Is Working with Debt Collectors a Better Option than Debt Relief Firms?

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The public perception of the debt collection industry is fairly easy to describe: debt collectors are bottom-feeding scum that will stop at nothing to squeeze a penny out of consumers that can’t pay. And given the high-profile actions of some nefarious debt collectors, that perception can be warranted.

But the legitimate debt collection industry has been shockingly consistent in pushing a central message – work with us, don’t ignore us, and things might turn out better than expected.

This message was underscored in two unrelated feature-length articles appearing recently in major news outlets. Both flip the popular narrative for those dealing with debt problems; consumer-focused “debt relief” can lead to disaster, while working with debt collectors and creditors can solve a lot of problems.

In a very intimate and detailed account of a credit card debt gone sideways, Nathan Rabin concedes on Gawker that “I had stopped paying my credit card bills. My credit card company sued me.” His essay, “Getting Sued by American Express Led Me Out of the Ruins of My Life,” offers a scathing critique of the debt consolidation and settlement process in the U.S.

The story chronicles his experience with a debt consolidation firm that promised to help with $36,000 in credit card debt. Instead, his credit was ruined and he got sued by American Express anyway. At one point in the process, frustrated by the monthly payments to the debt relief firm coupled with marked inaction on their part, Rabin decided to actually face the debt collectors that were coming after him:

I started opening the letters debt collectors sent me and was pleasantly surprised to find them filled with exceedingly reasonable offers to settle my outstanding debts for twenty five to thirty five percent of the original total. At this point a strange reversal occurred as the debt collectors I had considered the enemy I now came to see as allies with the same goal as me: ending my debt as quickly and cleanly as possible. I similarly came to see the debt consolidation group as a formidable obstacle intent on eking every last penny out of me and keeping me in debt as long as possible.

So I started calling up the debt collectors and settling with them outside the debt consolidation program, which wouldn’t even speak to many of my creditors until much further along in the process (i.e after the debt consolidation group collected all of its own fees). Little by little, I started scrounging up enough money to start paying off my creditors one at a time. It was incredibly liberating paying off a six thousand dollar debt for two thousand dollars. I began to see a sliver of light in a vast eternity of darkness.

A very similar tale is told by John Hechinger on Bloomberg. His piece, “Student Debt Relief Industry Profits From Desperation,” details the story of an unemployed Cleveland mother, Polly Williams, as she attempted to address her $23,000 student loan using a debt relief firm advertised online. Williams paid an up-front fee for the services, but said it offered no help in lowering her monthly payments.

Resolution came when she reached out to a debt collector:

On her own, Williams got in touch with a debt-collection company working for the Education Department, she said. Williams spent 10 minutes filling out forms to sign up for a new plan, which reduced her monthly outlays to $8 from $136, she said.

Hechinger, the author of a piece last year titled “Obama Relies on Debt Collectors Profiting From Student Loan Woe,” (which some saw as an exposé and others as a straight up hit piece) allows that public perception of the debt collection industry may have driven Williams into the arms of the debt relief industry, writing:

Private debt collectors working for the Education Department have the power to seize paychecks, tax refunds and social security payments. Williams, the Cleveland borrower who supports a 17-year-old son, turned to a debt-relief company because she faced the prospect of wage garnishment on her defaulted loans, she said.

The two pieces help to reinforce what debt collectors have been saying for years: if you owe the debt, talk to us. With so much information available on how to avoid paying legitimate debt and how to “stick it to debt collectors,” it’s encouraging that messages like this are seeing the light of day.

 

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Posted in Collection Law Firms, Debt Buying, Debt Collection, Featured Post .

Continuing the Discussion

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  • avatar Charles Phelan says:

    I’ve been involved with the debt settlement industry since 1997, and I couldn’t agree more! In 2004, I set up ZipDebt.com to teach consumers how to reach out to their creditors and work out settlements directly, instead of paying thousands of dollars to some debt company to handle something better handled by the consumer on their own. If you work at a debt collection agency or law firm, chances are you’ve settled with many of my coaching clients, without realizing that they had a coach! No power-of-attorney, no third-party intervention, no stupid cease communication notices, just direct phone calls from the consumer to the OC or agency. The problem for the collection industry is that the average person is very intimidated by the prospect of calling you! Many collectors still use very tired old scripted lines, such as “We’re going to note that you are REFUSING to pay!” This just gets people to shut down and stop talking to you. If the industry can improve training, and get front line collectors to stop treating every single person like a “deadbeat” who should “just pay their bills,” then you just might see more people reaching out to work out deals directly. If you want more people to call you back and negotiate settlements or workout arrangements, then please start treating them with some respect and dignity.

  • avatar derek-bell says:

    This article is very misleading. I agree that it’s unfortunate how the debt collection industry has a bad reputation due to high-profile examples of “nefarious” actors. But why then blast the debt resolution industry for having the same bad actors, or by using examples of prior tactics that are no longer allowed? The FTC amended its Telemarketing Sales Rule in October 2010 to protect consumers seeking debt relief services. The Rule specifically prohibits for-profit companies that sell these services over the telephone from charging an upfront fee before they actually settle or reduce a consumer’s debt. The companies that follow the rules are only allowed to charge a success-based fee, just like debt collection companies. This regulatory change legitimized and strengthened the debt resolution industry, making it illegal for unsavory debt relief companies to continue their predatory practices. You can read for yourself on the FTC website: http://www.ftc.gov/opa/reporter/finance/creditanddebt.shtml.

  • avatar Debt Guy says:

    It’s not misleading in the least. At best it’s a waste of money to pay someone to do something that is VERY easy to do yourself. At worst you’ll wind up much worse off than you would have if you’d just manned up and dealt directly with the creditor/agency. I can’t tell you how many times a debtor ceased me, tried to hand me off to an unresponsive settlement company then ended up getting sued and garnished for the full balance plus all of the fun extras that come with litigation and judgment enforcement. Plus whatever they paid those schmucks to mishandle their affairs.

  • avatar Charles Phelan says:

    What is misleading is telling consumers it is “safe” to take 3-4 years to settle their CC accounts, knowing full well that they are very likely to get sued by one or more creditors before completing the “program.” Debt settlement provides a viable alternative to Chapter 13 bankruptcy, and quite frankly, it yields a better outcome for creditors (and agencies) than Ch. 13, but only if the consumer can raise sufficient resources to settle on a fast-track basis. I coach my clients to get the job done in 12 months or less, which yields a 4-year head start on the typical 5-year Ch. 13 plan. Consumers do need to step up and handle their own negotiations, but collectors also need to realize that some of the outdated bullying tactics still in common use are precisely what drives the consumer away from working directly with you.

  • avatar Debtor Nation says:

    As long as debt collectors false serve alleged defaulters, debt collectors have no motivation to avoid going to court.

  • avatar Debtor Nation says:

    It should also be pointed out that sometimes the credit card companies don’t accept the payment made to the debt collection company as paid in full. Additionally, the amount that was “forgiven” will be considered income by the IRS. If a person has enough money to make thousands of dollars in payments, then they may already be a in a higher tax bracket and that forgiven amount converted to income will be an additional IRS tax surprise.

  • avatar jessie-gomez says:

    Charles Phelan,

    Most original credits sell their debt to debt buyers so now you know who the consumer needed to deal with. I notice your domain is hiding behind a domain of proxy who should raise a red flag.

  • avatar Charles Phelan says:

    Debtor Nation, the reality is that most debtors won’t have to pay taxes on the 1099-C “income” from forgiven debt, due to the exemption for insolvency. See IRS. Pub. 4681 for details. Also, the “thousands of dollars in payments” clients need for settling CC debts usually come from liquidating dwindling assets, retirement funds, or private loans from family members. Anyone with sufficient income to sustain regular payments should not be using the settlement strategy in the first place.

  • avatar Charles Phelan says:

    Jessie-Gomez, most OCs only sell the account well after charge-off. They usually assign to contingency agencies for 6-12 months or longer. There are exceptions, of course, where the debt is sold shortly after charge-off. But the majority of my coaching clients’ settlements happen within 60 days plus or minus the 6-month charge-off deadline, with only a small percentage having to deal with the debt purchasers. Some OCs never sell their paper — Amex comes to mind. Also, what’s this about my ZipDebt domain? My contact info is on the website, and I’m an accredited BBB business with an A+ rating. Many site owners use proxy registration to avoid problems with third-party solicitations, spammers, etc.

  • avatar jessie-gomez says:

    Charles Phelan,

    I was not knocking your website. I have seen over the years that people sell books on how to build credit to help the consumer get out of debt. Now if your service does not help the consumer do you give a complete refund?

  • avatar Charles Phelan says:

    Jessie-Gomez,

    Yes, certainly. My policy is a one-year money back guarantee.

  • avatar Debtor Nation says:

    Quote….”Debtor Nation, the reality is that most debtors won’t have to pay taxes on the 1099-C “income” from forgiven debt, due to the exemption for insolvency”.

    I can’t agree with you. The forgiven amount is treated as income by the IRS, who will then tack on penalties if the person cannot pay them. The “forgiven” debt is not forgotten, and if that person ever does business with that bank again, the bank can swoop in and take the remainder of what was owed to them.

  • avatar Debtor Nation says:

    I think the bottom line is this…Involuntary credit card defaults should be treated differently than strategic credit card defaults.

    Involuntary credit card defaults simply means that a person experienced a life changing experience beyond their control, and will need new payment terms that do not further penalize them in any way.

    It’s really that simple, why complicate it?

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