their bank accounts, the company failed to disclose where the funds were being held and debts remained unsettled, according to the BBB.

Loophole for lawyers

The debt settlement industry is a complicated one to regulate because it involves so many parties — the creditor, the debt settlement provider, a consumer, and, in Morgan Drexen’s case, lawyers who negotiate the debt.

According to Harvey-Jones’ email, “1,000’s of consumers have used MD [Morgan Drexen] supported attorneys to assist them with resolving their disputes with their creditors. MD has processed $266M of debt for just over $100M [in] over 72,000 settlements.”

“The figures above speak for themselves. The attorney-based debt resolution program is successful,” Harvey-Jones said.

The involvement of a lawyer in debt settlements is an important advantage for companies that promise to settle their clients’ debts.

Just last fall, the U.S. Federal Trade Commission amended its telemarketing regulations to prohibit companies that sell debt settlement services over the telephone from collecting fees until a client’s debt is settled. However, the rules allow lawyers who perform debt settlement services to collect legal fees up front from consumers.

Morgan Drexen has also taken note of the FTC’s new rule. “Although it is unclear at this time whether or not the FTC has the authority to govern the practice of law, it is the intention of the law firms as well as Morgan Drexen, to make certain that all services and support operations comply fully with the new rule or are exempt from its application,” the company says on its website.

Consumer advocates say debt settlement companies are using the law firm exemption as a loophole to get around regulations.

For example, debt settlement companies using this model may advertise that lawyers will serve as an active negotiator between a debtor and creditor, critics said. Recent lawsuits against these companies, however, allege that the lawyers do little and are involved only so that a debt settlement company can collect advance fees.

“It’s like a cat and mouse game,” Stuart Sloan, a consumer lawyer based in North Carolina, said. “Of course there are regulations, but we see these debt settlement outfits morph. They make a new name and a new strategy to get around these rules.”

Lawsuits in 10 states

In the past year, consumers or state officials have filed suit against Morgan Drexen and similar businesses in at least 10 states, including Colorado, Virginia, Washington, New Jersey, Kansas, Ohio, Michigan, New Hampshire, Illinois and West Virginia. The lawsuits accuse the named companies of charging illegal up-front fees, giving clients little or no contact with an attorney, and failing to settle clients’ debts.

In May, West Virginia Attorney General Darrell McGraw accused Morgan Drexen of failing to deliver its advertised services, failing to disclose adverse consequences of debt settlement programs, and collecting fees that exceeded legal limits for debt pooling, among other allegations.

“Morgan Drexen purports to merely provide paralegal services to lawyers engaged in debt settlement activities on behalf of clients,” the West Virginia complaint states. “In reality, Morgan Drexen provides all of the meaningful debt settlement services while lawyers it recruits merely ‘rent’ their bar licenses and company ‘letterhead’ to Morgan Drexen.”

In return for partnering with Morgan Drexen, the lawyers are paid a monthly fee based on the number of clients they supervise, the lawsuit alleged. A contract one West Virginia lawyer supplied to the attorney general’s office showed she was paid a minimum of $500.00 each month for the first 300 clients she oversaw, plus $2.00 for each additional client.

”The appearance of licensed lawyers providing debt settlement services enables Morgan Drexen to evade state regulation of its activities,” the West Virginia attorney general’s lawsuit said. Lawyers have no active role in negotiating debt with creditors, communicating with creditors or consumers, or billing consumers, it said. “All of these activities are performed by Morgan Drexen,” it said.

Morgan Drexen’s Harvey-Jones said that the company is “vigorously” defending itself. “[The] AG’s allegations relate to clients of the law firm that were engaged pre-TSR [Telemarketing Sales Rule] amendment. To the extent that the [West Virginia Attorney General] alleges that MD collected fees, that allegation has been denied,” Harvey-Jones said.

Another company, Legal Helpers Debt Resolution which calls itself one of the largest in the industry, faces a similar lawsuit filed in March by Illinois Attorney General Lisa Madigan.

That lawsuit accused Legal Helpers of collecting excessive fees from more than 1,000 Illinois clients, which include a $500 retainer, a $49 monthly charge, and 15 percent of the total debts. While Legal Helpers states or implies that “consumers will be represented by a law firm … in fact all debt negotiation and related services are provided by non-law firm third parties and LHDR is merely a referral source for these same third parties,” the Illinois attorney general’s complaint said.

The allegations are “totally incorrect,” Jason Searns, general counsel for Legal Helpers, told iWatch News. “The client’s cases are reviewed by our attorneys, and if they are sued, we represent them. They remain our clients the entire time.”

“We are not referring any services to non attorney third parties. We work with a support group who is under contract with us, and we constantly supervise their work,” Searns said.

Sloan, the consumer rights lawyer, is also suing Legal Helpers on behalf of clients who claim the company didn’t deliver what it promised.

“With debt, you get really desperate and can get suckered into working with these companies,” Sloan said. “But here’s the dirty little secret: you don’t need them. Credit card companies will negotiate directly with the debtor — you don’t need the middle man.”


For some consumers who have racked up thousands of dollars in debt, though, there are few things scarier than speaking with creditors. That fear makes them easy targets for debt settlement companies.

Linville began receiving unsolicited phone calls in early 2008 from companies offering debt settlement services that claimed she could be debt-free in less than a year.

“They told me that if I paid the minimal amount of my credit card, it would take me 40 years. They said they could get me debt free in one year,” said Linville, who lives in a one-story home built in the late 1970s in the scenic West Virginia mountains.

At first, she hung up on the robo-calls, but by April 2008, Linville figured she had nothing to lose. A salesman on behalf of Morgan Drexen assured her that it would settle her debt for a lower amount than she could find anywhere else. Her monthly payments would be $771.25 — “something I could live with,” Linville said.

The package from Morgan Drexen even provided Linville with a script so that she knew what to say if any of her creditors phoned to ask why she had stopped making payments.

Morgan Drexen continued taking payments from her on the 15th of every month, Linville said, which she believed went into a special account that would be used to pay off creditors. Linville said she had no sense that anything was wrong until November when her dinner with friends was interrupted by the sheriff’s deputy serving her with a lawsuit.

Like many consumers, Linville was unaware that there is no guarantee that creditors will accept a partial payment of a debt. In fact, once a consumer stops paying the creditor, he or she may be charged interest and late fees, as well as charges for exceeding a credit limit — all of which can eventually double or triple the consumer’s original debt amount.

“These companies might get you a settlement of 65 percent, but you do the math and add in the upfront fees. The client might be paying over 85 percent of the debt’s principal balance, and that’s not great at all,” Sloan said. “And that’s even before you add in the extra fees the creditor is charging you.”

While creditors have no obligation to negotiate consumer debt, they are legally required to accurately report a consumer’s failure to make monthly payments to credit reporting agencies. In some cases, creditors may sue a consumer to recover money owed.

Harvey-Jones acknowledged that not every consumer who engages in debt settlement sees results. “There are many factors that decide the success of a client,” her email said. “The attorneys representing the consumer cannot, nor do they guarantee a result. The prospective clients are advised of this in no less than three locations.”

The morning after she received her court summons to appear in court in mid-December 2008, Linville said she called Morgan Drexen and asked for a lawyer to represent her in court. The firm referred her to Lawrence W. Williamson, Jr., an attorney in Wichita, Kan.

“He would talk over the phone and tell me what I should say in court, but he refused to show up there with me,” Linville said.

The West Virginia attorney general identifies Williamson as a lawyer that Morgan Drexen assigns to most of its clients in the state, though he is not licensed to practice there. The state’s lawsuit alleges that Williamson, Jr. is practicing law in West Virginia or “is knowingly misleading consumers and creditors into believing he is.”

Williamson told iWatch News that the state accusations were unfounded.

“I have not provided any acts that constitute the practice of law in West Virginia,” he said, adding that his law firm works with local counsel to advise West Virginia consumers, a practice allowed by the West Virginia bar rules.

“Instead of taking a toothpick and removing all the bad cells, the attorney general is taking a huge paper towel to wipe everything off the table,” Williamson said. “They are judging us for the things other people are doing. It’s an unfair picture.”

Williamson also said that Linville’s claims were false. “We never refuse to represent someone in court,” he said. “They might not be able to afford a full-fledged representation lawyer, but we can help provide help in the courtroom.”

But unable to come up with the $7,000 demanded by Discover in its lawsuit, Linville said she had no option but to file for personal bankruptcy in early December 2008, days before a scheduled court appearance. “I was so scared, I didn’t know what to do,” she said.

“This was the most embarrassing part,” Linville said. “We just weren’t raised that way. I live in rural West Virginia.. We give our word, and that’s all you need.”

While Linville and her husband, Ronnie, managed to hang on to their home and vehicles, they lost the good credit rating they had built up over several decades, which meant that they could no longer finance any purchase through borrowing. Ronnie Linville, who is also retired, receives a small payment for preaching at a local Church of Christ but says he donates most of that to the church.

Equally as painful was the damage to her family’s reputation in the small West Virginia town of 1,300 residents.

“People just sit on their porches and gossip about you,” said Linville’s son, Jamie, who lives just 200 yards down the road from his parents’ home.

“Nobody has to say anything to your face, but you know when you see them that they know what’s up,” Jamie Linville said. “For months after the bankruptcy, my parents were so ashamed to be seen out in public that they drove 40 miles away to Charleston to buy groceries. The only time they would leave the house would be to go to church.”

The shame and embarrassment only got worse when news of the bankruptcy made the pages of The Lincoln County Journal, which has a circulation of 15,000. That is when Mary Linville’s elderly mother first learned of it.

“My grandma yelled at her for 20 minutes straight,” said Jamie, 37. “And mom just cried and cried. It was a tough pill for her to swallow.”

What will CFPB do?

The Linvilles say they hope that the new Consumer Financial Protection Bureau, which officially opens its doors for business on July 21, will help families get the debt settlement help they pay for.

The bureau has promised, along with the Federal Trade Commission, to regulate debt settlement companies. The two agencies will share enforcement and coordinate on rule making, but only the CFPB will have supervision and examination authority over debt settlement companies, said Betsy Lordan, an FTC spokeswoman.

“The CFPB and the FTC are negotiating a memorandum of understanding to coordinate their rulemaking, law enforcement, consumer education, and other activities so that the agencies operate as efficiently as possible, apply consistent standards to regulated entities, and provide consumers with useful and consistent information to make well-informed decisions,” Lordan told iWatch News in an email.

State attorneys general will be involved in enforcing any regulation of debt settlement companies, along with the CFPB and the FTC. “Debt settlement was identified as a priority area by the states, but there has not been anything more specific on this issue,” said Noelle Talley, a spokeswoman for North Carolina’s Justice Department, which has been working with the CFPB as it develops its regulatory agenda.

How aggressively the CFPB will move to regulate debt settlement companies remains unclear, especially because the agency cannot propose new regulations until it has a full-time director confirmed by the U.S. Senate. Senate Republicans have threatened to reject any presidential nominee for the top job until the new agency is restructured to weaken its power.

A CFPB spokeswoman declined to comment on the bureau’s plans for debt settlement companies.

Meanwhile, Linville is closely watching the West Virginia lawsuit against Morgan Drexen.

“You know, one thing stands out in my mind about this whole ordeal,” Linville said, recalling how she was always put on hold when phoning Morgan Drexen. “While I was on hold, there would be a recording of people telling me stories of how Morgan Drexen saved their lives, improved their credit, et cetera. ‘Without them, I wouldn’t know what to do,’ ‘They were a lifesaver’ — things like that.”

She paused.

“They said they would do the same for me, and minutes later, I was brainwashed. I really fell for that.”

August 1, 2011 Update

After this story was published, Morgan Drexen said the number of law firms it supports had increased to 42, up from 35 firms cited in two recent corporate blog entries on A company spokeswoman also said that Mary Linville did not return her power-of-attorney documents until July 2008, and that resulted in an “unrealistic timeframe” to settle Linville’s entire $72,000 debt. However, the attorney representing Linville did reduce one of her debts by 50 percent despite her relatively short time in the program, the spokeswoman said.

Read more in Inequality, Opportunity and Poverty

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