CRN Supports Changes to the Telemarketing Rule Just Announced by the FTC

Yesterday, the FTC announced important changes to the Telemarketing Sales Rule, http://www.ftc.gov/opa/2010/07/tsr.shtm. The changes are intended to protect consumers with too much credit card debt from abusive debt settlement practices. One of the most important changes is that settlement firms will no longer be able to charge consumers up-front fees to settle their debts as of 10/27/10.

Overall, I am thrilled that the FTC is reigning in abusive debt settlement firms. For too long, these firms have been allowed to prey on consumers with too much credit card debt. Sadly, in far too many instances, consumers who worked with such firms saw their financial situations grow worse, not better, because of the large up-front fees they had to pay, and many of those consumers eventually ended up in bankruptcy.

The rules will shape the industry and promote the best practices moving forward.

I am concerned that some settlement firms may charge a large fee at the back end of their work for consumers. I have always contended that the fee amount charged by a debt settlement service provider directly correlates to how long it will take an individual to be successful in settling all of their debts. Program duration is directly attributable to increased risk of aggressive collection efforts such as filing lawsuits against a consumer in order to collect.

When consumers are looking into debt settlement as one of the few legitimate options available to deal with crushing debt, it is IMPERATIVE that they still weigh the COST for the service.

I will be posting more detailed comments about the amendments soon. Stay tuned!

Anyone looking into their options when dealing with debt that is too hard to handle on their own has limited options when looking for outside assistance. Your legitimate options will generally be narrowed down to bankruptcy, credit counseling and debt settlement.

You MUST do your research into ALL three of these options by discussing them individually with reputable service providers.

Debt Management Plans (DMP’s) & Credit Counseling Services:

The core benefit when enrolling in a DMP is lower interest rates on the existing debts you have with creditors who participate in managed plans. This translates into lower and more manageable monthly payments.

When it comes to DMP’s and Credit Counseling Companies who support them, my experience is that not all firms are created equal. While the interest rate concessions that DMP providers arrange with your creditors are generally predetermined and will not vary from one service provider to the next, the service and attention to YOU, their client and customer, can vary greatly! The difference in consumer education and hands on tools that are provided as well as the care and compassion rooted in their management and employees can make all the difference in a positive experience and outcome!

When consulting with a credit counseling firm, you also need assurance that you are not talking with someone whose goal is to sign you up into a program that you are not suited for. Many of these firms want to beef up their numbers in order to collect a monthly fee and increase their fair share and grant contributions from creditors, without enough regard for how suitable a candidate you are for their program.

For these reasons and more, I recommend anyone gathering information about DMP’s offered through a credit counseling organization contact:  Safe Guard Credit Counseling – Direct Dial: (800) 673-6993. I am sure there are other companies who offer similar services around the nation that could meet the high standards you will be greeted by at SafeGuard.

So why single them out for you to contact and schedule a free consultation?

• I have been to their offices.
• I know, like & trust their management team.
• I have reviewed their counselor training materials.
• Their fees are fair & their people care about assuring you can be a success when working with them.

SafeGuard is who I have trusted, and continue to trust, when referring people to find out if a debt management plan could work for them.

Disclosure: None. Consumer Recovery Network, Debt Bytes nor Michael Bovee receives any form of compensation for referring consumers to Safeguard.

Having worked with consumers who are struggling with debt in one form or another for many years, I have always endeavored to compile informative resources geared towards a better educated consumer. Most resources and professional assistance available to consumers are often ones that have a bias due to self promotion. Someone or some source that has something to sell you is generally going to tip the scale in their favor and is prone to “talking their book”.

In the debt relief industry, finding a reliable and affordable source of comprehensive information about all of your options that is unbiased and not motivated by selling you something is becoming increasingly difficult to find.

This post is about “talking someone else’s book”! In its seventh printing no less!

The #1 resource I could possibly recommend to a consumer struggling financially and who is concerned with being fully informed about all of their options to deal with crushing debt is “A Guide to Surviving Debt”.  This book has critical information EVERY consumer will want to evaluate if they are struggling to find the best solution for themselves and their family in tough financial times.

This book will thoroughly deliver reliable information that you can use to determine your best path for getting out of debt, with no concern for whether the information is slanted toward a solution other than the one that is best suited for YOU.

Let me put it this way:

Get this book, read it cover to cover, and you will know more than most of the self-proclaimed experts offering debt relief advice or products.

Surviving Debt tells consumers, their counselors, and lawyers what they need to know about:

• dealing with debt collectors
• which debts to pay first
• saving your home from foreclosure
• your credit report
• credit card debt
• student loans
• when to refinance your car loan
• income tax collections
• how to find effective credit counseling agencies
• special rights for military service members
• your bankruptcy rights
• much more

“A Guide to Surviving Debt” is published and available from the National Consumer Law Center (NCLC). NCLC has a dedicated and successful history of championing consumer rights that spans decades!

If you are struggling financially or work with people who are, you owe it to yourself or those you work with to review this number one go-to resource!

Michael Bovee
CRN – President

Today, the Detroit Free Press ran an article about how consumers have the option to negotiate a reduced balance pay off with creditors (debt settlement). Read the full article here: Debt Settlement in Michigan

I was interviewed by the reporter for the story, as was a CRN member who was quoted in the article. The article gave some good advice, but I would like to expand on it. The article correctly stated many companies “have taken outrageously high upfront fees — as much as 13% to 20% of your debt”. The average fee charged by most settlement companies is 15% of the debt you ask them to settle for you.

The CRN member quoted in the article settled $35,000.00 of debt for $12,000.00 by implementing the tools and following the guidance she received as a CRN member. Had she hired a typical settlement company to settle her debt she would have paid an average of $5,250.00 in upfront fees. However, as the Detroit Free Press article stated, she paid CRN just $1,200.00 to do the same thing. Would it really have been the same thing though? Not hardly!

If you hire the typical settlement company, you’ll find:

• By paying high upfront fees before the company achieves any real substantive results for you, you are prolonging your success, and often dramatically reducing your odds of achieving any success at all.
• The company will probably send notices to your creditors letting them know they are now working with you. This means the creditors will know that you are now paying a settlement company instead of them. Often, the reaction to this information will be to become more aggressive about collecting what you owe them, possibly by referring your account to a law firm in your area earlier than it would otherwise and giving the firm authorization to sue for the money you owe.
• The settlement company will generally not be negotiating with your original creditors because they mostly wait for your accounts to charge off. Charge-off usually happens at about 6 months of nonpayment. Once creditors charge off bad debt, they will typically do one of three things with your account, assign, sue or sell.

Settlements are still available when your account goes someplace other than with your original creditor after charge-off, but depending on who your creditors are, you’ll save the most through debt settlement by negotiating with the original creditor BEFORE the account charges off. In other words, you could find yourself paying more, sometimes much more, when settling with a 3rd party.

The article in the Detroit Free Press seems to suggest that the CRN member was still hoping debt settlement would work for her by saying “She’s crossing her fingers that this arrangement works.” It did work. She enrolled with CRN in September of 2009 and completed her settlements in March 2010. She got out of debt in 6 months rather than the 3 to 5 years it would have taken her to resolve her debts if she had filed for chapter 13 bankruptcy instead or the average of 4 to 5 years if she had enrolled in a debt management plan.

Credit Reporting

Debt settlement is an option for someone who can no longer continue making timely payments on their debts and whose credit score is, therefore, either already suffering, or soon will be.

What happened to the credit score of the CRN member quoted above?

The CRN member gave me permission to share an excerpt from an email exchange I had with her on 3/22/10:
“…Two days ago, I re-ran my credit and 3 of the 4 settlements had already posted. My credit was already 671-677 from each of the three bureaus! I think my credit ranged from 670-710 in the year prior to starting the settlement process so this is amazing.”

The effect of debt settlement on an individual’s credit score will differ based on several factors, so please do not take the experience of this CRN member as an indicator of what will happen to yours.  The points here are: Getting out of debt should be your first priority, and once you do, your credit will bounce back regardless of the option you choose to get out of debt.

The US economic engine is based on roughly 70% consumption. In a tough Michigan economy, this CRN member and her family can return to responsible spending in 6 months rather than 3 to 5 years. Furthermore, not only did she avoid bankruptcy, but also, her creditors got something rather than 90% odds they would have gotten nothing were she to have filed chapter 7 bankruptcy.

If you find yourself running out of money before you run out of month and live in Michigan (or anywhere in the US for that matter), please call CRN a call at 1-800-939-8357 when you are considering debt settlement as one of your 3 legitimate options to deal with debt.

Michael Bovee
CRN President

FICO Data Reveals That Settling Your Debts Damages

Your Credit Scores Less Than Filing for Bankruptcy

FICO, the company that calculates consumers’ FICO scores — the scores that are the most widely used by American creditors to determine whether or not they will extend credit to a particular consumer and the terms of that credit — recently released data showing how different negative actions consumers might take in regard to their credit will affect their scores. Among other things, the data shows that settling your debts is far less damaging to your FICO scores than filing for bankruptcy. In other words, the data helps make the case for why settlement rather than bankruptcy is an excellent alternative for many cash-strapped consumers, assuming that they either settle their own debts or work with a reputable settlement firm that charges fairly for its services.

The data released by FICO and available on its web site at: http://www.myfico.com/crediteducation/questions/Credit_Problem_Comparison.aspx, shows that as a consequence of filing for bankruptcy, consumers may see as much as a 240 point drop in their FICO scores. In contrast, if they settle their debts, their FICO scores may drop by 125 points at most. Interestingly because of the way that FICO scores are calculated, when consumers have higher scores prior to either filing for bankruptcy or settling their debts, their credit scores are harmed more by settlement or bankruptcy than are the scores of consumers who had lower FICO scores to begin with. According to FICO, the reason for this difference is that the scores of lower scoring consumers already reflect their credit missteps.

Despite the FICO data, I must caution you not to base your decision about which debt relief option to pursue based on that information. All debt relief options — credit counseling, settlement and bankruptcy — will have a negative effect on your credit histories and/or FICO scores for some time. (See my recent blog, Debt Relief Options vs. Your Credit Score).

When you are deciding how to deal with your debt, your primary concerns should be gaining a clear understanding of how each option works and its pros and cons, and determining whether the numbers associated with a particular option make sense for you. For example, your first test if you are considering settlement should be whether or not you can accumulate the money you need to fund your creditors’ settlement offers before your risk of being sued by them for what you owe begins to escalate. If you cannot come up with the money you need to settle your debts relatively quickly, then bankruptcy is probably your better option.

For free help determining which debt relief option would work best for you, fill out CRN’s consultation request form.

{Beware: the pump monkeys}

One of the biggest concerns for Americans who are struggling with debt, and looking for solutions to get out of debt, is their credit score. The question that I’ve heard most frequently over the years of working and consulting with consumers is; what will “this” do to my credit report? My answers are generally pretty enlightening, and because there are so many misconceptions, and even people willing to mislead consumers in order to sell them on some approach, I want to lay out some facts.

Let’s start with this fact: Risk aversion by lenders, in the extension of credit, has returned with a vengeance! This means that if your Debt to Income (DTI) is unhealthy, you will frequently find that additional credit is unavailable to you regardless of your credit score. Many consumers are finding that existing credit lines are being cut down to current balances and unused accounts are being closed. There is much more to discuss on this topic, but for the consumer struggling with debt my point is; stop thinking about your score. Additional credit availability is unlikely right now, anyway.
The credit score has been so indoctrinated into our consumer based society; people make irrational decisions, negatively impacting themselves and their families, all in the name of the all mighty FICO. So, as if through a megaphone from 10 stories below; “Put down that credit report and step away from the ledge”!

If you’re struggling with debt, whatever the hardship, and are forced to consider your options. I will lay out the legitimate options and outline the effects to your credit.

Debt Management Plan (DMP, sponsored by for profit or nonprofit credit counseling companies):
Your accounts that are accepted into the program will be closed and this will have a slight impact on your score. While enrolled in the program, it is typically very tough to get financing of virtually any nature in the first 24 months, due to the DMP notation in your credit report, next to each of the accounts enrolled. Debt Management Programs run, on average, 5 years. You are basically in “unsecured credit purgatory” for this entire period (such as obtaining new credit cards). You may be able to get financing on a vehicle or even purchase a home, modify an existing home loan, or qualify for a student loan (either your own or parental) after the first 2-3 years of successful participation in your DMP. When an account in your DMP is fully paid, the DMP notation is removed. This is a good option, if the math supports your finances (more on the math in a moment).

File Bankruptcy:
Chapter 7 – will stay on your credit report for 10 years. This does not mean you won’t have access to credit for the full 10 years! This is one of the biggest misconceptions out there, and partially what motivated me to write this. There are many reasons to try to avoid bankruptcy. Your ability to get credit in the future is one of the flimsiest. Up until the economy started crashing in 2007, consumers who discharged debt in a chapter 7 were finding unsolicited credit offers in their mailbox within 6-12 months of discharge. The credit offers were generally subprime, so not the best limits and rates, but were offered nonetheless. With the return of risk aversion, and many of the subprime credit card issuers having left the market, I don’t see these solicitations for credit just outside of bankruptcy being offered much, at the time of this writing. I find them even less likely moving forward, as banks will be repairing their balance sheets for years to come. Besides, having just obtained discharge of unsecured debt, one should not be in a hurry to obtain more, and most certainly not at subprime rates.

Current FHA underwriting standards mean you will not qualify for FHA funding after filing bankruptcy for a period a 2 years. It is, therefore, unlikely you will get a loan for a home purchase in this time frame, in the current loan market. Student loans are generally off the table for a few years, including ones you would apply for in order to assist your child. You may be able to finance a vehicle purchase after a chapter 7 within 12 or so months after discharge.
Your credit score is factored on several data points. 35% of it is reportedly factored on utilization/Debt to income (DTI). After discharging debt in a chapter 7, your DTI and utilization should be fabulous. Now, you wait out some of the 2-3 year timelines lenders and underwriters use as a standard, take a few effective steps to rebuild credit, and this whole 10 year misconception is seen for the baloney it is.

Chapter 13 – is totally different. It’s the worst of all options. The court is overseeing a repayment plan of 3 or 5 years. It’s on your credit report, you’re on a court approved household budget, and if you were to seek a new credit contract of virtually any type, you must first get approval from the court appointed trustee, who has been empowered to tell you “NO”. This version of bankruptcy is credit purgatory. It is rigid and inflexible. You will have court protection from creditors, but at the highest cost. It is an option, but should be seen as a last resort.

Debt Settlement:
Settling debts for less than the balance requires you to be behind in payments. Since another 35% of your credit score is factored on repayment history, your credit report and score is going to get clobbered! The clobbering itself and the duration of the pain will be different for each person. Once you achieve zero balance reporting, your credit score will begin to improve. How long it will take to improve will depend on several factors, such as:

• How long you went delinquent before a zero balance was reported
• Was the account charged off (settling debt inside of 6 months delinquency is optimal)
• Was it sold after charge off and re-reported (original creditor reports the charge off and the debt collector reports as well)
• What accounts were current during the settlement process (mortgage, car payment, other)
• What was the depth of your positive credit history (have you had cars, mortgages etc… paid off in the past)
• Did you take prudent steps to rebuild credit along the way

My experience has shown that roughly 18 months after completing the last settlement, and the zero balance due reporting, you’re in decent credit shape again, when contemplating legitimate needs. I have seen CRN members qualify for FHA funding on a new home purchase 9 months after finishing their settlements (focusing on the above 6 items) . The primary reason for this is that your debt to income is in better shape, and the math shows you can comfortably service the mortgage. This aspect should be considered by those who have been turned down for a modification on an existing home loan based on their DTI, and who have resources that can be creatively deployed.

Summary:
These 3 options are what a consumer, who cannot keep up with payments, has to consider. The fact is; every one of them is going to hurt your score. Even just slogging along and struggling to meet your minimums is going to keep you from any new credit, based on a poor DTI ratio, regardless of the FICO score. The days of fog a mirror – and get credit – are gone.

Basing your decision on which option to go with because of the affect on your credit report, is like arguing over whether to punch a one foot or two foot hole in the bottom of the boat while at sea. The boat sinks no matter what.

These 3 options actually track pretty well when you boil them down to which one will put you in position to obtain legitimate loans, like a home/car purchase or student loans, the quickest.

The point is, when you are drowning in debt and are worried about your credit score, you’re worried about the wrong thing.

The media, lenders, regulators, unwitting commentators, have all contributed to the credit score hype. Sure, it is important when you are out shopping for loans and better interest rates, but that’s not what someone who cannot keep their payments up should be thinking about. They are not going to get credit, and they cannot service the additional debt anyway. Anyone saying something different is talking up their book, has the luxury of not struggling with debt, or is a pump monkey for some special interest.

When determining which debt relief option will best suit your situation, and you’re mid-to-long term goals, always start with the math. The math doesn’t lie and should assist you in narrowing down which option is best.

Chapter 7, for those who qualify, and who fully understand all of the implications associated with filing (sans the credit score), will provide the quickest, most thorough relief.

Other than a discharge through bankruptcy, my experience would suggest that consumers weigh and compare a debt management plan (DMP) beside a debt settlement approach, and make a rational decision based on the math and the flexibility that is built into either option. Settlement will generally win this test. When doing the math to qualify for a DMP, you will need to factor your ability to consistently and comfortably make a monthly payment of 2.5% of your current unsecured credit card balances. If you cannot, or question your ability to maintain this type of payment, I question why you would even start a DMP. You have a high probability of not completing it and will have wasted resources that would have contributed to your success using a settlement approach and the ability to regain your financial freedom sooner.

If you are considering settlement, be sure to consider the hype and fees associated with its pump monkeys, too. Please read: Debt Settlement Marketing-The gist, The Juice & the lies or Dude Meets Debt Wall

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, with no risk to you, and schedule a consult to find out if you should pursue debt negotiation.

By: Michael Bovee, CRN President