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.
There are loopholes in the new law that can be exploited. And with the amount of money that can be made when circumventing the plain language and intent of the law is going entice some, and perhaps many.
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 today.
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:
- 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.
- 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, and who have been around a while.
If you have any questions or concerns about any of the changes I mention above you are welcome to post in the comments below for feedback.
The struggle may be due to the fact that you, as a reporter and knowledgeable debt expert, are someone who cares about a positive outcome for consumers.
High fail and bail statistics are built (and building), due to the activities of those who care about commissions and profits.
The two don’t mix all that well.
I still struggle with companies that feel it is wrong to wait to be paid for services they actually perform rather than intentionally embarking on a fail and bail approach.
Steve