Debt Settlement Companies Put Under FTC Microscope

Comment from Tom De Coro Sr. Financial Consultant on November 4, 2008 at 8:17PM EST

Very interesting conversation here. The clients who come into a settlement program are clients who are in a financial hardship. These are people who are looking into a program that will shield them from filing BK. Many clients try to call the creditors and ask for help to no avail. These are consumers who can not afford a credit counseling programs because credit counseling often does not lower the client’s payment. Although credit counseling does lower the rate which is great however these are clients who are in a financial hardship and they need some sort of payment relief. Only 30% of clients who enroll into credit counseling ever graduate from it, I wonder why that is? That is where settlement comes into play.

Due to the extreme financial hardship people are facing many of them are already behind or they are about to fall behind. None-the-less their credit is already in jeopardy of being affected. With a settlement program it lowers the payment and allows the client to payoff their debt and get back on track. I have done many loans for clients who have come out of a settlement program and they all have decent fico scores after their debt has been paid and settled. Most importantly their debt to income ratio is much improved which really allows them to get back on track financially.

Settlement when done correctly is good for the consumer and it is good for the banks. These are people who would normally file for BK and in most cases they may qualify for a CH 7 Bk, in which the bank would get $0. In a settlement plan the creditor can expect anywhere from 40-60% of the original balance in addition that the creditor gets a 15% tax credit from the government. So a bank could recoup 75% of the debt within 3 years. Not a bad deal given the circumstances.

With all of that being said, Debt Settlement is not for everyone, it is for people who have a job loss, medical condition or variety of other reasons which makes it impossible to payback their debt. This is not for people who can afford their payments, that is what credit card counseling is for. These are people who are behind on their debt or who are about to fall behind. If this is the case how is their credit not already affected? They can not get a loan to consolidate the debt for a lower payment, they can’t afford the payments required by the creditors but they can afford 1/2 of what their payments are now. That is where settlement comes into play. It is an honorable way to discharge the debt with out filing for BK. BK stays on your credit for 10 years and I decline people for loans everyday for that reason. I have not declined anyone for having late payments on credit cards and that is what shows up on a client's credit report in a settlement program.

Debt Settlement is a release valve for the economy, if it did not exist these clients would file BK. How is that good for the economy? It is not. Now here is the deal, Debt Settlement needs better regulation and it needs better cooperation by the banks. You see it’s not the settlements firms’ fault the client gets sued, it’s the banks fault. If the banks were more cooperative the client would not be harassed constantly by the creditors. The client could make one affordable payment and the bank could get paid off something rather than nothing.

I am in the trenches everyday with the consumer and some of the statements above are really far from being true. Really not even close to what really goes on with the consumer and the banks. The bottom line is Debt Settlement is a necessary evil, it needs to be better regulated and there needs to be a miens test for the client to complete in order to enroll. This will help solve a lot of issues with that industry. If you would like to know what really goes on with the banks and the consumer I would be more than happy to shed some light on it for you.

Comment from Someone on November 13, 2008 at 3:20PM EST

Mr. Lerner,

You are clearly a bill collector and do not know of what you speak.

I work with a Debt Settlement Company that has been in business for almost 7 years. We value our clients and their situations and NEVER has my employer asked me to anything despicable. In fact, we do everything in our power to keep our noses clean so that our clients are satisfied as well as the lenders that we work with.

I can't begin to tell you how many clients have told me "Thank You, you have helped me avoid my BK" or call me in tears because they were threatened by a collector.

Too many times have I seen FDCPA violations on behalf of large national banks.

No one should have credit cards for more then $1000. This provides all one could need, car rental, emergency fund, etc. Any more and you are spending money that you don't have and that is the real drain on this economy. Too many Americans spending money that they do not and probably never will actually have.

Credit card companies have created a model in which a customer is penalized for making their payments every month.80-90% of the payments we all make go right into someones pocket and nothing will ever be done to change that as these companies have their hands in so many Government pockets they can do whatever they want know with no penalty.

Universal default is the perfect example of this.

How is it that almost every facet of our nation is struggling financially and credit card companies, in large part, are posting record profits.

Debt Settlement is a great service if it is done right. Sure, we make money. It is called convenience fee. Have you ever gone to a mechanic to have your oil changed or your tires rotated? Did you pay them? Why would you be so blind to pay someone for something that you can do on your own? Maybe because we don't want to get our hands dirty?

My clients are busy. They work, have children, pay bills and are barely keeping their hear above water. They don't need the extra hassle of contacting some collector who views them as a number to explain their situation only to hear, well that is to bad, pay me or I'll sue you.

I was 3 days late on a credit card this month and this company called my work line 43 times over this 3 day period. This is on an account with a $275 balance. Think of what you'd have been done if I owed $27,500!

In closing, I welcome the regulations to the Debt Settlement Industry. It will weed out fly by nights and make real companies who help consumers that much more successful. I just wish someone would take as much time to regulate the industry that causes us to be in business in the first place. The CREDIT CARD INDUSTRY

Thanks,

Joe

Comment from DONALD DALY on November 20, 2008 at 12:57PM EST

I DON'T KNOW WHERE MR FRANKLIN GOT HIS "VANILLA OR CHOCOLATE" THOUGHTS. CCCS OF UPSATE NY HAS BEEN PROVIDING FULL SERVICE BUDGET COUNSELING SINCE 1971 AND HAS DONE A REMARKABLE JOB. DEBT SETTLEMENT COMPANIES ARE SIMPLY ANOTHER WAY TO SCAM THE CONSUMER WHO IS DESPERATE FOR INSTANT GRATIFICATION AND WILL THROW GOOD MONEY AFTER BAD RATHER THAN FACE REALITY AND COMMUNICATE WITH THEIR CREDITORS. THIS COUNTRY DOES NOT NEED ANOTHER LAYER OF SERVICES TO CLEAN UP LENDERS OR CONSUMERS IT JUST NEEDS TO REGULATE WHAT IT HAS BETTER. IRRESPPONIBLE LENDERS AND THEIR IRRESPONSIBLE CUSTOMERS SHOULD BE ABLE TO DRAW UP NEW REPAY PLANS WITHOUT "FORGIVING" A CENT. THIS WAY THE LENDING INDUSTRY WOULD KNOW THEIR RESPONIBILITY AND SO WOULD THE CONSUMER AND HOPEFULLY PASS THAT EDUCATION ON TO FUTURE GENERATIONS.

Comment from The Man on May 12, 2009 at 12:40AM EST

What the FTC needs to understand is that the problem here isn't whether Debt Settlement works or not, because it certainly does... The problem is in advertising, contracts, disclosure, and service - DEBT SETTLEMENT NEEDS REGULATION, plain and simple.

This will only help the good companies out there that are providing a valuable service to those in a legitiate financial hardship. I have worked in financial services for large Banks, Lenders, and Collection Agencies, and most recently in Debt Settlement.

I will address these issues one by one. 1. Advertising - It just needs to be more CLEAR to the consumer, the reason complaints happen is because they do not understand the process or the program implications they are entering, this should be an easy fix.

2. Contracts should be clear and concise, if consumers are signing a service agreement, they are responsible for understanding all of the details. The FTC could most certainly develop a standardized industry contract that all consumers can easily understand.

3. Disclosure is the MOST important thing here in the Sales Process, here are the fine points. - Your balances will increase - Your credit score will suffer - You will get collection calls and letters - You could be sued by your creditors Ofcourse there is much more that needs to be explained about the Settlement Process to educate your clients for success in this type of program, but here are the FACTS.

Most clients are already falling behind, about to default, defaulted, or in collections when they call for this type of service, and if not they should be informed that due to their hardship, they will be making the personal choice to go late (or to continue to go late)voluntarily upon entering this program.

2. If they are already behind, then their balances are already increasing, and their credit score is already suffering, this will continue in this program until the debt is SETTLED w/ the lender directly, or the 3rd party account holder (i.e. collection agency/ debt buyer).

3. If they are not behind they should be notified that by going LATE, collection efforts will continue, and at around 180days of non payment these accounts get contracted to 3rd party collections, or sold to a debt buyer.

4. As soon as they go LATE, thereby breaking their contract w/ the original lender, they are at RISK of being sued by their lender - the chances do not necessarily increase because the client enrolled in Debt Settlement, and besides even if they are sued, it doesn't change the fact that they couldn't afford to make the minimum payment in the first place, sometimes this is simply unavoidable.

Keep in mind, that most consumers DO contact their creditors directly to ask for assistance and are turned away. Since their debt to income ratio is upside down, and they have recent late marks on their credit report they are not qualified for a loan of any sort. And it certainly isn't advisable to liquidate your hard earned retirement assets, or leverage your home mortgage with an equity line, sometimes it just isn't am option.

Also, many people can not qualify or afford Consumer Credit Counseling, often times payment stay the same or even go up... The problem for consumers here is CASH FLOW. I have yet to be convinced how a CCC program can actually HELP someone that is struggling to make their current minimum payments. Their programs are typically 4-7 years, so how could someone afford to commit to a program that long continuing to make the same payments they can't afford to make right now?

As long as a client fully understands the Benefits and Risks involved in Debt Settlement they can prepare to be successful in this program.

And lets be clear, just because a consumer is sued etc., doesn't mean they were FORCED into bankruptcy, lets explore this topic.

First of all, we are talking about unsecured debt: 1. Not backed by any collateral 2. Not attached to any assets 3. Not backed by the federal government

When a bank or lender sues to collect on an unsecured credit card bill, they are typically doing so to envoke a settlement, something our clients are already working towards in this program (accumulating monthly funds for the purpose of settlement). And, here are the specific scenarios:

1. A legal judgement is filed - This changes nothing, sure it has a negative effect on the consumers credit, but it doesn't put the money in their hands either. Also a judgment can be avoided if a settlement can be reached prior to escalation, and it can also be settled afterwards - Clients need to know that it might take a little longer and the creditor may settle for a slightly higher rate; either way BETTER than a BANKRUPCY filing.

2. A property lien could be placed on their property - This also means nothing unless they are trying to sell their home. Same as a legal judgement, this can be avoided prior to escalation if a settlement agreement can be reached, and even afterwards a settlement can be reached. In fact lets be honest, this is merely a SCARE TACTIC by creditors, especially in today's housing market, no bank is going to 1. Wait for the consumer to sell their home, and 2. Hope that there is enough money left over to cover the balance. The fact is, that bank (whichever bank we are talking about), may not even be that bank in the next 10-15 years (or whenever a consumer sells their home).

As I said when a creditor sues, they are hoping for a reasonable settlement to put positive cash flow into the bank infrastructure, we all know banks are struggling now more than ever, they are not going to turn down money; they might put up a fight, but that is why certified Debt Specialists trained in Debt Arbitration are successful, we know every angle, we know everything lenders know.

And finally they could pursue a wage garnishment. This is a lengthy and expensive process for the creditor, and in most states, only 25% of their disposable income can be garnished - this is usually a very small amount, considering they are in a legitimate financial hardship to begin with. Again, this can be avoided if a reasonable settlement can be reached prior, and again, even afterwards a settlement can be reached.

For example on a $10,000 bill, if you were a bank, would you rather take $100/ month for the next 8 years or settle up front for $4500.00 right now?

Better yet, lets put this in a REAL perspective - Let's say a bank has 20,000,000 in DEBT that went unpaid in today's economy - If you were a bank, would you rather have $200,000/ month for 8 years, or 9 MILLION dollars right NOW!

Remember we are talking about debt that is defaulted, at least 90 days late or 180 days late and in collections - And we are not even considering the additional cost to litigate to garnish either, its all rhetoric because the banks and creditors know they are losing this BATTLE, and it all started with predatory lending.

Lets get some legislation to regulate lending practices, I mean how is it even possible that ALL banks can increase a credit limit to almost 30%, especially when consumers are falling behind, its a cut-throat industry... and they make a living on interest, fees, and penalties. Consumers have rights and when they fault behind, they need OPTIONS, and Debt Settlement is a VERY effective method for the right candidate.

There is bad companies out there that lie and withhold the truth, but they are being weeded out of the industry, and legitimate, good companies are paving the way for a thriving industry that will exist as long as banks and lenders continue to operate with no restrictions in America.

The only thing Stronger Regulation will do for Debt Settlement is make it easier to provide a reputable and legitimate service to struggling consumers finding themselves in a variety of financial hardship situations.

Comment from Anonymous on May 20, 2009 at 10:43PM EST

The Debt Settlement Industry is regulated by 4 institutions....one, they fall under marketing guidelines, and are not supposed to deceive, two they cannot perform unauthorized practice of law, three states have debt management laws and there are federal banking laws. They already are regulated and do not need more legislation. Those companies that are above board have nothing to worry about, the sheisters out there need to be shut down as they are greedy and could care less about the consumer...most are mortgage brokers and real estate agents who couldn't find anything else to do where they would be in control rather than working for someone as a W-2 employee. Lastly, I am so sick of hearing about "bad companies'" it is the dumb gulible naive consumers who should read every contract they sign with a fine tooth comb, checking with the BBB, etc. They are the idiots if they get scammed for not picking an above the board company listed with TASC or BBB.