Credit card debts forgiven in fraud case

JPMorgan Chase, the nation's largest credit-card issuer, has agreed to forgive the debts of 13,000 cardholders who it says were defrauded by a group of Florida-based debt-settlement companies that promised to rescue them from their credit-card debts.

Chase's Wilmington subsidiary, Chase Bank USA, agreed to the forgiveness as part of a settlement reached Monday with a receiver appointed to run Hess Kennedy Chartered L.L.C. and affiliated companies. The receiver was named last July as a result of a separate lawsuit filed by Florida's attorney general, who called the companies "scam artists who prey on the vulnerable."

Chase's agreement follows similar deals announced in November, in which Capital One and HSBC forgave the debts of a total of 24,000 cardholders. All told, the card issuers have written off more than $150 million in debt, according to receiver Daniel J. Stermer.

Stermer, a former prosecutor in New York and Florida, said Hess Kennedy was at the center of a web of companies that lured clients with assurances that they could settle credit-card debt "for 30 to 50 cents on the dollar."

What the companies didn't say in their ads was that they would instruct clients to stop paying their creditors and instead start making monthly payments to Hess Kennedy. But rather than disburse the funds to creditors, as legitimate debt-management services sometimes do, Hess Kennedy kept them toward an up-front payment of fees.

Stermer said Hess Kennedy charged its clients about 15 to 25 percent of their total debt, or about half of what the clients were eventually supposed to pay if they continued with the program.

"It was rare that credit-card companies were actually paid. It happened in certain cases, but it wasn't the norm," Stermer said.

According to Chase's lawsuit against Hess Kennedy, one result of the scheme was that Hess Kennedy's clients continued to fall deeper into debt and suffered further harm to their already damaged credit records.

Stermer said Hess Kennedy and its affiliated companies, including the Consumer Law Center L.L.C., had more than 90,000 clients, which it lured via advertisements on radio, television and in other media.

Chase's suit said Hess Kennedy's primary tactic was to send form letters on behalf of clients disputing their bills and threatening litigation if collection efforts continue. The goal was to obtain an offer to settle clients' debt for a fraction of what was owed.

Under the settlement reached Monday, Hess Kennedy's receiver agreed to pay Chase $4.4 million in damages, and to share anything the receiver recovers in a related case.

Tanya Madison, a spokeswoman for Chase, said the lawsuit and settlement were "a great success for Chase."

"We identified that there was wrongdoing here against people who were seeking out assistance to manage their debt, so we stepped in," Madison said.

Laura Hess, former managing partner of Hess Kennedy, could not be reached for comment.

Contact staff writer Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.