BEWARE OF LOAN MODIFICATION COMPANIES and LOAN MODIFICATION COMPANIES BEWARE!!  

Vulnerable mortgage and credit card debtors are prey to the ruthless individuals working under the guise of companies with seemingly reputable and venerable names that engage in illegal and sometimes fraudulent loan modification services or, in some cases, NO SERVICES AT ALL.  Many of these companies have defrauded such debtors out of THOUSANDS OF DOLLARS without obtaining any results whatsoever for the debtor, perhaps because no services were performed at all or such companies knew that there would be no modification to the loan but yet charged and accepted fees anyway from the debtor in advance.

For the past few months, the Attorney General of New Jersey filed lawsuits and imposed fines against several companies and individuals that were engaged in violations of these laws and other laws.   The counts in the complaints ranged from violations of the Debt Adjuster Act (also known as the Debt Adjustment and Credit Counseling Act) to the Consumer Fraud Act.  Search Milgram v. United Credit; Milgram v. Hope Now Financial Services and Milgram v. New Hope Modifications.  See also the NJ Dept. of Banking & Insurance website warning consumers against loan modification companies.

Loan modification services in exchange for fees is ILLEGAL unless it is done by an attorney or a qualifying non-profit organization. See NJ Stat. Sec. 17:16G-1, et seq.  Under this statute, the Debt Adjuster Act, a “debt adjuster” is defined as any person who ”acts or offers to act for a consideration as an intermediary between a debtor and his creditors for the purpose of settling, compounding, or otherwise altering the terms of payment of any debts of the debtor.”

Bogus loan modification companies are charging exorbitant illegal fees ranging from $2,000 to over $3,500 because such companies are not attorneys.  If debt adjuster work is done by a qualifying non-profit, then the fees are limited to a maximum $60 per month to a non-profit credit counselor per consumer.  See NJ Admin. Code Sec. 3:25-1.2.  Also, any non-profit company must have a license and a $50,000 bond to be permitted to perform debt adjustment services.

Loan modification is simply an area involving the practice of law; it’s contract negotiation with a lender, which is why lawyers are permitted to charge their normal (but hopefully reasonable) legal fees for such services.  See NJ Stat. Sec. 17:16G-1(c)(2)(a), which explicitly carves out an exception to the Debt Adjuster Act.  A violation of the Debt Adjuster Act is a fourth degree offense and the fines start at $1,000 for first offense and then $5,000 for each subsequent offense. NJ Stat. Sec. 17:16G-8.

Therefore, CALL MY OFFICE at 609-799-0090 before you give any money to any non-attorney that offers to modify your loan for a fee.  But, for those of you non-attorneys who are engaged in loan modification work, STOP IT NOW, lest you violate the Debt Adjuster Act.  Please call my office  for guidance in this area and REAL LEGAL ADVICE to help you with your debt matters.  Note that you may also be entitled to bankruptcy protection if necessary.

Even though I am an attorney, I am required by law to disclose that “we are a debt relief agency and that we help people file for bankruptcy relief,” if necessary.

During an economic downturn, customers are usually slower to pay your invoice.  You may have called, sent letters, faxes and emails without getting them to pay anything for a while.  You’ve considered calling a lawyer but you might not have done so because you might have been concerned about the additional costs for the lawyer’s time.  Determining whether litigation (going to court) is necessary is most times a very difficult decision because of the money involved in hiring a lawyer and the prospect of disintegrating any chance of settlement.  But, unless instructed by you, lawyers don’t necessarily jump to go to court right away.  Rather, a good lawyer simply puts your interests paramount and does what’s best for you, which should involve discussing and implementing an effective and perhaps creative settlement strategy.

Here are some tips on resolving such disputes with customers:

1. Offer to lower the amount due by an acceptable discount amount, say 20% or maybe even up to 40% (depending upon whatever you can afford) off of the amount due (set a deadline date for the offer to be accepted and the manner in which it can be accepted).
2. Offer to set up an acceptable payment plan, perhaps even without charging interest.  If possible, couple the promissory note with a security agreement so that you have a lien against the customer’s assets and can preserve your right to get paid in the event of a customer’s refinancing, sale, liquidation or bankruptcy.  It’s very important that you perfect the security interest by filing the appropriate documents and paying any applicable fees with the state; otherwise, you’ll still be an unsecured creditor.  Automatic payments from a credit card would be mutually advantageous so as to eliminate the need for writing, delivering and cashing checks.
3. Offer to forgive a small amount of principal each time the customer pays a large amount of the principal balance.  The customer will likely want a written agreement for this alternative.
4. Write a very reasonable and articulate demand letter offering to settle the matter with various settlement alternatives.  I recommend you at least use a lawyer to review it but having it on a lawyer’s letterhead (stationary) gets more prompt attention.
5. Write a demand letter threatening to sue the customer by a certain date if no payment or response is received.  Again, having this letter coming directly from the lawyer’s office is usually more conspicuous (less likely to be thrown in the trash) and effective. 

Each of the above methods has worked for my business clients at one time or another.  Each case is different because each customer may have different ability to pay.  It is important to know when to use your lawyer to write the letter and get involved directly with the customer.  Most importantly, seek counsel so you can be advised of your rights and strategies under the particular circumstances.

Most lawyers will write the demand letter for either or both an hourly fee and/or a contingent fee.  There should be a pre-litigation contingent fee that is less than the contingent fee when litigation is necessary.  For example, the lawyer might only charge a 15% contingent fee for a pre-litigation settlement but a 33.33% (one-third) contingent fee if the lawyer has to go to court for you, which means that if the matter is settled prior to filing the complaint, then you only pay the lawyer 15% of the amount recovered but once the complaint is prepared and filed, the lawyer is entitled to one-third of the amount recovered.  Also remember that negotiating the details of the settlement agreement may take some time, possibly a few days or longer, which may add some cost to you if the lawyer is charging an hourly fee. 

However, remember, getting some money now is better than some more money two years from now or never collecting anything.  Always try to work with the customer to get some payments coming in, even if they are very small payments.  Helping to keep the customer in business goes a long way to generating the goodwill that might be fruitful in having that customer use your services or buy your product in the future.  And they just might refer you some other business in the meantime and in the future. 

If you cannot resolve the matter prior to litigation, you might have no choice but to sue the customer.  And, never forget, you can always maintain the opportunity to negotiate a settlement even after you’ve filed the lawsuit against the customer.  Starting the lawsuit starts the clock ticking in your favor and gets you closer to a judgment, which makes you closer to becoming a secured creditor.  Don’t quit after you get a judgment.  You need to docket the judgment in order to get a state-wide lien against the assets of the customer by filing the judgment with the county clerk and paying the required docketing fee.  Only then can you become a secured creditor.

There’s no telling whether a customer will go out of business or file bankruptcy.  If the customer files for bankruptcy protection, make sure you file your proof of claim to preserve any rights you might have in collecting at least some money from the customer notwithstanding the bankruptcy.  As mentioned above, a payment plan that gives you a secured lien (remember to perfect the security interest) on the customer’s assets and docketing the judgment are the best ways to preserve your rights to collect because secured creditors are much more likely than unsecured creditors to get paid from the bankruptcy.  Take action now to start collecting!

Darren M. Baldo, Esq., CPA, LL.M. www.dbaldolaw.com