REFORMING AN INDUSTRY

After 10/27/10, virtually all of the companies offering to settle debt for a fee, will have to charge those fees based on a contingency. In other words, you pay for the service contingent upon who you hire, having successfully negotiated a reduced pay off amount with your creditors that you then accept and fund. Makes a ton of sense right? Yes indeed!

People will, however, still need to approach the idea of hiring someone to settle debts with caution.

Where We Were

Debt negotiation companies have, for the most part, been able to charge upfront fees. Often, the fees have been spread out over 6 to 18 months or more. This practice has long been recognized by some of us in the industry as one of the leading causes for consumers to “fail and bail” from their settlement program.

• The reason for the fail; money that could have been aggressively saved up to fund the earliest settlement offer went to the service providers fees instead.
• The reason for the bail; creditors and their assignees continue down a relatively predictable path to collect on unpaid accounts which can eventually lead to filing a court action to force you to pay.

Being sued does not necessarily mean the death of your debt settlement plan, but you need resources to address the lawsuit before it becomes a judgment. Without the money needed to address the issue, it will often mean the end of the road. Having paid upfront fees to a company who put their profit ahead of your success means you have limited, or no, resources to maneuver through the different stages of collection.

Where We Are

You may have, or currently do, recognize a debt settlement plan to be a realistic approach for you to avoid bankruptcy. Having enrolled (or thinking of enrolling) in a plan with a company whose fees were/are/still paid prior to successful negotiations is equivalent to gambling. You bet you can get through the settlements before getting sued. The company you hired bets they can get you to pay them all their fees before you bail.

Many companies who sell or perform debt settlement today will find that, without the ability to charge the high upfront fees, they will not be able to keep the marketing machine going. They will leave the industry. In their wake, we will hear from many more consumers who were sold the hope of avoiding bankruptcy by sales people whose only motivation was to meet a quota, keep their telemarketing chair and get paid. For more than a year, the media and internet has been ablaze with stories of people being taken in by the promises of many players in the debt relief industry. They are a statistic of the “fail and bail”. The statistics will get worse as several companies close their doors and leave their customers in a lurch, having paid in advance for a service that now will not be completed. At least, not by the people who were already paid for it.

Where We’re Headed

Do I sound a bit jaded? That’s because I am. So much so, that I can see where we are potentially headed in this industry.

Beginning in September, I think we will start to see some similarities with new and existing companies offering debt settlement  based on the now required (in most cases) contingency fee structure. Two of the similarities will be:

1. The new sales approach; “You need to come up with money as quick as possible to settle with your creditors”. – This is a good thing! It has been missing from the message of the majority of people selling debt settlement for a decade.
2. Many of the companies offering success fee debt settlement will charge between 25%-30% of savings where possible (some states have limits or caps on fees –Illinois is capped at 15%). – This is a bad thing!

When comparing 50% of your account balance as an average settlement, 30% of savings is roughly the same as charging the 15% of debt enrolled that has been the average in the industry to date. Fees could actually be higher than before with debts settled early in the program and for less than 50%.

We will still see high “fail and bail” statistics because companies will settle a debt and collect their contingency fee first, before moving onto the next settlement. There really is no problem with that per say. They did a job and should get paid for it. It is the correct model to have. Always has been. The problem is if the fee is too high, it still takes just as long to settle the debts as it did prior to the FTC banning upfront fees for a settlement service.

Where We End Up

I estimate it will take a year for the industry to settle in to the new business and operational realities created by the new FTC rules. Some companies are going to try to adapt, only to quickly find it no longer worth their while. Some will find that they should have been doing business this way all along, and will thrive. The amount of companies around a year from now will be far fewer than we have today. Within 12 to 18 months, the industry will have completed the all too necessary cleansing of those who came to it in order to make a quick buck.

BOTTOM LINE:

If you are a suitable candidate for debt settlement, which is someone who otherwise would have to file bankruptcy, look for companies with the lowest contingency fees. Even better, look for a company that: Offers low fees and other flexibilities that will lead to your success!

I have continuously written articles and spoken out in interviews about the practice of “selling” debt settlement. Selling someone into debt settlement is the number one reason the industry has been tarred and feathered in the media. The over hyped selling by profiteers and sales groups has resulted in enforcement actions by many states, and new FTC rules, in order to curb abuse.

DEBT SETTLEMENT SHOULD NOT BE SOLD!

Steve Rhode, on his blog, getoutofdebt.org, regularly covers the debt relief industry and its foul ups, bleeps and plunderers. He has recently covered several lawsuits filed by employees against the firms they sell/sold debt settlement for. The lawsuits allege failure to pay wages related to work performed. Steve has posted about lawsuits against: Lloyd Ward and Associates, ABC Debt Relief, The Debt Answer, Debt RX USA, Silverleaf Debt Solutions, CreditAnswers, and Credit Solutions of America. Key assertions in these lawsuits provide a clear view into the sales culture at some of these companies. I will focus on Steve’s post about the employee suit against Credit Solutions. Credit Solutions are also the target of multiple state legal actions.

From Steve’s post where he excerpts from the court record (my comments are in bold):

For at least three years prior to filing of this complaint and continuing (hereinafter “Liability Period”), CSA had a policy and practice of not correctly compensating its debt consultants for work performed for the benefit of CSA over and above forty (40) hours per week, to wit: virtually all debt consultants received a $2,000 forgivable draw their first 90 days of employment and a non forgivable draw of $2,000 per month thereafter. Debt consultants qualified debtors for debt settlement plans of Defendant by verifying the debtor possessed at least $10,000 in debt. Next debt consultants analyzed each creditor comprising the $10,000 is owed at least $600 and there are contracts in place between the creditor and CSA. The debt consultant sets up a CSA account for each creditor. Lastly, the debt consultant verified the debtor’s bank accounts and assisted the debtor in picking a payment plan. Once a plan was chosen the debt consultant, using CSA guidelines, would set up a monthly draft on the debtor’s bank account whereby CSA would obtain its fee and moneys to satisfy the debtor’s creditors. Eighty-five percent (85%) of CSA’s fee is collected from debtors’ accounts within the first 90 days. Debt consultants received a fee from the first monthly draft which was a percentage determined on the total volume of draft’s occurring monthly attributable to that debt consultant.

Here we learn that “debt consultants” are what I would more correctly define as sales people. The way this alleged fact is laid out would actually describe more of an order taker. What do they actually do by way of a consultation? It appears they just hit the immediate qualifiers, and then help you pick a payment option that will work for you. There is an obvious motivation for “picking” a payment that you will agree to. That is how they get paid! They have to do it though (more on this below).

Debt consultants were required to work a minimum of 12 hours per day, but were expected to work as many hours as necessary to reach assigned sales goals. Debt consultants regularly worked 14-16 hours a day and CSA provided debt consultants a room to nap and sleep when necessary to reach company goals.

Imagine the pressure to hit sales goals. In the current job market, these sales people HAD to perform to keep the job. They HAD to hit sales goals even if it meant sleeping at HQ to do it! No pressure, right?

Debt consultants were not provided a rest or lunch break, but instead, CSA served debt consultants “cup of noodles” for lunch so they would not have to leave their desk and could continuing selling the debt settlement services.

This allegation is one of the most descriptive of the debt settlement sales culture I have ever seen. Why not just put a shackle from the desk to the ankle of the sales person? Were there bed pans nearby?

Debt consultants worked six (6) days a week.

Ever see Ben Affleck in the movie “Boiler Room”? “ALWAYS BE CLOSING” – The sale that is.

As stated above, debt consultants do not receive overtime for hours worked over 40 in any week.

And why should they? You think cups of noodles are free?

CSA’s revised compensation/bonus plan containing an overtime component does not correctly calculate debt consultants’ regular rate of pay for purposes of calculating overtime; i.e. commissions paid on top of consultants’ hourly rate are not included in their regular rate of pay. – Source

Other than the outright lies that are told, there is no single more frustrating fact about the selling of a debt settlement service than the pick a payment plan approach. It is sold that way because it has to be. A consumer who is struggling to pay their creditors the required monthly minimum is focused on the dollar amount they cannot come up with. When a debt settlement sales person suggests all you need is to establish a monthly dollar figure that you can do, the hook is set!

Imagine if the sales people at Credit Solutions actually shared the TRUTH of the matter with you. If they told you that in order to be successful with settling your delinquent accounts, you are in a race. You have to come up with the money to fund offers as fast as possible. You would not feel the sigh of relief that is purposefully designed into the sales approach by the majority of people selling debt settlement.  Instead, your heart would palpitate. You would know that debt settlement is a tough choice, not an easy one. You would have a much clearer idea if debt settlement is even right for you. The sales person for CSA would not close as many sales. Do you think they would ever get to go home?

Don’t consult with a sales person offering debt relief!

If you are asked what you can come up with each month to put toward settlement, or someone “helps” you come up with a figure they are confident you will bite on, you are talking to someone offering “pick-a-pay”. Pick-a-Pay is a suitability test that everyone will pass. Using this approach means virtually any one breathing will qualify for debt settlement. That is, and has been, absurd (absurdly profitable that is).

Look to speak with someone who actually works with consumers and their creditors/collectors on a daily basis. If they have any experience and are what I would consider a responsible service provider, they will TELL you the amount of money you will need to come up with, and how quickly, in order to SUCCEED with settlement in your particular situation. Armed with this knowledge, you will then be able to evaluate whether or not filing bankruptcy would be the better choice.

You can speak with just such an expert by scheduling a consultation with a CRN negotiator. All CRN consults are conducted by people who, every day, actually settle debt or provide detailed information to CRN members on how to settle their own. There is no one more prepared to provide you the necessary details about how this approach will apply to your unique set of circumstances.

For more on how debt settlement is inappropriately SOLD, read:

• Dude Meets Debt Wall
• Shocking Eye Witness Debt Settlement Report
• Debt Settlement Marketing: The Gist, The Juice, and the Lies

I have long held the position: If banks cannot be profitable by lending money at no higher than 15% interest, they should be considered too incompetent to be a bank.

Currently the cost of money for the banks is next to nothing, but they loan it out charging consumers as much as 30%. That is quite a spread!

The argument I hear for high interest rates is often one of risk. The banks use available data from resources like your credit report which may (or may not) suggest that your behavior reflects a higher risk of default. This risk data is then used, by applying some twisted logic, as justification for increasing your interest rates. Let’s see… some arbitrary or even actual data shows an account holder is at higher risk for not being able to make one of their payments and so the bank’s solution is to increase your rates making your payment higher than those at a lower risk. Gee, that’ll assure timely payment! How’s that working for ya Mr. Banker?

Judging from the increase in bankruptcies, delinquencies and charge offs… Not so much!

Obviously, the current job market is adding to the payment pressure consumers are under, but even those who are employed are often just one interest rate increase away from the edge of a financial cliff. I speak to them daily.

This Bloomberg article from yesterday: A CLUE, shows that some in a position to affect change, via the proposed legislation, actually get it.  It doesn’t take a crystal ball to see that a cap on interest rates will provide for a future where consumers can actually afford to borrow, spend, and successfully pay back their debt, thereby assisting in an economic recovery. There are lawmakers who possess, or are willing to borrow from their constituents, the backbone needed to support a return to sound lending principles.

Yes, I understand that we are approaching an election cycle and perhaps there is a desire by politicians to look good at home, but this legislation has never been more relevant than it is today.

Let’s hope it gets the traction it needs this time!

Settlement with creditors is a great way to deal with debt when you are unable to maintain consistent payments. It is however, not a cake walk, though many in my industry will sell it as such.

This post was inspired by a consult I did this morning with a gentleman in Pennsylvania looking at settlement as an approach to dealing with his unmanageable debt. He wondered onto our website while searching out his options, after having already consulted with another company in the industry.

His unsecured debt totaled $22,000, spread out over 7 accounts. His minimum payments are just over $900.00 a month. His interest rates on most of the accounts are over 20%. That is what’s killing him. He would be able to meet minimums, but for the higher interest, and likely be very successful using an aggressive debt rollup, or debt snowball strategy, to get out of debt quickly and unscathed. His plight, when outlined to creditors, has thus far resulted in “Dude meets wall”.

The company he consulted with prior to me outlined a 36 month program where he could pay into an account roughly 300.00 for 36 months and poof, his debt is gone. Never mind that $3300 of that money set aside over that time will go to the settlement companies fees, I’ll get to that in a moment. The sales person with whom he consulted is selling rainbows and unicorns for a commission. The 36 month plan for his situation is ridiculous for some of the following reasons.

Two of the accounts we discussed have balances of about $1000.00 and another one for $1500.00. Enrolling these accounts in a plan like this, unless they are the first ones settled (even then not advisable, unless left with no choice) is futile and silly. The math doesn’t work. Optimum balance reduction through settlement only happens when you are delinquent, often very delinquent (5 months or more). When you stop paying, default interest rates of 29-32% will be applied, late payments will be assessed, all of which could result, in some cases, in over limit fees being tacked on. Depending on when settlement is reached the amount of the debt could now be double. Can the debt be settled? Absolutely, but using 50% savings as an example, what did you actually save? Nothing, or close enough to nothing to prove that the math doesn’t work.

What if we take these 3 smaller accounts out of the equation? We are now working on $18,000. By aggressively saving and setting aside every penny, this family could be out of debt in less than 12 months and limit to near nonexistent, the risk of being sued on unpaid debt.

Now, I was completely upfront with this consumer about the way I saw his situation and perhaps he appreciates the candor and becomes a member. Perhaps the other consult he had sounded more appealing, with its 36 months, low (too low) payment to his savings for settlement and easier sounding approach. He will pay the typical fee in this industry, which by their very nature is harmful to the settlement process. The sales person will make his commission (some cases I have seen, commissions are in excess of 70% of client fee) for selling rainbows and unicorns.

He may ultimately be out of debt in 36 months, but it will have been a very long 36 months, and he will have paid too much, experienced too much grief, may be sued on one or more accounts and may miss out on strategies that could have been beneficial to recover his credit standing much faster (this is whole different topic for another post).

Moral to this post: Don’t buy into rainbows and unicorns unless you are into paying a salesman’s bills when you can’t afford your own. The settlement industries frontline is, for the most part, populated by sales people motivated by commissions. Rarely do you find a place where you can consult with, and talk to an experienced debt specialist on first contact, prior to forking over any fees and whose motivation is your success, not your money.

If you have hit the debt wall and want to learn about all of your debt management options, including debt settlement, visit Consumer Recovery Network. While you’re there, learn about becoming a member of Consumer Recovery Network (CRN), with no risk to you, and find out if you should pursue debt negotiation.

By: Michael Bovee
CRN President

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