STATE OF NEW JERSEY
NEW JERSEYLAW REVISION COMMISSION
Revised Tentative Report
Relating to
New Jersey Debt-Management Services Act
December 1, 2010
Thisrevised tentative report is distributed to advise interested persons of the Commission's tentative recommendations and to notify them of the opportunity to submit comments. The Commission will consider these comments before making its final recommendations to the Legislature. The Commission often substantially revises tentative recommendations as a result of the comments it receives. If you approve of the draft tentative report, please inform the Commission so that your approval can be considered along with other comments.
Please send comments concerning this tentative report or direct any related inquiries, to:
Laura Tharney, Esq., Deputy Director
NEW JERSEY LAW REVISION COMMISSION
153 Halsey Street, 7th Fl., Box 47016
Newark, New Jersey07102
973-648-4575
(Fax) 973-648-3123
Email:
Web site:
Introduction
The Uniform Debt-Management Services Act (“UDMSA”) was recommended for enactment by the National Conference of Commissioners on Uniform State Laws in 2005, and was last revised and amended by NCCUSL in 2008. The purpose of the Act is to “rein in the excesses while permitting credit-counseling agencies and debt-settlement companies to continue providing services that benefit consumers.” NCCUSL Report, 2008, page 4. UDMSA has been enactedin six states (Colorado (1/2008), Delaware (1/2007), Nevada (effective 7/2010), Rhode Island (3/2007), Tennessee (effective 7/2010) and Utah (7/2007)), and introduced in ten additional states and in the United States Virgin Islandsin 2009 and 2010.
Adiscussionof the evolution of debt-management services in this country is contained in the NCCUSL final report, which may be found at archives/ulc/ucdc/2008final.htm. Since the federal Bankruptcy Reform Act of 2005requires an individual to show that debt counseling/management was attempted before filing for Chapter 7 bankruptcy, greater transparency and accountability are needed to prevent excesses and abuses.
The Act applies to “providers” of “debt-management services” that enter “agreements” with individuals for the purpose of creating “plans.”Id. at 4-5. The Act speaks of “individuals,” as opposed to “consumers,” so it applies to farmers and other individuals saddled with personal debt incurred in connection with their businesses.Id. at 5. The definition of “debt-management services” encompasses both credit counseling and debt settlement. The Uniform Act is neutral on whether for-profit entities should be permitted to provide debt-management services. Id. at 6.The states that have adopted some version of the act permit for-profit entities to participate in debt-management activities, but some states (Illinois, for example) have drafted their law in such a way that it may be financially prohibitive for those entities to do so.
New Jersey does not currently allow for-profit entities to engage in debt relief activities within the State. Only not-for-profit entities may be licensed to do so pursuant to the current law. For-profit entities are generally associated with a type of debt-management known as debt-settlement. Debt-settlement involves a reduction of the principal amount of the debt and a payoff of the reduced debt in a lump sum or over a short period of time (three to six months). Traditional debt-management, on the other hand, involves creditor concessions such as reductions in the interest rate, finance charges, late fees, and the like, and a payoff of the full principal balance after concessions over a period of five years. Commission Staff is not aware of any not-for-profit entity licensed to do business in the State of New Jersey that engages in debt-settlement. It appears that federal law limits the extent to which tax-exempt, not-for-profit entities may engage in debt-settlement and retain their tax-exempt status because such activity falls outside of the permissible charitable or educational goals and is not an activity listed in the 501(q) provisions pertaining to such entities.
Comments provided to the Commission on this project
During the early stages of Commission consideration of the UDMSA, informal comments were provided by the Department of Banking and Insurance and the Office of the Attorney General. Both of those entities suggested that the current law is outdated. The UDMSA represented an opportunity to revise New Jersey law to offer more protection to New Jersey consumers from some of the abuses associated with debt-relief services. Since the UDMSA was released by NCCUSL, the Federal Trade Commission has revised the Telemarketing Sales Act to impose some limitations on the fees that may be charged by certain for-profit entities engaging in debt-settlement activities and other states have revised their laws in an effort to afford their consumers increased protection from predatory debt-settlement companies.
The Commission has been fortunate to receive a great deal of input from an array of commenters with differing interests in this area of the law. The comments included very general feedback as well as detailed, specific suggestions for revisions to improve the language.
Since the issue of whether for-profit entities should be permitted to engage in debt-settlement in New Jersey is the most significant substantive question posed by this draft, some of the comments on both sides of this issue are summarized below.
The information provided to the Commission by commenters on this project suggests that some predatory for-profit debt-settlement entities victimize New Jersey consumers even though they cannot legally conduct business in this State. The NJDMSA could help clarify the requirements imposed on entities doing business here as well as the penalties and powers of enforcement. It is generally recognized by those who object to the participation of for-profit entities in this State that debt-settlement is, for some segment of the consumer population, the best debt-relief option. It has been suggested that, as long as there are New Jersey consumers in need, more debt-settlement activity, not less, will take place in this State. Some of this work may be done legally by attorneys, some of it may ultimately be done by not-for-profit entities and, if for-profits are allowed to operate in New Jersey, some of the work could be done by for-profit entities licensed and subject to the stringent requirements imposed by this act.
The Commission has not yet made a determination about whether or not the NJDMSA should be drafted to allow for-profit entities to participate in debt-management in New Jersey. The current draft is structured in such a way that a single sentence contains the authority for for-profit entities to operate here, so only limited changes would have to be made if it is determined that they should not now be permitted to do so.
I. Comments in favor of for-profit debt-settlement.
Arguments have been made to the Commission in favor of allowing for-profit entities to provide services to New Jersey consumers. The Department of Banking and Insurance explained that, with regard to for-profit entities, for more than 30 years New Jersey Debt Adjuster Act has attempted to protect the public from potentially rapacious debt adjusters by limiting the pool of service-providers to nonprofits. In the past two or three years, with the foreclosure and financial crisis, the demand has grown exponentially but the pool of services has remained static because of the regulatory regime limiting the available service providers to not-for-profits.
CareOne Services, Inc., based in Columbia, Maryland, is licensed or registered to operate in 42 states. CareOne suggested, in comments provided to the Commission, that an important aspect of this issue is that the consumer who has unsecured debt falls onto a continuum consisting of four services ranging from a consumer who just needs help with a budget and some credit counseling to those for whom bankruptcy is the most appropriate solution. The four services are credit counseling, debt management, debt settlement and bankruptcy.
Debt-management plans were described as the traditional territory of nonprofit credit counselors. Such plans involve payment, by the debtor, of 100% of the principal amount of the debt over a period of 60 months, with concessions by the creditors like a reduction of fees or charges. The upfront fee would be set at about $35 to $50, plus a monthly fee to cover the ongoing support to the consumer during the period of the plan. Debt-settlement involves the repayment of less than the full principal balance owed and may be appropriate in cases in which the consumer cannot afford a debt management plan, but may be too solvent to pass the means test to qualify for bankruptcy. Debt-settlement may also be appropriate for a consumer who does not qualify for a Chapter 7 bankruptcy and would prefer not to pursue a Chapter 13 because he or she wants to try to retain their house. Traditionally, “for profits” entities provide this service and, historically, they charged substantial up-front fees.
CareOne has had 1.5 million consumers contact them for counseling and has facilitated the payment of more than $165 million between consumers and their creditors. They talk to 650,000 new consumers every month. CareOne suggested that one reason to allow for-profit entities to offer services in New Jersey is that when a consumer presents to an entity, he or she can be anywhere along the continuum he described above, and they should be allowed to choose the services they receive. CareOne did stress that it favored clear laws and strict regulation.
Debt-settlement takes place when a consumer is delinquent on outstanding debt and the creditor has charged the debt off. The creditor is either going to write it off or give it to an internal debt collector or a collection agency. It was explained that the key is negotiating with creditors and having the necessary knowledge to do so, either by systematizing it or basing it on relationships with them. The provider tells the creditors that the consumer can only afford to pay “x” dollars, either in lump sum or installments, that “y” dollars is what the provider has in escrow, and that the debtor is willing to settle at, say, 50 cents on the dollar, take it or leave it, adding “if you don’t want it, I am going to the next debtor”. The provider will then receive a fee based on the savings to the consumer. With debt management, creditors have standard reductions for consumers on a plan. It is not a negotiation; the deal is the same for each consumer. For example, 9.9% is one credit issuer’s standard offer; 11.3% is another entity’s standard. There is no negotiation in debt-management plans; there is negotiation in debt-settlement plans. That is why debt-settlement entities say that higher fees are justified for them, because it takes more work to settle and costs approximately four times more to engage in debt settlement than in debt management.
The Association of Settlement Companies (TASC), imposes mandatory standards for its members, has a third-party accreditation and “secret shops” their members by calling them and posing as consumers in need of assistance in order to make sure members are following TASC’s standards. TASC’s members offer the product for the middle-range consumer, the product between debt management and bankruptcy which is not being addressed by nonprofits. Based on the responses to its FOIA requests to the FTC, TASC reviewed materials and determined that debt settlement companies comprise approximately 20% of companies on the list of the 100 most complained about companies in the area of debt settlement/debt negotiation, but only 5% of the complaints. TASC suggested that the rate of completion for Chapter 13 bankruptcy plans nationwide is approximately 33%, the success rate for not-for-profit administered debt-management plans is approximately 21-26% and the success rate for debt-settlement for TASC members is approximately 34%. In materials submitted to the Commission, TASC suggested that not-for-profit entities are failing to meet increased consumer demand for debt-relief services. It also suggested that the Illinois fee-limitation model, which is included in this draft, is not a good model to follow since it is anticipated that for-profit entities will no longer be able to operate in Illinois since the permissible fee is actually several times less than that permitted for not-for-profits and does not even cover the costs of providing the necessary services to consumers.
TASC addressed what it called some common debt-settlement myths, explaining that: debt-settlement clients are not usually low income individuals; consumers cannot negotiate their own deals as effectively as a third party; debt-settlement does not cause timely payers to default on debt; and there are consumers who have been helped by debt-settlement companies.
II. Comments opposed to for-profit debt-settlement.
Arguments have also been made to the Commission against allowing the participation of for-profit debt-settlement entities. Legal Services of New Jersey, in materials submitted for Commission review in November, stressed that it was vitally important to continue to limit debt relief work in New Jersey to not-for-profit entities, referring to a “frightening, industry-wide record of deception and abuse” on the part of for-profit debt-settlement entities “extensively documented” in federal and state government investigations. LSNJ suggested that it was too soon to tell whether the FTC Rule change and the stricter laws in states like Illinois will be sufficient to offer consumers more than illusory protection against predatory debt-settlement companies. LSNJ said that to the extent that there was a segment of the consumer population best served by debt-settlement, that segment was very small and, for most consumers, bankruptcy is a less expensive and more effective option. LSNJ also expressed concerns that a “lawyer referral” business model might be the next wave of for-profit debt-settlement activity.
When the industry-wide record of the for-profit entities is considered, it should also be noted that, until 2004-2006, not-for-profits were bad actors in the debt-relief area. An IRS audit of 41 not-for-profit entities representing more than 40% of the revenue in the industry, triggered by credit counselingabuses during that time period, resulted in the revocation, proposed revocation or termination of tax-exempt status for all 41 of the entities.
New Jersey Citizen Action, a citizen watchdog coalition in New Jersey, suggested in comments that for-profit debt-settlement companies are notorious for widespread abuses and have generated the most complaints received by the Better Business Bureau since 2007. NJCA suggested that New Jersey’s current law offers the best protection to New Jersey citizens by precluding the participation of for-profit entities in debt-relief activities. Commissioners noted that even according to TASC’s own numbers regarding the success rate of its members, approximately two-thirds of debtors who seek help from debt-settlement companies are unsuccessful.
A commenter who is an attorney with a practice focusing on bankruptcy explained that he sees about 1,000 clients a year in his practice and that about 10-20% of them have dealt with a debt-settlement company despite the fact that such companies cannot legally operate in New Jersey. He explained that none of those clients had any success with the debt-settlement companies and suggested that a legitimate attorney would not likely engage in a substantial volume of debt-settlement work because of the inherently predatory nature of the business model. He added that, in his experience, attorneys who are serious bankruptcy practitioners do some debt-settlement work as well because there is a percentage of the consumer population for whom this is the best solution and because most consumers cannot effectively negotiate the best deal for themselves. He suggested that New Jersey is a progressive state that protects its people and that New Jersey citizens should not be exposed to predatory debt-settlement companies.
The Commission also heard from a representative of Consumer Union who suggested that New Jersey citizens already have some of the best protection against debt-settlement companies simply because they are not permitted to do business here. Consumer Union expressed concern because although debt-settlement is theoretically a beneficial business model, the segment of consumers for whom it is suitable is small and yet it is marketed to everyone, including people for whom it is inappropriate and financially dangerous. CU suggested that careful thought be given to opening the door and exposing all New Jersey consumers to predatory practices when only a small number of them would benefit from the debt-settlement model. CU added that the key question is whether any consumers who pursue debt-settlement actually come out ahead, when the unsettled debts that have ballooned as a result of non-payment are considered along with the fees paid and the payments made on any debt that is actually paid off.
The not-for-profit commenters on the project have not objected to the participation of for-profit entities, but instead have stressed the need for parity and strict regulation of for-profits. They suggested that the law included limitations on fees applicable to for-profit and not-for-profit entities.