Unrealistic Collection Expectations Drive Consumers to Debt Settlement
Debt collection agencies and creditors must recognize that many consumers will not be able to repay their debts in full, according to a consumer finance expert. Failure to do so will unnecessarily drive more debtors to settlement firms.
Partial payments of outstanding consumer debt have to be incorporated into the current economic environment, says Robert D. Manning, research professor and director of the Center for Consumer Financial Services, Rochester Institute of Technology, Rochester, New York.
Manning, author of "Credit Card Nation" (Basic Books, 2000), said that while debt settlement companies fill that roll now, creditors and consumers would be better served if they worked together to determine appropriate settlements and payment plans for outstanding debts rather than using debt settlement companies.
Manning was among those who discussed these issues at the Federal Trade Commission’s workshop that discussed the debt settlement industry and possible regulations for it ("Debt Settlement Companies Put Under FTC Microscope," Sept. 29).
He faults lenders for granting too much credit as the catalyst of the current credit crunch. Too much lending centered around equity and liquidity values of homes, not on income. Repayments had historically been based on liquidity values of assets and incomes.
Both the lending and the repayments need to be based on income, Manning said. He added that creditors need to accept that home values have declined sharply, so consumers no longer have the home equity safety valve that they once did, impairing their ability to repay debt.
“One of the fundamental problems is that creditors have no empirical evidence to determine what someone can afford to pay,” Manning said. Therefore, creditors are demanding more than debtors can afford, driving them to debt settlement companies or bankruptcy.
But Manning said that the debt settlement companies hurt creditors and consumers alike – creditors because funds they might otherwise be able to collect go to pay debt settlement fees instead, and consumers because debt settlement companies escrow funds before any settlement is made. While creditors are waiting to be paid, the debtor’s credit rating continues to drop.
Manning thinks that some creditors will start doing a better job of incorporating partial payments into their recovery schemes in the next couple of years. He also expects to see bankruptcy reform legislation.
Debt settlement companies need to provide better transparency, Manning added. But he also said creditors could adopt what he has defined as the Responsible Debt Relief Program in which creditors have a better handle on the types of payments debtors can truly afford to make and what types of partial payments the creditors themselves should be accepting. A more thorough discussion of the program, including a formula for determining partial repayments, can be found at http://www.creditcardnation.com.
Jack Craven, president of Debt Settlement USA, Inc. in Phoenix, Ariz., said there are indeed a number of bad operators in the business that put a reputational burden on firms like his that he said “believe in consumer protection and full disclosure.” He added that his firm provides debtors with full information about fees, eventual payments to creditors and other information before the debtor sign an agreement.
“We believe in fair and full disclosure when someone deals with a debt settlement company,” Craven explained. “We encourage people to shop around.”
When they investigate different companies, debtors will find that some don’t provide disclosures or have other questionable practices. That’s why Craven joins consumer advocates, creditors and others seeking some type of national regulation for the industry. The FTC will be collecting comments on the debt settlement industry through Dec. 1, and will then decide how to proceed in regulating the burgeoning industry. Craven’s firm has provided the FTC with a white paper explaining the issues and challenges of debt settlement and related firms.
Craven also said that his company tells debtors that if they can make their minimum payments each month, they are not eligible for his company's program.
The problem, according to Craven is that the creditors -- or the collection agencies that represent them -- demand higher payments that the debtors can make and threaten lawsuits, which is where debt settlement companies come in.
However, many debt settlement companies don’t provide full disclosure or make promises they can’t keep, Craven said. “People have to have the discipline to save in order to get out of debt.” If the debtor doesn’t make that commitment, the debt settlement company can’t help.
Many debtors do make that commitment, according to Craven, who said his company has helped 1200 people get out of debt in the last two years.
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Comments
Comment from Mike Ginsberg on November 21, 2008 at 8:32AM EST
Phil,
I think you captured this topic very well. Creditors and debtors are both to blame for causing the emergence of debt settlement companies. A middle ground needs to be established and well defined between full payment and bankruptcy. The answer is not a debt settlement company collecting into an escrow account on behalf of the debtor and keeping their percentage that would otherwise go to the issuer. The middle ground will emerge through disclosure by the debtor of their ability to pay and clarity by the issuer that partial payments are acceptable.
Comment from David on November 24, 2008 at 10:03AM EST
I guess creditors can also be blamed for the emergence of the DMPs administered by non profit and for profit "credit counseling" companies. If the creditors had been more willing to have established guidelines for legitimate and practical work out programs, the DMP industry would never have come into beeing. In many instances the DMP administrator, whether for profit or non profit, earns more money administering a simple payment program than does a settlement company, whose program is much more complex and costly to administer. Both a DMP administrator and a settlement administrator can provide cost savings to creditors by grouping all of a consumer's accounts into a single program, while at the same time getting better deals for the consumer.
Comment from Rick Wittwer on November 24, 2008 at 5:56PM EST
Phil,
Enjoyed the article. As a former CEO of a debt settlement company, I had the unique opportunity to hear both sides (lender and debtor) of the story. If lenders/agencies/debt buyers would alter their collection practices to be less confrontational (frequency of calling included), provide the debtor ways to contact them in a safe way and at a time of their choosing, and offer real solutions - ie multi-part settlements (up to 6), debtors would be less likely to pay debt settlement companies to represent them.
Until this happens, debt settlement companies will continue to over represent what they can do and debtors will continue to solicit their services.
Comment from Anonymous on January 8, 2009 at 6:58PM EST
My father in law ended up in a lot of credit debt and he tried to rescue himself using Debt Settlement USA in Arizona. It's funny the Jack Craven often speaks about debt settlement and even pushes for more regulation. My father in law had over 50K in credit cards and enrolled with Debt Settlement USA. He pays almost $800 per month and $600 of it is taken as fees for Jack Craven's company for the first 11 months then the fees reduce. The payments go into an escrow account where the fees are deducted monthly. We came to later find that the creditors have already sold off the bad debt to collection agencies for pennies (6 cents) on the dollar. We could have simply negotiated a settlement with the collection agency to pay 25% of the debt. Now, there is no guarantee that the collection agency will actually settle with Debt Settlement USA and my father in law could still end up being sued after all the payments are made for 3 years. By then, there would have been almost $10,000 in fees taken out by Debt Settlement USA. Does this sound like a valuable service? Most "For Profit" Debt Settlement/Debt Relief industry are preying on those at the end of the rope. I hope we get some govt regulation soon.