Watch Out for Debt-Elimination Scams

The Easter bunny-believers who buy into this logic find themselves deeper in debt than ever -- and well down the road to financial ruin.Okay, it’s official: There is no argument so stupid that somebody won’t buy it.



I thought the folks who fell for the “income tax is unconstitutional” scam were pretty soft-headed. But they’re geniuses compared to the ones signing up for the latest “debt elimination” swindle.



Here’s how it works: For a stiff upfront fee -- sometimes $2,500 or more -- you can get a certificate to take to your bank that supposedly eliminates your obligation to repay your mortgage, credit cards or other debt.



What the victims get, of course, is an entirely bogus document that starts them down the road to trashed credit, foreclosure, financial ruin and possible federal fraud charges.



“People fall for this . . . and then they start getting collections notices. They don’t really understand what’s going on,” said FBI spokesman Paul Bresson. “This is a growing problem, particularly in the past five or six months.



The Feds are really angry

Spread via Web sites, e-mail and those ubiquitous hotel ballroom seminars, these scams have proliferated to the point that the Federal Reserve Board and the Office of the Comptroller of the Currency, which regulates the national banks, have sent out alerts to the banks they regulate. The warnings tell banks not only to be on guard against this scam but also to confiscate any documents that the borrower presents and send a suspicious activity report to the FBI -- the same kind of report used to alert the bureau to information about possible terrorists, money launderers and other criminals.



“From the tenor of (the warnings) they’re really mad,” said attorney Gary Van Ryzin, chief legal compliance officer for Great Lakes Higher Education Corp., a student loan servicer and guarantor based in Madison, Wis. “They take the integrity of the financial system pretty seriously.”



In the past few months, Van Ryzin’s company has been presented with several of these bogus documents, some of which resemble legitimate certificates such as bankers’ acceptances, which are a kind of payment used between banks. Like other student lenders, Great Lakes is required to send suspicious activity reports to the FBI when sent the phony papers -- a reality that agonizes Van Ryzin.



“Some of these (scam victims) are the same age as my daughter,” Van Ryzin said. “Do I want to send the FBI out after them? That’s a tough call.”



The debt-elimination promoters make a variety of arguments to support their outlandish assertions. Sometimes they claim the Declaration of Independence condones their approach, while other times they question the authority of the Federal Reserve or the legitimacy of the U.S. dollar. Like the anti-income tax idiots, they quote selectively from official documents, court rulings and other authoritative-sounding sources to “prove” their ridiculous theories. Some, in a monstrous bit of circular reasoning, denounce the Fed and then claim the central bank actually approves their activities.



In fact, their techniques are so similar that many regulators suspect a few of the same yahoos who promoted the anti-tax schemes are behind some of the debt elimination scams.



The $2,500 fee is really a $2,500 theft

The stakes seem to be higher, however. While many of the anti-tax folks stuck to selling books or seminars, the debt elimination scamsters typically ask for an upfront fee of $2,500 to $3,000 and may demand an additional 15% cut of any debt “eliminated.” Sometimes, they even suggest taking out a second mortgage to pay the fee for “wiping out” the first mortgage.



“It’s another opportunity (for the promoters) to steal money,” the FBI’s Bresson said. “The Internet presents a lot of opportunities to . . . commit fraud against unsuspecting consumers.”



But while it took years for the slow-moving IRS to finally clean the tax protesters’ clocks, ruin comes much more quickly for those who fall for debt removal schemes. The first late payment can devastate a credit score and result in higher interest rates. After a few months, the accounts are turned over to collections -- further damaging the credit score and opening the borrower up to lawsuits and wage garnishment. Foreclosures can happen just as quickly, and your auto lender can repossess your car as soon as a day after you miss your first payment.



Denver attorney Jill Beaty, who works for a collections law firm, said she has pursued civil action against nine of these cases recently, winning judgments each time, with another case pending and 10 more awaiting action on her desk.



“(The protestors are) filing fake arbitration awards with the courts and asserting that the debt doesn’t exist,” Beaty said. She had number of cases where the protesters all filed exactly the same arguments. “They’re filing something they found on the Internet, and they don’t really understand what they’re doing.”



It’s an open question how quickly law enforcement agencies will take up the charge against this rip-off. The FBI’s Bresson said the agency is investigating several of the schemes. The burgeoning scam, however, is still in its early days, and state and local prosecutors have yet to get into the act. While regulators are most likely to go after the scam’s promoters, borrowers who persist in making frivolous debt-elimination arguments -- or who try to pass bogus paperwork off as legitimate bank documents -- could face fines and jail time just as their anti-tax counterparts have.



If it’s too good to be true . . .

Sadly, some of the people who stumble on these schemes were originally looking for legitimate ways to handle their debts, such as credit counseling. But a single phone call to the Fed, one of their lenders or a lawyer could have exposed the swindle for what it was.



There are a few old clichés that apply here, the most obvious being that “If it sounds too good to be true, it probably is.” More importantly, though, “You can’t cheat an honest man.” If people weren’t so willing to grasp for quick-fix solutions for their financial problems, rather than doing the hard work necessary to solve them, they could smell this con coming a mile away.



By Liz Pulliam Weston