The consumer buying sprees of recent times have spawned a new creature, the debt management company.  Unlike consumer bankruptcy attorneys, whose promises are backed by the Bankruptcy Code, debt management companies promise that debt relief will result solely from their management skills and the cooperation of creditors.  You've heard the ads:

(A)   Sally and John just wiped out $100,000 in bad debt.

(B)   The Richardson family just consolidated their monthly bills to save an average of $700.00 per month.

(C)   My clients have used powerful federal laws to wipe out over $10,000,000 in debt.  Call me; I'll show you how.

It seems as though every time the economy becomes our enemy, debt management companies want to become our best friend.  The promises are as tempting and tantalizing as a cool glass of ice water after being stranded in the desert -- but is it safe to drink?  Let's look at a scenario that plays nightly in homes across America.

I.  The Debt Management Company. 
Picture a typical American family.  After a cozy dinner and maybe an hour or two of watching television, the children are put to bed and the monthly dreaded activity begins:  paying the bills.  The couple starts with the mortgage payment.  This must get paid.  Next come the utility bills.  These too must get paid.  Now, the car payment that is months past due; the creditor has even started to call and make threats to repossess the vehicle.  This has upset the entire family and has put a tremendous strain on the marriage.  The loss of the car would have dire implications on the couple's ability to get to work, not to mention its impact on extracurricular activities and the social stigma attached to being without a car.  Finally, the credit card bills -- that apparently endless spiral where no matter how much money the family pays, the balances never seem to go down.  An then, like sunlight bursting through the clouds, they open an envelope containing an advertisement.

These ads normally get a cursory glance before they are tossed into the garbage, but this one is different.  Along the front, in large all-caps print, the ad reads, ARE YOUR BILLS DESTROYING YOUR LIFE?  ARE YOU AFRAID TO PICK UP THE PHONE?  CALL UP - WE CAN HELP!  Curious and desperate, the family calls the number and are told that if they sign up with Debt Savers Inc., their monthly bills will be reduced, guaranteed.  The company explains that this can be accomplished by consolidating the family's bills and by allowing the company to act as a negotiator with the creditors.  The family thinks this is a deal that is just too good to be true.  Not only will their bill payments be reduced, but they won't even have to deal with the creditors directly.  And so, our family signs up, agreeing to some nominal fee, and Debt Savers Inc. marches valiantly forward to rescue our family from the evil creditors.  But are the promises true?  Not really.  Debt management companies see their services with two myths.

MYTH #1
All creditors will consent to a consolidation.  This simply isn't true.  And if you pause to think about it, it doesn't even make any sense.  Why would a creditor allow itself to anonymously grouped together with other creditors, listed with absolutely no order of priority?  For example, a mortgage company knows that people tend to pay their mortgages first, as opposed to car or creditor card payments - so what incentive does it have to submit to an equal standing with these normally secondary creditors?

MYTH#2
Debt management companies can negotiate better deals with creditors than you can.  Again, this is absolutely incorrect.  As a matter of fact, creditors are less inclined to deal with intermediaries at all.  Creditors generally prefer to deal directly with their borrowers than with a third party for a variety of reasons.  First, intermediaries are not personally or emotionally involved with their clients' debts.  This often translates into a sort of reverse harassment, whereby the debt management company threatens the creditor.  Representatives of some debt management companies have actually told creditors that they will call a thousand times until the creditor accepts their terms.  As you can imagine, that doesn't really put the creditor into a friendly negotiating mood.  Not only is the creditor under absolutely no obligation to offer a settlement deal to a debtor, it is under no obligation to deal with third party debt management companies, period.  At best, the creditor will simply refuse to deal with the third party, effectively ensuring that the debtor has wasted his time.  At worst, the debtor has lost any chance of negotiating a settlement in the future.

Second, debt management companies are not financially involved with, or liable on, the debt, other than whatever fees they may charge, and have no means of protecting a debtor from any litigation arising from the debt.  This can often place the debtor in a tenuous position, where a debt management company, failing to convince a creditor to accept an absurdly low settlement offer, marches off to fight another fight, and leaves the debtor in the wake of a resulting lawsuit.  Had the debtor approached the creditor directly, there might have been some chance to reach a higher settlement amount and avoid legal fees.

Third, creditors often refuse to deal with third parties because of the anonymity factor.  Once a debtor signs up with a debt management company, all payments and correspondence are sent by the third party to the creditor and vice versa.  For obvious reasons, creditors prefer to know where their debtors are located, and under the umbrella of a debt management company, a debtor could potentially skip town without the creditor knowing anything about it.  Generally, in these situations, a debtor makes payments to the debt management company, which in turn passes along these payments to the creditor -- after removing a small fee, of course.  So, if at some point the debtor moves and then stops making payments to the debt management company, the debt management company may refuse to divulge the debtor's new address to the creditor.  Most creditors would prefer to avoid such a risk.

For these reasons, it almost always serves both a creditor's and debtor's best interests to leave debt management companies out of the loop, and communicate with each other personally and directly.

II.  Attorney's Responsibility to Negotiate with Debt Management Companies.  
For the most part, attorneys representing creditors have no more interest or obligation than the creditors to negotiate with or respond to offers of settlement proposed by debt management companies.  Ethical rules imposed on attorneys place a good faith responsibility on attorneys to communicate offers proposed by opposing parties (in this case, debt management companies) back to the client (in this case, creditors).  Most creditors, however, have neither the time nor the inclination to respond directly to the potentially thousands of offers presented by debt management companies every year.  To circumvent this waste of resources, creditors often give their attorneys parameters within which the attorney is free to accept offers of settlement.  Unfortunately, debt management companies generally propose a certain settlement offer, and then refuse to negotiate the offer into a range compatible with the creditor's stated parameters.  As a result, such bargaining ultimately and almost inevitably ends in a stalemate.  This is further complicated by the fact that debt management companies are not attorneys, and do not represent the debtor in any legal capacity.  that makes working with such companies very awkward, and potentially unethical for an attorney -- especially when litigation is a very real possibility.  Because of the pre-established settlement parameters and the numerous ethical and legal hurdles involved with working with debt management companies, most attorneys simply choose to refrain from such negotiations.

If you would like to find out more on this subject or have any questions, please contact Pedro J. Zabala at (919) 250-2135 or pzabala@smithdebnamlaw.com, or Ben P. Fisher at (919) 250-2136 or bfisher@smithdebnamlaw.com.

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When Your Car is a Lemon

In 1987, North Carolina passed its New Motor Vehicles Warranties Act.  This Act, known as the "Lemon Law", provides consumers purchasing or leasing new motor vehicles with important protections against the manufacturer of the vehicle.  The Lemon Law applies when a vehicle does not conform to the express warranties provided by its manufacturer; the manufacturer has been unable, after a reasonable number of attempts, to correct the nonconformity; and the nonconformity substantially impairs the value of the motor vehicle to the consumer.  The Lemon Law only applies to those defects or nonconformities that occur within 24 months or 24,000 miles of the original delivery of the vehicle and which substantially impair the value of the motor vehicle.  It is presumed that a reasonable number of attempts to repair the vehicle have been undertaken if:

(1)  The same problem has been presented for repair to the manufacturer, its agent or its authorized dealer for or more time but the same problem continues to exist; or

(2)  The vehicle was out of service to the consumer during or while awaiting repair of the problem for 20 or more business days during any twelve month period of the warranty.

In order to use the second alternative, the consumer must provide notice to the manufacturer directly in writing of the existence of the nonconformity and allow the manufacturer a reasonable period, not to exceed 15 days, in which to correct the nonconformity.  The consumer must maintain careful records in order to document the efforts that have been made to have the vehicle repaired.

The Lemon Law will not provide the consumer with remedies against any entity (such as the dealer or finance company) except the manufacturer.  Failure to make timely payments under the retail installment contract financing the purchase or lease of the vehicle will only result in a negative notation on the consumer's credit.  The nonconformity will not serve as a legal excuse to cease making payments under the retail installment contract or lease.  The consumer's sole source of relief under the Lemon Law is the manufacturer.

If the consumer can't peacefully resolve the problem with the manufacturer, the consumer is entitled to bring suit.  The Lemon Law makes it clear, however, that suit should be a last resort.  The consumer must provide the manufacturer with written notice of his intent to bring suit against the manufacturer at least ten days prior to filing such suit.  Should suit become necessary, the prevailing party may be awarded by the Court with reimbursement of its reasonable attorney's fees.

If a Lemon Law case is made, the consumer can opt for a new, comparable replacement car or to return the "lemon" and get his money back, plus damages.  We hope you don't get a "lemon."  But if you do, document your problems and you might be able to prove a Lemon Law case.

If you have any questions regarding this article, please contact Caren D. Enloe at (919) 250-2125 or by email at cenloe@smithdebnamlaw.com.

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