A view of Carolina Legal Services' website as it appeared in 2019. The law firm has since closed. (Obtained via the Wayback Machine, a project of the Internet Archive.)
Katherine Otto of Charlotte, North Carolina, signed up in 2019 with a law firm called Carolina Legal Services that promised to help her handle around $15,000 in credit card debt. The law firm took $746 per month from her bank account, according to an email she shared with Law360.
"I never skipped a payment, nothing, believing that they will actually pay back the credit cards and everything," Otto told Law360.
"But they never did it."
She said she learned of the problem when a sheriff's deputy knocked on her door and served her with a lawsuit from one of her creditors, Wells Fargo Bank. That was in August 2020, court records show. A few weeks later, she was sued by another creditor, Discover Bank.
It turned out that Otto had paid thousands of dollars to what the Consumer Financial Protection Bureau would later call a "facade law firm."
Carolina Legal Services was a local front for an out-of-state debt relief conglomerate that told clients to stop paying their creditors and promised to handle negotiations with the lenders, but instead it delivered shoddy services and misused clients' money, a state bar investigation and a lawsuit by state and federal authorities later concluded.
Otto says the law firm reimbursed her only about $900, and she lost more than $10,000. She believes companies like Carolina Legal Services shouldn't be allowed to do business at all. "I mean, that's legit just stealing from people," she said.
Debt relief companies have a specific reason for setting up facade law firms in North Carolina: It's one of many states that have banned their business model.
But the North Carolina ban, which dates from 1963, was revised in 2005 with a key loophole: lawyers are exempt from the ban.
An email from Carolina Legal Services urged Katherine Otto to make regular payments. She told Law360 she made the payments, but two of her creditors sued her, and the law firm did nothing to help. (Courtesy of Katherine Otto)
"The current law is very old, and I think that legislators just didn't imagine the sort of contortions that companies and individuals would go through in order to be able to take money from people for this service," Rochelle Sparko said. She spoke with Law360 in 2023 and 2024 when she was director of North Carolina policy for a consumer advocacy group, the Center for Responsible Lending.
She has since moved to a position with the North Carolina Department of Justice and declined further comment this year.
Sparko was part of a coalition of consumer advocates who has lobbied North Carolina's General Assembly to pass a new bill to shut down the debt relief industry forever.
To date, however, the bill has repeatedly failed.
The multibillion-dollar debt relief industry has hired around 12 lobbyists to convince North Carolina legislators to write the laws in its favor and allow companies to keep doing business — and take clients' cash.
North Carolina's story serves as a microcosm for what's happening across the U.S. And the problem could soon become even worse, because the major watchdog agency that cracks down on debt relief companies — the federal CFPB — is being dismantled by the Trump administration.
A Notary Comes Knocking
Now 37, Otto works in retail sales. She said that in 2019, she wanted to consolidate and pay off her credit card debts.
"And then I started looking into companies, and I called a couple, and somehow this one actually popped up on my computer," she recalled.
She inquired about Carolina Legal Services, and someone called her from New York and discussed the debt program.
"They explain to you, they actually send a notary to the house. So they can notarize all the paperwork and everything," she said.
"So they made things for the beginning — everything legit, everything good. They were good there for the first payment and, like, everything. And after that, they get you hooked, and that's when you last see them."
Carolina Legal Services was nominally run by a North Carolina attorney named Daniel Rufty.
"I can't remember if I specifically spoke to him, but I spoke to a lot of paralegals," Otto said.
Reached by phone, Rufty declined to comment.
Many of these details, including the notary coming to her home, the limited contact with a lawyer, the big monthly payments, and the lawsuits from creditors, were raised by other clients in a lawsuit that the CFPB and state governments would file later against a national network of people and businesses that allegedly ran Carolina Legal Services.
Otto said that after Wells Fargo and Discover sued her in 2020 and 2021, Carolina Legal Services didn't help her, and she had to negotiate settlements with the creditors on her own.
By May 2021, Otto was among a group of former clients writing messages on Carolina Legal Services' Facebook page. "Please do not fall in this trap, still waiting for this company to give me my money back, over $6,000," she wrote.
Another woman wrote: "I am being sued by the creditors they told me not to pay. I had a sheriff banging on my door at 8am this morning."
By this point, the principal of Carolina Legal Services, Rufty, had already admitted to the North Carolina State Bar that he had participated in large-scale misconduct.
Rufty signed an April 8, 2021, disciplinary document saying that as a recent law school graduate in 2018, he was hired by Illinois lawyer Jason Blust.
Blust had started law firms in multiple states, the disciplinary document said.
Rufty would act as a figurehead for Blust's debt relief operation and funnel 97% of the profits from Carolina Legal Services back to Blust and another lawyer, according to the document.
North Carolina customers who responded to Carolina Legal Services' advertising were connected to New York nonlawyer staffers with a related company, Strategic Financial Solutions, the disciplinary document said.
Strategic Financial Solutions staffers in New York sent notaries to people's homes and had them sign agreements that automatically took money from their bank accounts, the document said.
Carolina Legal Services claimed that it would make lawyers available to clients seeking debt relief, but that was false — instead, nonlawyers did much of the work at the firm, including legal services, and Rufty failed to show up at some clients' court hearings, the document said.
Rufty also admitted to mishandling client trust funds.
The disciplinary document called the law firm's actions "predatory and illegal," and said Rufty had engaged in multiple bar violations and criminal acts, including debt adjusting, which is illegal in North Carolina.
In January 2024, then-North Carolina Attorney General Joshua Stein, who has since been elected governor of the state, joined colleagues from multiple states and the CFPB to sue a company associated with Carolina Legal Services — Carolina Client Services Inc.
The lawsuit also targeted Blust, Strategic Financial Solutions, now known as Stratfs, and multiple other companies and individuals, saying they had taken more than $100 million in illegal fees from their clients.
Blust and colleagues had created about 30 "facade law firms" scattered across the country, with names such as Anchor Law Firm PLLC, Guidestone Law Group, Brandon Ellis Law Firm LLC and Monarch Legal Group, federal and state authorities alleged in a May 2024 amended complaint.
These are screenshots taken by Law360 this month from websites and one Facebook page for some of the 30 or so law firms that the Consumer Financial Protection Bureau and several state governments have alleged are "facade law firms" associated with debt relief company Stratfs. A representative of Jason Blust, an attorney accused of controlling the law firms, told Law360 that the allegations are "unsubstantiated." Daniel Rufty, former head of now-closed Carolina Legal Services, declined to comment. Messages left with the listed phone numbers for the other law firms weren't returned.
The programs used aggressive marketing to enroll more than 100,000 people nationwide, encouraged them to stop paying debts and left most clients in worse shape, the complaint alleges.
Many of the defendants have denied wrongdoing.
In January of this year, the CFPB called Blust as an adverse witness in its lawsuit against him and his colleagues.
"And the North Carolina State Bar found that you arranged for Daniel Rufty to be the majority owner of Carolina Legal Services in name only; correct?" attorney Joseph Sanders of the CFPB asked, according to a transcript.
Blust's response: "On the advice of counsel, I invoke the Fifth Amendment and respectfully decline to answer your question."
Blust would invoke his Fifth Amendment right against self-incrimination about 200 times during the hearing, according to a transcript.
Blust's attorney, Rodney O. Personius of Personius Melber LLP, released a brief statement to Law360.
"In the interest of fairness to all the parties to this pending proceeding, we are constrained from making public comment regarding the merits of those unsubstantiated claims, as well as any matters associated with Carolina Legal Services and Mr. Rufty," he wrote. "As to the [Daniel Rufty case], we do note that it has been dormant for many years."
Understanding how North Carolina ended up with a legal loophole that leads debt relief companies to create fake law firms, however, means going back to the history of North Carolina's debt adjustment law.
N.C. Tried To Get Rid Of The Debt Relief Industry, But It Found A Way Back
In March 1963, Silas Chatmon came to a North Carolina Senate committee hearing and testified about his experience with a predatory debt relief company.
Chatmon's words, quoted in The News & Observer newspaper, carry direct parallels to Katherine Otto's statements decades later.
Chatmon, a Raleigh plumbing and electrical maintenance worker, testified that he had seen newspaper ads for a debt relief business called National Budget Services Inc. He signed a contract to pay the company $62 every two weeks to handle all his debts.
"Not a one of my creditors did they pay," Chatmon said.
Chatmon told the lawmakers that one of his creditors filed a lawsuit against him, and that the debt adjustment company refused to pay him his money back.
State Sen. John R. Jordan of Raleigh introduced a bill in March 1963 to ban the "debt adjustment" businesses entirely, because these companies were harming people who were already in financial trouble.
"We decided prohibition (of such firms) would be better than regulation," The News & Observer quoted him as saying.
State Insurance Commissioner Edwin Lanier went further, calling the leaders of these companies "dirty, white-collared flim flam artists," according to a report from The Associated Press. "At least Jesse James used a gun," he added.
North Carolina's law won final approval in 1963 and established strict penalties for running debt relief businesses.
Companies involved in debt adjusting were now subject to civil penalties and asset seizures, and individuals who run such companies could face fines and up to 60 days in jail.
Many other states passed similar laws around the same time.
In 2005, North Carolina's legislature modified the law, and said lawyers could settle debts for their clients, as long as they were "an attorney-at-law licensed to practice in this State who is not employed by a debt adjuster."
One person who paid attention to the 2005 legislation was Carlene McNulty, director of litigation at the North Carolina Justice Center, a consumer advocacy group.
She said that lawyers often help their clients settle debts, and she said she believes lawyers' groups wanted to make sure that this activity wouldn't break the law.
"I'm pretty sure that's why that language was added — not because of a specific case, but because attorneys are involved in this type of activity routinely, legitimately," she told Law360.
But she said debt settlement providers and loan modification companies have used that language as a loophole to keep operating.
Sparko told Law360 in a 2023 interview what that looks like.
"And the way that that pans out is that lawyers kind of rent their license, basically, to the debt settlement firm."
"And so it looks and sounds to the consumer like legal services, but they're actually not meeting with a lawyer. They're not getting legal representation. The services that they're receiving are not supervised by the attorney."
Debt relief companies have also used the tactic of splitting up the business: One company provides debt settlement service, while an affiliated company takes money from consumers, she said.
"And by splitting up the behaviors, they manage to evade North Carolina law, which currently is not clear enough about affiliates being liable if they have some involvement in the debt settlement activity," Sparko said.
The result is debt relief companies operate openly in North Carolina, and ordinary people get hurt, she said.
"Far more often than not, debt settlement leaves borrowers in a worse position than they were when they contacted the debt settlement firm," she said.
"Because people stop paying their debts, their credit report takes a hit. The collection efforts do not stop and so if you miss three or four months in a row at that point, oftentimes lenders will file a lawsuit against the debtor."
Fresh Abuses Lead to Overhaul Attempt
A report from the North Carolina DOJ, undated but probably published around 2013, said that debt settlement providers and loan modification companies were operating under the cover of law firms "in an attempt to evade state and federal regulation."
The report described how the office had joined the North Carolina State Bar to sue a national debt settlement business called World Law Group. A judge blocked the company from operating in North Carolina, and World Law Group eventually settled with North Carolina authorities and reached a $107 million settlement with the CFPB in 2017.
The subsequent case of Rufty, the lawyer who says he ran Carolina Legal Services on behalf of Blust, helped alert consumer advocates and authorities to the practice of out-of-state debt relief companies setting up local law firms to evade North Carolina law, Sparko said in August.
The investigation of Carolina Legal Services began in June 2019, when a collections attorney sent an email to the state bar alleging that Carolina Legal Services and other businesses were engaged in unauthorized practice of law, Carmen H. Bannon, counsel for the bar, wrote in an email to Law360.
While that case was still under investigation, a coalition of organizations including the state DOJ, the state bar and consumer protection groups started trying to change the law, Sparko said.
They were joined by companies that offer consumer lending in North Carolina, Sparko said in a 2024 interview. "They were concerned as well, because they weren't getting paid," she said.
In 2020, state Rep. Julia Howard, a longtime Republican representative for a mostly rural area west of Winston-Salem, introduced a proposal to close the loopholes and ban the debt relief industry.
That year, the state House of Representatives passed Howard's debt relief ban bill, but it never progressed beyond committee in the state Senate.
Howard reintroduced the bill in 2021, and the House approved it by a 120-0 vote, but it didn't get a committee vote in the state Senate.
In the 2023-24 legislative session, Howard introduced the bill for the third time. The House passed it 113-0, but it never advanced beyond the Senate rules committee.
The bill sponsor, Howard, did not respond to requests for comment for this article. State Senate leaders did not respond to requests for comment.
Debt Relief Industry Hires Lobbyists
It's not a partisan split: For years, Republicans have controlled the state House and state Senate in North Carolina.
Perhaps more relevant is that the debt relief industry has worked hard to influence policy in the state.
"As far as I know, there are about 12 lobbyists working the building against this bill," Sparko said in an August interview about Howard's bill.
"It's one of the things we talk about when we would get meetings with legislators — this is obviously something that is making people a lot of money, or they wouldn't be doing this."
It's unclear exactly how much money debt relief companies earn in North Carolina or nationwide, but industry publications offer some hints.
One study commissioned by the debt settlement industry concluded that in March 2020, the industry had enrolled 1.6 million individual customers across the United States with total accounts worth $45.2 billion.
The report, authored by Greg J. Ragan, said that these numbers did not yet account for the COVID-19 pandemic, which sparked an economic crisis and may have pushed even more people into debt relief programs.
A major industry group, the American Association for Debt Resolution, formerly known as the American Fair Credit Council, has been hiring lobbyists to influence legislators in North Carolina since at least 2017, when it hired three people, according to the North Carolina secretary of state's website.
The website said that for the current legislative session, the debt relief association has hired six lobbyists. The name of the organization recently changed again — AADR announced in May that it has joined another organization, the Consumer Debt Relief Initiative, to create the Association for Consumer Debt Relief.
One debt relief company, Beyond Finance, has also hired six lobbyists in North Carolina for the current session, the secretary of state's website says, bringing the total number of debt relief lobbyists to at least 12.
Law360 contacted the American Association for Debt Resolution and requested an interview about its lobbying activities in North Carolina and other states.
The organization didn't make anyone available for an interview, but released a statement from its CEO, Denise Dunckel Morse.
"Consumer debt delinquency is at its highest level in five years and the growing debt crisis is one of the most pressing issues facing Americans today. Debt resolution is a critical part of the solution for many consumers drowning in unsecured debt," she said in the statement.
"While it's not for everyone, debt resolution is a proven and effective option for consumers facing financial difficulties to reduce their debt and avoid bankruptcy. This industry is committed to educating consumers and policymakers about debt resolution and its benefits, holding debt resolution companies to the highest standards, and protecting and expanding access to accredited debt resolution services nationwide."
The organization says it subjects member companies to audits to ensure that they follow laws.
But it didn't release audit reports to Law360, and didn't respond to emailed questions about why some of its members have repeatedly faced fraud complaints.
Nor did the organization respond when asked about its position on the Carolina Legal Services case.
Bill Stalls Again
This year, Howard brought forward her anti-debt relief industry bill once more. The House approved it 112-0 on April 16.
But once again, the bill stalled in the Senate rules committee. The chair of the committee is Bill Rabon, a Republican who represents a district in the southeast corner of the state. He didn't respond to requests for comment.
"I think there are just some real philosophical differences between House and Senate leadership on sort of the legitimacy of this type of paid debt settlement product," said Whitney Barkley-Denney, deputy director of state policy and senior policy counsel at the Center for Responsible Lending.
Specifically, she said state Senate President Pro Tempore Phil Berger sees things differently than House leaders.
"The senate president [pro tempore], I think, believes in the free market to the extent that he doesn't really like a lot of prohibition from business. And so he would see this business as something that should be allowed to operate in whatever way people see fit."
Berger, a Republican who represents a mostly rural area near Greensboro, didn't respond to requests for comment.
Also this year, lawmakers considered a state Senate bill which would give the debt relief industry a formal right to operate in North Carolina.
It failed to advance beyond committee and is likely dead for the year, Barkley-Denney said.
Lawsuit Against National Conglomerate Continues
Rufty, the Carolina Legal Services lawyer, later told the state bar that he'd sent notification letters to 1,927 clients that he was winding down his practice, Bannon, the state bar lawyer, wrote in an email to Law360.
Twenty-nine of Rufty's clients filed claims to a fund for victims of dishonest attorneys and collectively received reimbursement totaling nearly $250,000, Bannon wrote. Rufty accepted a five-year suspension of his law license and could apply for reinstatement in 2026, Bannon wrote.
Meanwhile, the CFPB, North Carolina and other states have continued pursuing the lawsuit that they filed in 2024 against the bigger national operation allegedly tied to Carolina Legal Services. The suit names Stratfs LLC and multiple people and businesses.
A judge agreed last year to approve a restraining order on the businesses and install a person to control them.
But the defendants have fought back and filed appeals on multiple issues, and the prosecution of the case has been affected by the arrival of President Donald Trump's administration.
Earlier this year, the CFPB missed a deadline for briefing in the case and cited leadership transitions and related problems.
Trump has installed Russell Vought, his budget chief, as CFPB acting director, and under Vought's leadership, the agency has dropped numerous enforcement lawsuits. On Tuesday, the CFPB's top enforcement official, Cara Petersen, resigned, saying she can no longer effectively do her job under leadership that "has no intention to enforce the law in any meaningful way."
However, CFPB lawyers confirmed in March that they will continue to press the Stratfs case, and the court docket shows the CFPB's civil lawsuit against the defendants is still active.
Meanwhile, Katherine Otto, the woman who lost thousands of dollars to Carolina Legal Services, said the situation drove down her credit score.
In recent years, though, she said she has been able to rebuild her score.
She said she's received phone calls from people who are considering signing up with a debt relief company.
"I say that was the worst mistake I did, and don't do it," she told Law360. "Because you're going to end up losing your money instead of just talking to those [creditors] that you owe them, and then just let them know how much you're going to pay, and then just fix your situation with them. Don't involve this company at all."
--Additional reporting by Jon Hill and Katryna Perera. Editing by Orlando Lorenzo. Graphics by Jason Mallory.