Debt Settlement and Debt Collection: Friends, Foes and the FTC

Andrew Housser

On the surface, debt settlement and debt collection seem like they could be natural partners. Both have the same ultimate goal: resolving unpaid consumer debts. Yet in fact, the two are often in conflict. The good news is that they don’t need to be.

The issue is that some creditors and collectors are concerned that debt relief companies are trying to force customers into debt settlement (also known as debt resolution), when in fact these individuals should be working with other forms of debt relief, such as debt consolidation refinance, credit counseling or a self-managed paydown plan. However, it does debt relief firms no good to push someone in the wrong direction – and that is especially true for firms that comply with Federal Trade Commission (FTC) regulations issued in October 2010. To be fair, many debt relief firms were already working to get the right consumer into the right program before the FTC rules went into effect. Now, the incentives are very much aligned.

Today, for compliant debt relief companies, there is no reason to be in conflict with debt collection and ARM businesses. Here’s why.

Current market realities

In October 2010, the FTC issued a ruling to curb unethical debt relief companies. The new regulations included the well-known advance-fee ban, which prohibits companies from collecting fees until they have negotiated a result for a client, and the client has accepted that negotiation.

Because the rules include a strict prohibition on payment until the debt relief firm delivers a settlement that the client accepts, they provide companies with a strong incentive to keep people out of a debt settlement program if they don’t belong there. So, if a consumer has the means to pay off debts on his or her own, that consumer will be disappointed with the negative effects of a debt settlement program and drop out before accepting any settlements. If a consumer has no means to get through a debt settlement program, he or she will drop out because of no ability to settle any debts. In either case, a debt settlement company would be investing in a significant amount of work – with no payment.

Debt resolution clients who do their homework can find a company that will explain all the options available to them, get them into the most appropriate program for their situation, and, if that program is debt settlement, refrain from charging any fees until after delivering results. As a real-world example from my own company, following our pledge to adhere to the FTC regulations, approximately 80 percent of our enrolled clients see at least some of their debts resolved. On average, our clients see their first debt negotiated within three to four months of starting the program.

Who is the debt settlement client?

Many debt relief companies closely guard information about their clients; after all, it’s a competitive world. Therefore, speaking only for my own firm, a mere five percent of the consumers who reach out to us ultimately enroll in a debt settlement program. Many more are referred to debt management plans, debt roll-up plans, or consolidation loans.

The debt settlement, or resolution, process is by no means a one-size-fits-all process. Rather, it is best suited to a specific type of consumer. Typically, successful debt settlement clients are struggling with very serious debt (generally at least $10,000 across multiple debt accounts, and often more, depending on circumstances), cannot make required minimum payments, and otherwise might be considering bankruptcy.

On the other hand, individuals who are in mild hardship, but need more time to pay off their debt, can often find success with other types of debt and credit management programs, as listed above. Still others can, with time, and perhaps working out their own agreements with creditors, manage to repay their debts on their own.

This is where debt relief and ARM companies share common ground: The goal for each is to get to the bottom of a consumer’s troubling debt situation and resolve it to the best possible outcome for both parties. Debt relief firms work with some of the most challenging cases, seeking to develop holistic solutions for unsecured debt problems on a client-by-client basis. Unlike with most Chapter 7 bankruptcy filings, the outcome is one in which creditors receive at least partial payment from the consumer.

Debt settlement-debt collection interaction

Good debt settlement companies now receive payment only when they succeed in resolving debt – which often involves cooperating with debt collection companies. One benefit for companies in the ARM business is that the advance-fee ban has purged the debt relief industry of most of the unscrupulous players. The companies that remain are dedicated, professional organizations that serve consumers well. These companies understand that if they are not meeting their customers’ needs, they will not be in business for long.

Nevertheless, as with most rules, there are those who look to exploit the loopholes and/or exceptions, and find ways to do so. If consumers cannot discern whether a debt relief company is one of the ethical players, they could find themselves struggling – FTC rules or no.

One measure the industry has developed is a public endorsement of the FTC rules by the American Fair Credit Council (AFCC), formerly The Association of Settlement Companies. Membership in the AFCC is limited to companies that have agreed to adopt the no-advance-fee model. Consumers dealing with an AFCC member can have confidence that they will be treated fairly. They also gain assurance that the company is conducting honest and fair negotiations as a neutral party, without any incentive from creditors or collectors. Consumers who need significant debt help clearly find this arrangement assuring; AFCC members settled more than $1 billion of unsecured debt last year.

The more debt collection companies understand the full debt settlement industry, the new FTC regulations and how they work, the better the two industries will work together.

Andrew Housser is the co-founder and co-CEO of Freedom Financial Network, LLC (FFN), which provides comprehensive consumer credit advocacy services through its Freedom Debt Relief, Freedom Tax Relief and ConsolidationPlus programs. Housser, who holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College, is a past recipient of the Northern California Ernst & Young Entrepreneur of the Year Award.