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CREDIT CARD NOVATION A “New” Variation on an Old Scam

Date: Fri, 02/27/2009 - 09:46

Submitted by anonymous
on Fri, 02/27/2009 - 09:46

Posts: 202330 Credits: [Donate]

Total Replies: 18


I found this on The ZipDebt Blog. I hope once and for all this settles this debate and puts it to rest. I hope this helps EVERYONE.

Debt Elimination — A “New” Variation on an Old Scam

Regular readers of the ZipDebt Blog know that I routinely warn consumers about the notorious “debt elimination scam.” This is the type of program where the promoters claim that you never actually borrowed any money on those credit cards, because … wait for it … your signature on the credit card application is worth exactly as much money as the credit limit extended to you. Essentially, the core of the argument made by these people is that credit card debt is not *real* money. Yet they are usually more than happy to accept payment of their huge fee ($2,500 minimum, and usually a *lot* more) by having you take a big cash advance against one of your credit cards with no plan to repay it. That’s fraud, of course, but they don’t seem to mind one little bit.

I write today about a “new” variation on this debt elimination scam. I put “new” in quotes because this latest crop of con-artists are promoting it as such, yet it’s really been around for a very long time. The twist on the debt elimination scam is one where the company *takes over the debt obligation itself*! They make the claim that through contractual law procedure, they can use the banks’ own contracts to assume your debt liability and then deploy their arsenal of secret legal tactics to force the bank to discharge the obligation. Presto! Like magic, your debt is erased.

It’s all still based on the bogus “no money lent” argument that has been rejected repeatedly by the courts, and warned against by the Office of the Comptroller of Currency. Let’s see. Who should you believe? The “network marketing” sales agent trying to make a buck off you, or an agency that is part of the Federal Government? Tough call, right?

Anyway, this new variant on the debt elimination scam is all wrapped up in legal-sounding jargon and packaged into a very convincing sales pitch. But the notion of altering the terms of the contract is not new at all. It’s been around for years and it’s called “novation.” Novation is nothing more than the substitution of a new contract for an old contract, often involving a change of parties to the transaction. Another relevant legal term is “assignment,” where contractual rights are transferred outright from one party to another.

The problem for the scammers is that novation requires that all parties to the contract must consent to the novation. And the banks have language in their agreements that precludes “assignment” of the debt to another party in the way that the debt elimination folks want. So how do they get the bank to agree to such a change? By using a technique called “accord and satisfaction.”

The way it works (in theory) is that you send the bank a payment with “restricted endorsement” language. That’s where you write a bunch of legal mumbo-jumbo on the back of the check, which basically says, “If you cash this, you agree to all these modified terms.” The theory is that this creates a brand new contract. The thinking is that the bank will not catch this, since they process so many thousands of checks every day. So the idea is to “fool” the bank into accepting the new terms. Supposedly, you can build into the “new contract” all kinds of clauses that work in your favor.

Accord & satisfaction, of and by itself, is not actually a scam. It is a legitimate legal concept often used to settle contractual disputes between parties. But the way it’s employed by “debt elimination” scammers is definitely bogus. Most states have their own version of legislation that protects creditors from such nonsense. In California, for example, you have to send such a notice in the form of a letter, and it must be sent to the corporate correspondence address, and NOT to a regular high-volume payment center. Further, the creditor has up to 90 days to reject such a payment and return it due to an unacceptable restriction on the endorsement. So you cannot legitimately smoke this by a creditor and expect any success thereby. Here is a link to the relevant California Code on accord and satisfaction.

There was a debt company called Briggs & Baker that got shut down by regulatory authorities for routinely practicing this type of scam. Here is the FTC press release that discusses official action against this pair of thieves. It reads a lot like some of the complaints against debt settlement companies, but this outfit was basically practicing the “accord and satisfaction” trick, obviously with very little success. It’s only a matter of time before the outfit peddling this latest incarnation of the debt elimination scam gets a visit from their friendly state Attorney General’s office or a legal team from the Federal Trade Commission. Let’s hope it happens sooner rather than later!

Also seek out and read Gerri Detweiler’s article called "Novation: Don't fall for this credit scam!"


Tom, are you stirring up trouble again? i saw in a previous post things got pretty heated! lol, but thanks for keeping a eye out on this type of scam. I heard someone ask about it but i cant remember were.

It wasnt here, i think i saw it on someones blog posting i wish i knew were i was now. What a tricky little loop hole if it worked.

Thanks for keeping a eye on the sheep, there are so many wolves out there!!


lrhall41

Submitted by love_my_things on Fri, 02/27/2009 - 12:07

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lol !! this is one of the masterpiece of the information for those who may fall pray to the marketing gizmo of all those bogus debt settlement program.

Surely this is gonna work out.

Now i have one request to Mr .TOM321 about what are the legitimate ways to debt settlement so that this whole thread will complete with the information.

thanks for the information.. :wink:


lrhall41

Submitted by manoj gopale on Sun, 03/01/2009 - 07:16

( Posts: 98 | Credits: )


I know im not tom, but im sure he will agree. you can either:

1. Do it yourself, if possible is the best route it is cheaper and everything is in your control

2. For people like me that could not do this on thier own,you could use a actual debt settlement company that is accredited, backed by the bbb, members of the tasc, and is upfront and honest about settlement what will and could happen, Is honest about thier statistics(maybe a website monthly posting or something). This takes extreme care when finding the right company because there are some scams out there probably more than there are good ones. But if your careful it is a very good tool too.


lrhall41

Submitted by love_my_things on Mon, 03/02/2009 - 05:41

( Posts: 1434 | Credits: )


I saw that post love my things. It's THEM. It's obvious. Don't worry about that. There is no need to waste time arguing about a process that does not work. This article on top and the Gerri Detweiler article puts this subject to rest.

And manoj_gopale I've posted what you said before on another thread. Maybe I should put it here though. I'll think about it.


lrhall41

Submitted by on Tue, 03/03/2009 - 06:35

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Article by Greg Artim:

Drowning in debt? Don't know where to turn? How about calling one of those debt settlement companies that you hear on the radio or see on TV?

In theory, their pitch sounds pretty good. Hire us and we will get all of your creditors to reduce the amount that you owe. We will get them to accept lesser monthly payments, and we will get them to agree to not sue you.

In reality, that is not how it works. First things first. When you hire that debt settlement company, there will be a fee, and it will usually be a very large one. There are many fee schedules that are used by these companies, but for the most part, no matter which fee schedule is used, the fee ends up being several thousand dollars. (I've had a few clients recently who have paid debt settlement companies between $5,000 and $8,000 on $40,000 to $50,000 in debt - clearly outrageous fees). When the debt settlement company finds that you don't have that much money in a lump sum, they allow you to make payments on the fee. Nice of them, right? Well, they may or may not tell you that they will not begin work on any of your accounts until their fee is paid in full. So, if it takes you 2 years to pay off their fee, that is 2 years that your creditors are not being dealt with. Do you think the creditors are going to wait 2 years to sue you?

After the fee is paid, if the company is at all reputable, they will begin to do the work. They will contact your creditors and attempt to negotiate payments or reduce the total amount of debt. They may end up being successful to some degree. It is pretty easy to get a creditor to reduce the amount of debt by 10% to 30% once you are in default. It is something that you can actually do yourself with a few phone calls.

On the other hand, debt settlement companies can often make things worse. In my early years at practicing law, I used to represent several large financial institutions. When a debtor would contact my office, or rather, when a debt settlement company would contact my office on behalf of the debtor, we had specific instructions to escalate the litigation immediately. Many creditors do not want to deal with these agencies at all.

In addition, I have found that most debt settlement companies do not assist you at all if a lawsuit is filed. My clients have told me that they have been ignored by the debt settlement companies, or been told that they cannot assist with legal matters once a lawsuit has been filed.

The best advice that I can give to someone who is saddled with debt is to contact a consumer attorney right away. Bankruptcy is an option, but, there are many other options as well. A knowledgeable consumer attorney can review the accounts that you have to see if negotiation or litigation is the best way to move forward, and he/she will do so for much less than the $5000 to $8000 that these debt settlement companies charge as fees.

Understanding how everything works is key. Hope this helps.


lrhall41

Submitted by on Thu, 03/05/2009 - 07:33

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Quote: " It would be great if it worked but we all know differently now, don't we?"

I would have to agree with you on this. Not all are bad but why take that risk and spend extra money when you can just do it yourself. I read somewhere in this site that a guy got scammed by two different debt settlement companies. He was so PO'ed. That's awful.


lrhall41

Submitted by on Thu, 03/05/2009 - 11:09

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Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. In contrast to an assignment, a novation must be agreed upon by all the parties to the original agreement. The obligee, the person receiving the benefit of the bargain, must only be given notice. The obligor, the party making the novation, must only make the new obligor aware and receive consent from the new obligor. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor.

For example, if there exists a contract where Alex will fix a printer for Becky and a contract where Daniella will fix a printer for Alex, then it is possible to novate both contracts and replace them with a single contract wherein Daniella agrees to fix a printer for Becky. Contrary to assignment, novation requires the consent of all parties. Consideration is still required for the new contract, but it is usually assumed to be the discharge of the former contract.

The criteria for one possible successful novation are: the complete acceptance of the liability by the new obligor, the acceptance of the new obligor by the obligee, and the acceptance by the old obligor of the new contract as full performance of the old contract.

In business, novation is typically the process by which a newly formed corporation assumes the pre-incorporation liabilities incurred by its founders. Novation is also used in transactions through electronic exchanges.

Novation can NOT be used on unsecured debt. Why would a bank agree this? They wouldn't. Since all parties MUST agree on the novation and the bank will not...you can't do this. You can't trick them or anything like that. There has to be an agreement with ALL parties.

They are trying to use a fancy term to fool you. It's the no money lent scam dressed up. I think I wrapped up this topic once and for all.


lrhall41

Submitted by on Mon, 03/23/2009 - 13:43

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BS Post Deleted - Novation must be agreed on by both parties. Writing a Restrictive Endorsement on a check is going to get you nowhere....now BEGONE - ND


lrhall41

Submitted by on Fri, 08/21/2009 - 12:42

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concerning Novation you are correct in stating that the bank has 90 days to return a check with a restrictive endorsement.It is called the safe harbor clause in the UCC under restrictive endorsements. It says also that they can send a check of equal value!! My question is if the smuck who tries this sends a copy of this check to the bank and tells them what was done, what it the bank decides to just keep the money and not return anything?


lrhall41

Submitted by on Tue, 02/02/2010 - 19:43

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