A popular credit repair company filed for chapter 11 bankruptcy after losing litigation lodged by the federal Consumer Financial Protection Bureau (CFPB) over its business model.
The voluntary petition was submitted June 4 under PGX Holdings in the U.S. Bankruptcy Court for the District of Delaware with up to $500 million in listed assets, up to $10 billion in liabilities and more than 100,000 creditors.
“Like most major companies that file chapter 11, they will find ways to continue doing business, and hopefully in a more ethical manner,” said Derek Jacques, a bankruptcy attorney with The Mitten Law Firm in Michigan. “I found the whole case interesting as I think there are a lot of bad actors in the debt repair space, and these were the biggest among them.”
PGX Holdings, also known as Lexington Law, provided operational support services to its affiliate Lexington Law Firm, an independently owned professional corporation that provided the credit repair legal services, according to CEO Chad Wallace who signed the bankruptcy petition.
“We remain steadfast in our commitment to the consumers that continue trusting us to advocate on their behalf,” said John Heath, directing attorney of Lexington Law Firm.
The bankruptcy is preceded by a May 2, 2019, complaint filed in the U.S. District Court for Utah against several PGX affiliates and Lexington Law Firm in which the CFPB alleged they violated the Telemarketing Services Rule (TSR).
When the federal court imposed a six-month billing delay in Bureau of Consumer Financial Protection v. Progrexion Marketing, the sudden change in business model led to a dramatic reduction in revenue, employee layoffs and ultimately bankruptcy.
“One of the biggest problems their billing services caused was charging consumers indefinitely, as the customers’ credit card was automatically billed every month,” Mr. Jacques told PacerMonitor News. “There were no term limits on the contract itself, so there was no end to the monthly fees unless the customer ‘affirmatively’ canceled service.”
But legal counsel for PGX and Lexington Law said they were likely targeted by the CFPB in order to send a message to the credit repair industry overall, which is valued at $4.4 billion, according to Money Transfers statistics.
“From their perspective, it would probably make sense to go after a large actor in the space because that should get people’s attention,” said Attorney Eric M. Kamerath.
The Bureau of Consumer Financial Protection did not respond to requests for comment.
The Lexington Law Firm provided its products and services to about 130,000 customers, according to an affidavit signed by Wallace.
The district court determined that the TSR requires a six-month billing delay for consumers who chose a credit repair company over the phone and for those clients, billing must be accompanied with documentation of achieved results.
“It’s unfortunate that the CFPB would advance a position that literally puts people in a place of not being billed until long after services are delivered,” Mr. Kamerath told PacerMonitor.
The embattled company, which served individuals trying to increase their low credit scores, stopped the billing practice that was the subject of the litigation and instituted a new approach.
“The big change in their business model was moving toward what looked like a pseudo-subscription service,” Mr. Jacques said in an interview. “This, ironically, is what triggered the CFPB to file suit against them, as they were violating the Telemarketing Sales Rules surrounding credit repair companies.”
To comply with a March 10 federal order that partially granted CFPB’s summary judgment, PGX shut down 80% of their business, including a call center, and laid off some 900 employees.
“I know many consumers seek debt relief and improving their credit score, but the vast number of customers Lexington had was much larger than I had thought,” Mr. Jacques said.
About $1,249,215 is owed to Hawthorne Direct, an advertising company in Los Angeles chaired by Jessica Hawthorne-Castro.
U.S. District Judge Bruce S. Jenkins has yet to rule on the CFPB’s request for $3 billion in restitution or refunds and Mr. Kamerath said Lexington Law does not have $3 billion lying around even though it is a successful business.
“The services that Lexington provides come at a significant expense,” he added. “It’s an expense interacting with the consumer reporting agencies. It’s an expense to interact with consumers. It’s an expense to get credit reports and Lexington has been the means for many people to support their families but that’s all at a cost. That’s what consumers are paying for. So, the money that the CFPB is requesting is not in a bank account someplace.”
In 2022, the defendant debtors had combined annual revenues of approximately $388 million. As of June 4, they had some $4 million in cash on hand and PGX has approximately $423.5 million of funded debt, according to court documents.
“I was surprised by the amount of the requested judgment,” Mr. Jacques added. “The major precedent here is that debt repair companies will need to practice their craft in accordance with the laws and rules the CFPB sets forward.”