“Creditors have better memories than debtors.” If it weren’t for those words inscribed on the wall, visitors to Richard Cooper’s Markham, Ont., offices could be forgiven for thinking they’d wandered into a management consulting firm. But those who deal in debt have their own lingo, their own humour—and Cooper understands that Benjamin Franklin quotation better than most. His business is helping creditors and debtors forget.
Cooper’s company, Total Debt Freedom, is one of a handful of niche players performing a specialized service for indebted Canadians. Known as debt settlement, it’s a process by which consumers stop paying unsecured creditors, wait months or even years until creditors have given up hope of collecting, then offer to settle outstanding balances for mere fractions of the amounts owing. In Cooper’s shop, salesmen accept initial inquiries and enrol people in debt-settlement programs in one room. In a larger room nearby, negotiators attempt to hammer out cease fires with creditors on behalf of existing clients.
Although debt settlement has been practiced informally for years, Cooper was among the first to pursue it exclusively in Canada. He founded Total Debt Freedom in 2004 after spending a dozen years managing collections departments, and says he feels far better about what he does today. “We’ve definitely beaten the path,” he says. “I’ve trained a lot of my competitors.” But during the past year, Cooper has become aware of some new competitors he didn’t train. New entrants, some of which hail from Florida, Texas and California, are aggressively soliciting cash-strapped Canadians. They’re seizing business from those who have traditionally served indebted citizens, notably credit counsellors and bankruptcy trustees.
The most visible of the new firms, Cambridge Life Solutions, launched a marketing campaign during the past year on radio, television and the Internet. It’s fronted by Ontario-born actor and pitchman Alan Thicke, star of the 1980s sitcom Growing Pains. In a mellifluous baritone, Thicke promises Cambridge can persuade creditors to reduce their outstanding balances by substantial amounts. “And I mean serious savings,” he says in one commercial. “Up to 70%, sometimes even more.” In barely a year, Cambridge has become—both in its own estimation and that of other industry insiders—Canada’s largest debt-settlement operation. So far this year, Cambridge reports it has eliminated more than $10.5 million in debt on behalf of clients. “I definitely couldn’t afford that marketing campaign,” Cooper says wistfully.
Not everyone is celebrating Cambridge’s success. Trustees and counsellors have criticized debt settlement publicly, asserting that they’re left to pick up the pieces when debt settlement companies fail. Cooper himself lashed out at Cambridge online in blog posts. Cambridge struck back with a $2-million libel suit, claiming defamation and “malicious, high-handed and arrogant conduct.” Other critics, too, have been threatened with legal action.
Cooper didn’t come out swinging just because he was worried about losing market share. “The biggest impact to my business is the bad media they’ve gotten,” he says. South of the border, the model that Cambridge and most other large Canadian operators use—charging high up-front fees before settling any debts—was declared an “abusive practice” by the Federal Trade Commission not long ago, and in 2010 the FTC banned the charging of up-front fees outright. The question now is whether Canadian regulators will do the same.
As for Cambridge, its team has roots in the American debt-settlement business that has drawn so much fire—and some of its earliest employees have been linked to companies accused of legal and regulatory violations in the U.S., according to court and corporate documents obtained by Canadian Business. Yet for all the attention the company has attracted, few in Canada know much about its origins. “I’ve Googled the owner’s name,” Cooper says. “I have no idea who he is, I don’t know where he gets his money.”
In an ideal case, debt settlement works like it did for Laurie Tyrrell. Two years ago, Tyrrell had more than $18,000 in credit card debt. She’d spent more than a decade trying to pay if off, she says, but despite contributing as much as she could every month, she was no closer to eliminating the principal. Last year, after hearing an ad on the radio, Tyrrell signed up for a 12-month Cambridge Life Solutions plan. Right away she stopped paying her credit card bill and started paying $740 a month into a dedicated account set up through the company. For the first few months—if Tyrrell signed a typical Cambridge contract—that money went to the company in fees. (Cambridge usually charges 15% of enrolled debt.) After that, minus a monthly maintenance charge, most of it was directed toward funding a future settlement. The credit card company caved 10 months later. She says Cambridge arranged to settle her debt for $4,700, less than a third of what she originally owed. “I still can’t believe it,” she says. “It’s too good to be true.”
But debt settlement doesn’t work for everyone. Nancy Larose, 57, lives just outside Ottawa. She built up a stack of unsecured debt before the credit crisis devastated her investments in 2008. By 2011, she had more than $65,000 in unsecured debts alone. Hoping to get out from under it, Larose signed up for a 36-month Cambridge program last fall. Under the contract—parts of which she shared with Canadian Business—Larose agreed to pay $1,054 a month into the settlement account. For the first three months, all of that money went to Cambridge in service and maintenance fees. For the following 13 months, more than half of the monthly payments would have gone to the company. Finally, more than a year into the plan, Larose would have been contributing money mostly into her own savings account.
But Larose never got that far. Her creditors deluged her with collections calls and court actions. By the spring of 2012, RBC, to whom she owed more than $30,000 on a line of credit, was garnisheeing her wages, and other creditors were telling her they wouldn’t deal with Cambridge. (Debt-settlement operators report that’s a common negotiating tactic.) Larose dropped out of the program entirely this summer. In total, she says she paid $4,500 in fees to Cambridge and received a few phone calls to creditors and little else in return. Debt settlement, she says, cost her money she didn’t have and left her far worse off than she was before. “I feel bad because I’ve always paid my bills, and I’ve always taken care of myself,” she says. “And now I just feel like such a loser.” Larose declared bankruptcy in July.
Nobody involved in the debt-settlement industry, as critic or booster, denies that cases like Larose’s or Tyrrell’s happen. They do argue stridently over which is more likely to occur. Unfortunately, there are no statistics—at least publicly available ones—that reveal how many clients successfully complete debt-settlement programs in Canada. But there is data available in the U.S.—where state and federal regulators have sparred repeatedly with debt-settlement firms—and none of it looks good for the industry. For example, in April 2004, the Federal Trade Commission sued a debt-settlement company called National Consumer Council and its affiliates. As part of the suit, a receiver was appointed to wind down the company’s business. Out of more than 44,000 enrolled customers, he discovered, only 1.4% had settled any debts. Forty per cent of customers dropped out entirely, after paying the company more than US$34 million in fees. That’s likely an extreme case, but other investigations by state attorneys general and the Federal Trade Commission have routinely found debt-settlement companies with completion rates of 10% or less.
The industry generally reports much higher completion rates, between 30% and 60%. But regulators and consumer advocates in the U.S. largely reject the notion that for-profit debt settlement is a good industry with a few bad actors. The New York City Bar Association, in a May report, called debt settlement for more than a nominal fee “inherently flawed.”
It’s worth pausing to note that all this has happened before. In the U.S., the business of wedging between a creditor and a customer is at least a century old. Such businesses went by many names: debt adjusters, debt poolers, debt managers. But all had a few things in common. As laid out in a history of the industry included in the New York City Bar report, all promised to reduce debts for a fee, and all eventually provoked a regulatory response.
State regulators and legislators have tried to ban or limit for-profit debt management since at least 1956. That year Maine, Massachusetts and Pennsylvania outlawed debt adjustment, an industry that included “debt poolers,” the precursors to modern debt settlement firms. By the 1980s, most for-profits in the distressed debt industry had been regulated out of business.
A new wave of non-profit “credit counsellors” replaced them. But many of the supposed non-profits charged high fees and paid executives enormous salaries, says Andrew Pizor, a staff attorney at the National Consumer Law Centre, in Washington, D.C. “Some of them weren’t even in any semblance non-profit.” The IRS cracked down in the early 2000s, and many were stripped of their non-profit status.
History repeats itself. In 2010, after a decade of massive growth in the U.S. debt-settlement industry, the FTC brought in new regulations that effectively banned the prevailing business model. Under the new rules, companies are allowed to charge substantial fees only after at least one agreement with a creditor to reduce a debt has been reached. Matt Zuchetto, a lawyer in Washington state who has filed class-action lawsuits against debt-settlement companies, says many established players simply modified their fee structures. But smaller firms had a tougher time of it. “People who started with a website from their garage in California, a lot of those folks have disappeared,” Zuchetto says. Disappeared, or, some believe, found new markets. “Those firms that were operating in the U.S. did get squeezed out,” says Henrietta Ross, executive director of the Ontario Association of Credit Counselling Services and an outspoken critic of debt settlement. “They came up into Canada and started to operate here.”
There’s no doubt some American firms moved into the Canadian market. Some operate as so-called lead generators, enrolling clients, mostly through online ads, and then selling them to affiliates or independent firms for finder’s fees. Others, such as Florida’s Vortex Debt Management, actively signed up clients on their own. But Cambridge Life Solutions has always maintained it is a Canadian company. And its CEO, Jorge Fortune, says he’s bewildered by the reception his firm has received since entering the marketplace. “It has been shocking the amount of false information that has been written about our company by competitors,” he wrote to Canadian Business. (Fortune declined to be interviewed for this piece, but answered some questions by e-mail.) Fortune says he spent years consulting for other debt-settlement businesses, and he eventually decided to launch his own. Market research told him that Canada’s largest cities were ripe with potential customers, so he decided to open up offices here, first in Vancouver, then in Toronto. “Our company is growing and we have already settled millions in debt on behalf of our clients,” he wrote. “Helping clients everyday is what motivates me.”
But Fortune’s history in the business, and that of the others involved in Cambridge, is difficult to piece together. Since the company first appeared in Canada, three names of note have been associated with it: Fortune, Phil Allopenna and Frank Cotroneo, who served early on as a company spokesman. They’d worked together before. In 2000, Cotroneo founded a company called Corporate Air Services, a caterer serving charter airlines and private jets in New Jersey and New York state. Its end-consumers were said to include celebrities, foreign royalty, business executives, presidential candidates and the Hamptons jet set. Cotroneo’s sister Nicole, a food journalist, was its marketing director. His father, Frank Sr., an experienced pilot, officially headed the company. Allopenna described himself as a co-founder. And Fortune? He was the executive chef. (As recently as 2008, Fortune appeared alongside Nicole Cotroneo on the reality TV show Throwdown with Bobby Flay, sporting a chef’s smock and passing judgment on arepas, a Venezuelan snack food.)
During the second half of the 2000s Allopenna, Cotroneo and Fortune separately migrated to California’s Orange County where all three entered the distressed-credit business. From a 5,100-square-foot mansion in Laguna Beach described by one local real estate journalist as “utterly over the top,” Cotroneo registered a series of debt-settlement companies. Meanwhile, in 2010, Allopenna began underwriting consumer bankruptcies at Hall Legal Corp., a law firm headed by an attorney who had just been admitted to the bar. Fortune established a company called Ready Bankruptcy, with offices in the same building. He also founded a consulting company called 707 Holdings, in Santa Ana, Calif.
Cotroneo’s enterprises caused a stir. Freedom Fidelity Management (FFM) was established in Santa Ana in 2008. In a recent sworn deposition for a lawsuit against the company, Carmen Viramontes, a former Freedom Fidelity employee, said Cotroneo and a man named Giang Phan (he went by “Jimmy”) co-owned the company. They also owned Beacon Debt Solutions. Both companies advertised through radio and TV ads in California and other states, and operated websites with a national reach. In doing so, they were subject to a dizzying mosaic of state regulations—and often ran afoul of them. For example, Freedom Fidelity wasn’t registered to do business in Minnesota but served clients there anyway. The state’s commerce department objected, adding that the company also charged fees exceeding permissible limits. Phan signed a consent order on behalf of the company, agreeing to stop servicing Minnesotans and pay a US$20,000 civil penalty. He also signed an “assurance of discontinuance” with the South Carolina Department of Consumer Affairs, promising to cease and desist from violating state law and refund fees the company collected from customers in that state.
Freedom Fidelity’s fee structure also violated a decades-old consumer protection statute in Washington state, where the company served hundreds of clients. “The most you can charge in Washington is $25,” explains lawyer Matt Zuchetto, whose firm launched a class-action lawsuit against the company on that basis. “You can’t charge any other fees until you settle the debt. And then they’re limited to 15% of any payment.” This year a federal court in Washington ruled that “there is no question” Freedom Fidelity’s fee structure violated state law.
Beacon Debt Solutions didn’t obtain necessary licenses either. During the summer of 2011, the California Corporations Commissioner slapped Beacon with a desist and refrain order demanding it cease operations in its home state. “This Order is necessary, in the public interest, and for the protection of consumers,” the Commissioner claimed. Idaho issued its own such letter, complaining that Beacon was engaging in unlicensed debt and credit-counselling activity to at least 65 Idahoans.
Freedom Fidelity and Beacon both attracted a slew of customer complaints. Some accused the companies of failing to contact or pay creditors, or failing to answer or return calls from clients. Others complained that after entering the program, creditors sued successfully and were now garnisheeing their wages. The Better Business Bureau awarded both companies an F rating, its gravest condemnation.
According to the State Bar of California, both Freedom Fidelity and Beacon also referred clients to Anaheim-based attorney Richard Lenard. Although enrollment documents from both companies claimed Lenard would negotiate their debts, the record in his latest disciplinary proceeding showed his role was largely confined to mailing cease-and-desist letters to creditors. An even bigger problem was that Lenard “served” clients in Florida, Wisconsin, Georgia, Pennsylvania, New York, South Dakota, Nevada and Oklahoma—states in which he wasn’t registered to practice law. He therefore “was incapable of providing competent representation,” the State Bar Court opined. In June, the Court recommended Lenard be disbarred. (He is appealing.)
In 2010, Cotroneo and Phan sold Freedom Fidelity and Beacon to three men for US$300,000 up front, plus US$1 million in business generated over the next six months, according to Huy (Mike) Nguyen, one of the buyers. (The enterprise went bankrupt last October.) Meanwhile, in January 2011, Fortune founded Woodbridge Corporate Solutions, changing its name to Cambridge Solutions Inc. the following month. Its offices were around the block from Freedom Fidelity’s. The new company reunited Fortune (president), Allopenna (Toronto branch manager) and Cotroneo (who was hired on contract to provide marketing services). Jessica Johnson, Cambridge’s compliance officer, briefly worked at Beacon before joining the company, and Scott Rodriguez, who worked for several months co-ordinating a Search Engine Optimization project for Cambridge, was formerly Freedom Fidelity’s operations manager.
Canadian Business asked Fortune about Cambridge’s links to Freedom Fidelity and Beacon. Fortune responded that it would be “absolutely wrong” to claim the companies were associated. “I am the sole owner and shareholder of Cambridge Life Solutions,” he wrote. “I had no involvement of any kind with Freedom Fidelity Management, Beacon Debt Solutions or Alliance8.” Cotroneo no longer works for Cambridge in any capacity, he added, nor does Rodriguez. Cambridge “is an ethical, socially responsible and successful business.”
High up-front fees, numerous complaints and regulatory troubles were—and still are—endemic in the U.S. for-profit debt settlement field. The risk for the budding Canadian industry is that, as American players move in here, a U.S.-style crackdown may follow as well. Scott Hannah, another outspoken critic of advanced-fee debt settlement, believes some U.S. firms are counting on it. He says he spoke to one ex-employee of a U.S. company (not Cambridge) who told him his firm believed it had a “four-to-six-year window to operate in Canada before the loopholes will be closed by legislation.” Hannah, the CEO of the Credit Counselling Society in B.C., is doing everything he can to make that happen sooner. “I’m hopeful that by the end of next year our major provinces [will] have legislation in place,” he says.
Hannah may get his wish. Alberta has long regulated upfront fees for debt settlement and capped settlement fees at 10% of total debt. Manitoba introduced nearly identical rules earlier this year, and B.C. Premier Christy Clark promised to follow suit. Kelly Regan, a Liberal MLA in Nova Scotia has twice introduced legislation that would restrict debt-settlement fees there. (So far, the NDP government has shown little interest in adopting the laws.) Meanwhile in Ontario, Henrietta Ross of the Ontario Association of Credit Counselling Services, says she’s lobbying the government to take action. “In Alberta and Manitoba, as soon as lawmakers put laws in place, the debt-settlement companies virtually disappeared,” she says. “They left the provinces because they could no longer make money.”
Richard Cooper, for his part, insists Total Debt Freedom serves its clients better than his American competitors, even if his business model is virtually identical. (Total Debt Freedom is accredited with the Better Business Bureau, which rates it A+.) He regards lobbying by the credit-counselling industry as deeply cynical. “All they’re trying to do, really, is stick a fire hose in their competition’s mouth,” he says. But even if efforts to outlaw the front-end fee model succeed, Cooper adds, it won’t ruin his business.
Still, the crackdown many trustees and counsellors want is hardly assured. Several government bodies, notably the Financial Consumer Agency of Canada (FCAC) and the Ontario Ministry of Consumer Services, issued warnings to consumers about debt-settlement companies this year. But there’s little apparent drive to do more. The reason: they’re just not getting enough complaints. FCAC spokeswoman Julie Hauser said that between last October and the end of March the agency received just 35 inquiries about debt settlement, a number she calls “very low.” Nova Scotia’s Regan, too, says she hasn’t had anyone come to her claiming to be the victim of an unscrupulous firm. “When I talked to the Credit Counselling Services of Atlantic Canada, what they said to me was people are embarrassed,” Regan says. Ross echoed that point. People aren’t coming forward because they’re humiliated, she believes, not because they haven’t suffered.
Another possibility is that Cambridge and other recent entrants operate quite differently from Freedom Fidelity or Beacon. In an e-mail in March, Allopenna, Cambridge’s Toronto branch manager, stressed that what happened in the U.S. shouldn’t reflect on the Canadian industry. “What you have to understand is there was zero regulation,” he wrote. “The industry had spun so out of control.…Unfortunately the sins of few who were not achieving results for clients affected the entire U.S. industry. This is a very different environment than what exists in Canada.” Fortune echoed this. “What a lot of people fail to realize is that our industry is heavily regulated” in Canada, he wrote. “Cambridge Life Solutions is proud of its transparency and its compliant operation.” At press time, Cambridge’s rating with the Better Business Bureau—where it is not accredited—stood at A–. The bureau listed just nine complaints against it, all of which it described as resolved. Alan Thicke, too, stands by the company. “My monitoring of their performance includes the hundreds of settlements they have been able to provide me,” he wrote in an e-mail. “Additionally, they are licensed and bonded or registered in the provinces they service, which makes them compliant with the laws that govern their business.”
Cambridge and the other debt-settlement companies have every incentive to keep the regulatory door open. At more than $26,000 per capita, the average Canadian’s non-mortgage debt is as high as it has been since at least 2004, according to Transunion, a credit bureau. So there are plenty of potential clients, and lots of money to be made. After all, even if the door closes on the current debt-settlement model—if the industry’s history is anything to go by—another is bound to open.