There's a lot of money to be made ripping off people who don't have very much. Just look at all the stories about victims of debt-settlement schemes.

In Minnesota, laws are on the books that forbid charging steep upfront fees for promising to negotiate a deal with creditors to pay less than the dollar amount owed. The negotiating work has to be done first.

But some unscrupulous outfits have found a way to skirt the law and continue collecting upfront payments anyway. Their weapon?


Lawyers licensed in the state are exempt from the prohibition of charging fees before the work is done. A retainer is common in the legal field, after all. So companies play the lawyer card. They pay a lawyer for the use of his or her letterhead or have a lawyer on staff to take big payments from consumers but never fix their debt issues.

Regulators are on to them. Victims call the Minnesota attorney general's office or the Department of Commerce when they learn that the $3,000 they paid for a debt-settlement plan got them nowhere. And if they stopped paying their debts, as instructed by many debt-settlement firms, they're far worse off than before.

Both offices have seen an increase in complaints about debt-settlement companies claiming attorney affiliation.

"It's particularly galling," said Minnesota Attorney General Lori Swanson. "Here you're seeing people who have a special privilege -- the privilege to practice law -- abusing consumers who are down on their luck."

She said most of the abuses are occurring by lawyers unlicensed in Minnesota working with out-of-state debt-settlement firms. Many of the debt-settlement companies are unlicensed too. Currently, just nine companies are registered to provide debt-settlement assistance in Minnesota. None is based in this state.

Both the Commerce Department and the attorney general's office have cracked down on these issues in the past and have investigations in progress.

State law also prohibits the collection of upfront fees for foreclosure consultants who offer services such as loan modification. This is also an area where lawyers are exempt and consumer advocates are seeing abuses.

Dan Williams, program director for LSS Financial Counseling, said a week rarely goes by without hearing a consumer tale about a company that took money upfront in return for a promise to save their home or repair their credit. They come to LSS when their money is gone and their credit is ruined. Sadly, many of the services promised by these for-profit firms can be addressed by nonprofit housing and financial counselors for little or no cost.

But for-profit outfits are good at marketing themselves, whether it's online or on late-night TV.

Ron Elwood, supervising attorney for the Legal Services Advocacy Project, was involved in the creation of the debt-settlement bill in the Minnesota Legislature. He said the intent of that law was to allow a Minnesota attorney working on a case such as a divorce or business liquidation to negotiate a debt settlement as a small part of a bigger case. But with lawyers who are exclusively working in the industry using the exemption to evade laws designed to protect consumers, the statute needs another look.

Elwood says this is part of the cat-and-mouse game played by consumer advocates and industries that crop up to supposedly help strapped consumers.

"You try to tamp an abusive practice down and then somebody figures out a little loophole," Elwood said. "So you close the loophole and then they open up a new loophole and you close that loophole."

Lawmakers, it's time to close those loopholes.

Kara McGuire or • 612-673-7293 Twitter: @Kara_McGuire