The Minnesota attorney general sued six out-of-state debt settlement companies Feb. 18 for alleged violations of Minnesota law that left consumers already struggling with their debt in worse shape than when they started.

“People who are swimming in debt are often desperate for a life preserver, but they should know that debt settlement companies usually just anchor them down with even more financial problems,” said Attorney General Lori Swanson in a news release.

Swanson’s office says debt settlers typically recommend that consumers stop paying their bills and instead put the money in a bank account, which the debt settlement company will use to negotiate a settlement of the consumer’s debt.

However, she cautions that consumers who stop paying their bills could end up with debt collection calls, ruined credit, collection lawsuits and wage garnishments.

A Minnesota law that took effect Aug. 1 caps the fees that settlement companies can charge for the service. For example, it generally caps the origination fee paid by the consumer at between $200 and $500. Monthly fees are capped at between $50 and $75.

The lawsuits were filed against American Debt Settlement Solutions, Inc. of Boca Raton, Florida; Debt Rx USA, LLC of Dallas, Texas; FH Financial Service, Inc. of Dallas, Texas; Morgan Drexen, Inc. of Anaheim, California; Pathway Financial Management, Inc. of Garden Grove, California; and State Capital Financial, Inc. of Hallandale Beach, Florida.

Swanson alleges the six companies weren’t licensed to do business in Minnesota and overcharged consumers by hundreds or thousands of dollars. The lawsuits seek injunctive relief, civil penalties and restitution.

According to the Federal Reserve, American consumers owed nearly $2.5 trillion in credit card and other consumer debt (not including home mortgages) as of November, 2009.  The debt settlement industry took off a few years ago as consumers faced high levels of credit card and consumer debt and a recession that made it difficult for many people to keep up with their bills. 

Debt settlement companies often ask consumers to pay origination and monthly fees of thousands of dollars, but their recommendations often leave consumers in even worse financial shape. 

 For example, debt settlers typically recommend that consumers stop paying their bills so that the debt settler can negotiate reduced payments with the creditors.  Consumers who stop paying their bills, however, usually end up with ruined credit and often face collection lawsuits, garnishment, and debt collection calls.  

In addition, when a consumer stops making payments on their credit card and other bills, late fees and interest accrue, and the amount of the loan swells.  

Meanwhile, the debt settlers are profiting from fees that could have been used by the consumer to pay bills.

  The lawsuits allege that the companies signed up Minnesota consumers for debt settlement contracts after August 1, 2009 (the effective date of the new state law) without being registered with the Minnesota Department of Commerce, as required by state law. 

 Minnesota law limits the origination and monthly fees that may be charged by licensed debt settlement firms.  

Depending on the amount of the consumer’s debt and the method they choose to pay the debt settler, state law generally caps the origination fee that may be charged by the debt settler at between $200 and $500 and caps the monthly fee that may be charged by the debt settler at between $50 and $75.