Charles Phelan

In January and February of every new year, I get numerous emails from people who have settled unsecured debts during the prior calendar year. They are surprised to find 1099-C forms in their mailboxes, which report to the IRS the forgiven debt balances as ordinary income. Many consumers are totally shocked to find they might owe taxes on cancelled debt balances. “How can I owe tax on a debt?” they want to know. “Can this be true? Is there anything I can do about it?” I figured I would write about this subject now, so I can point to this post when the email queries start hitting in January.

[UPDATE December 2013 — NEW Insolvency Calculator now available! Only $29 to save countless hours of frustration! Instant download. Read more …]

At first glance, it really doesn’t make much sense. How can a debt be treated as income? The logic is that the consumer enjoyed the goods and services purchased on credit. So when the lender has to record a loss on part of the balance, the IRS takes the position that this is equivalent to income to the consumer. You got a bunch of stuff, essentially for free, goes the argument, so therefore you need to pay taxes on that “gift.”

Under the current IRS code, that’s just the way it is, and there’s little point in wishing it were otherwise. Fortunately, there is a loophole provided by the IRS in the form of the insolvency exclusion. “Insolvent” means the same thing as negative net worth, where you owe more in debts than you own in the value of your assets. If you are insolvent at the time you reach a settlement with a creditor, then you can offset the 1099-C income up to the total amount by which you were insolvent.

Here’s an example to make it more clear. Let’s say you settled $50,000 of debt during 2009, and you paid an average of 50 cents on the dollar, resulting in a savings of $25,000. Will you have to pay taxes on the savings of $25,000? That depends on your net worth situation. Let’s assume that your home equity was flat or upside down (very common nowadays), so you don’t have any positive asset in the form of home equity. To keep it simple, we’ll ignore personal effects and automobiles. Your assets at time of settlement were limited to $20,000 in a 401k account (yes, retirement funds count in the asset column), plus $1,000 in checking, for a total of $21,000. You had $50,000 in unsecured debt. Therefore your net worth was negative $29,000 ($21,000 of assets, less $50,000 of debt).

Come January, you receive 1099-C forms from the creditors you settled with, and the total of those forms adds to $25,000 – the amount of debt that was forgiven. Since you are “insolvent” by $29,000, you can exclude the full $25,000 saved during the negotiation. In this situation, no extra tax liability would result from the 1099-Cs issued for the settlements, and the insolvency exemption has come to the rescue.

[UPDATE December 2013 — NEW Insolvency Calculator now available! Only $29 to save countless hours of frustration! Instant download. Read more …]

What would happen if you did have home equity? Let’s say that you had $30,000 of home equity based on the fair market value of your property, and all the other figures quoted above also held true. In that situation, your net worth would be positive. The $30,000 of equity added to the $21,000 of 401k and cash yields total assets of $51,000, against $50,000 of debt, for a positive net worth of $1,000. Under these circumstances, you would be liable for taxes on the full $25,000 of 1099-C income associated with the canceled debts. 🙁

It’s also possible that you might overlap these two scenarios, where you get to exclude some of the 1099-C income but not all of it. For example, let’s adjust the equity value in the above scenario from $30,000 down to $10,000, giving you $10k equity + $21k other assets, for a total asset value of $31k. Against $50k of debts, this results in a negative net worth of $19,000. Yet with $25,000 of debt forgiven, only $19k of this figure could be excluded, and the remaining $6,000 would have to be treated as ordinary income.

The above seems pretty simple when laid out like this, but for some reason, this entire discussion on insolvency still seems to throw many people a curveball. I see a lot of confusion on how to calculate net worth, and one of the biggest misunderstandings pertains to income. Sometimes people ask, “I’m working and my job is stable, so how can I declare insolvency?” Income has nothing to do with your net worth, so let’s at least try to clear up this key point. Income & expenses are one accounting category, while assets & liabilities (debts) are another category. It’s possible to be insolvent while you still make a six-figure income! Income is not an asset, until it becomes excess cash in your bank account, after expenses. So just because you have a job with a steady paycheck, that does not block you from claiming the insolvency exemption via Form 982. You can still owe more in debt than you own in assets even if you are working steadily.

Another stumbling block is when to perform the net-worth calculation. Technically, the IRS says you must calculate net worth at the time of settlement. OK, but what is the time of settlement? Is it the date the creditor verbally agrees to settle? Or is it the date their accounting department actually makes the ledger entry to write off the forgiven part of balance – and how could we ever know that date anyway? Pending any possible adjustments or improvements to the clarity of the IRS language on this subject, my standing advice to clients is that they should perform one net worth calculation for each settlement. For “time of settlement,” we use the date the settlement payment is due rather than the date of the agreement letter itself. If the settlement is a multi-payment arrangement, then we take the date of the final payment as the date of settlement. In the absence of any clear directive on this point from the IRS, the above would seem to be the most logical interpretation.

I strongly urge consumers to get professional help to assist with the tax issues associated with settlement, but I wanted to at least get across the fundamentals. Mainly, consumers really need to understand that the insolvency exemption is available, especially since debt collectors often try to talk people out of settlements by scaring them on the tax issue. In my experience, the majority of people pursuing debt settlement are insolvent and do qualify for the exemption. However, I also feel that it would be very foolish to reject the debt settlement strategy just because it might result in a tax bill. After all, the total of the settlement payout + taxes would still be well under the full balance on the account, resulting in an overall net savings. And even when taxes are “part of the lunch,” settlement still yields a vastly better outcome than the “forever plan” (i.e., endless minimum payments) offered by your friendly credit card bank!

Don’t let the 1099-C tax issue scare you away from debt settlement. Just be sure to follow the rules and document everything correctly. Settle your debts, claim insolvency if you are entitled to, and pay your taxes if you aren’t! Whether or not you owe taxes on your settlements, you’ll still be vastly better off without the debts on your back.

UPDATE February 29, 2012:

Consumers are now receiving 1099-Cs from creditors for debts that are several years old, in some cases decades old. In response to new rules by the IRS, companies are sending out these forms, and consumers are seeing little guidance from the IRS on dealing with this confusing situation. If you have received a 1099-C on an old debt obligation, here is a link to an excellent article by Gerri Detweiler, who has thoroughly researched this issue.

[UPDATE December 2013 — NEW Insolvency Calculator now available! Only $29 to save countless hours of frustration! Instant download. Read more …]

There may be major changes coming soon to the debt settlement industry. I’ve written recently about how the industry is being targeted by various regulatory bodies, such as the Federal Trade Commission, state Attorneys General, and various consumer advocacy groups. Recently, the FTC announced a proposed change to the “Telemarketing Sales Rule” (TSR) that will include the regulation of “debt relief services” within its purview. If the rule change is implemented as written, it has the potential to immediately change the entire dynamic of the settlement industry. The main reason is because the proposal includes a clause that will deny settlement firms the ability to collect any fee in advance of having performed the service contracted for.

Back in 1998, a similar action was taken that resulted in the “Credit Repair Organizations Act,” and that legislation effectively outlawed credit repair, where fees were charged in advance for such services. The net effect was to push credit repair “underground,” with very few firms able to clear the necessary hurdles to operate on a legitimate basis. Leaving aside any discussion on the merits (or lack thereof) of credit repair services, the proposed change to the TSR could have the exact same effect on third-party debt settlement companies across the nation.

Readers of the ZipDebt blog are already aware that I really don’t like the front-loaded fee structure adopted by most settlement firms. However, that doesn’t mean I think what the FTC is doing is a good idea. It’s a transparent attempt to literally hand over the debt settlement sector to the existing network of credit counseling organizations, and that would be a fiasco for consumers. I outline my reasons for this position in an open letter to the FTC, written in response to their request for public response to the proposed rule change.

Here is the full text of my open letter to the FTC:

>>>>>>>>>>>>>>>>>>>

Manchester Publishing Company, Inc.
132 N El Camino Real
Encinitas CA 92024

Federal Trade Commission
Office of the Secretary
Room H-135 (Annex T)
600 Pennsylvania Avenue, NW
Washington, DC 20580

October 6, 2009

Subject: Proposed Rule Change to TSR, Request for Public Comment

Dear Commissioners:

The purpose of this open letter is to provide a response to the Federal Trade Commission’s proposed change of the Telemarketing Sales Rule (TSR) to include regulation of “debt relief services.”

As someone intimately involved with debt settlement since 1997, I am very familiar with the evolution of the industry from its earliest inception. Further, since 2004 I have adopted a completely different approach to debt settlement. Rather than negotiating as a third-party representative, I provide consumers with training and coaching as they negotiate their own settlements. The training comes in the form of an audio-CD seminar, and the coaching is delivered via email and telephone. I have personally provided one-on-one coaching for thousands of consumers to settle their own debts without direct intervention by a professional negotiator. As a result, I literally have no “stake” in the continued existence of the industry in its current form. So my perspective on debt settlement is unique and different from that of most industry insiders who will reply to the request for public commentary.

With respect to reining in the abuses that are rife within the industry, I welcome the proposed rule-change to the TSR as it pertains to the requirement for full disclosure to prospective consumers. My chief criticism of the proposed change lies with the suggestion to eliminate any form of advance fee, a concern that I will address below. With regard to disclosure requirements, however, there is no question that tighter rules are called for. For too many years, debt settlement has been promoted by unethical firms looking to exploit the vulnerable consumer. One major problem with lack of proper disclosure pertains to the manner in which the debt settlement process is proposed and structured. I am referring to the common practice within the industry where 36-48 month program durations are routinely quoted to the consumer, without disclosure that the probability of creditor litigation approaches 100% during that long a timeframe. Further, debt settlement is being promoted to virtually any consumer who carries a revolving balance of $10,000 or more (total) on their credit cards. People who were otherwise fully capable of maintaining normal payments against their debts have been convinced to purposely sacrifice their credit and risk legal action in order to reduce their debt burden. Suitability analysis, independent underwriting standards, and lack of internal oversight within the industry has led to a situation where virtually anyone with a credit card debt is targeted for enrollment in debt settlement programs.

The reality is that the majority of consumers being enrolled into traditional debt settlement programs are not suitable candidates for this strategy. Once all the marketing hype is peeled away, debt settlement can properly be viewed for what it is – nothing more than an alternative to Chapter 13 bankruptcy. Consumers who can qualify for Chapter 7 bankruptcy, still approximately 60% of annual bankruptcy petitioners, should not even consider enrollment in a debt settlement program. Why should they? Instead of years of exposure to legal risk, in exchange for high service fees charged by the settlement company, they can simply discharge their obligations in court, usually within a matter of months (not years) and at a fraction of the cost of a settlement program.

Once the “target market” for debt settlement is properly understood to consist only of those individuals otherwise facing Chapter 13 bankruptcy (i.e., 5-year restructuring of the debt), it immediately becomes apparent that settlement is erroneously being promoted as a suitable alternative for all bankruptcy petitions, with no distinction made between Chapter 7 and Chapter 13.

Further, just because a person would otherwise be required to file bankruptcy under Chapter 13 rather than Chapter 7, this does not automatically mean they are a good fit for a settlement program. They must also have sufficient resources for the settlements to be negotiated quickly enough for legal action to be avoided. In my own experience, this generally translates to only a “fast track” settlement strategy being effective – 12 months or less. So much of what drives settlements in the first place is the charge-off event – normally at 6 months’ delinquency – with creditors seeking to reduce the booked loss via settlement prior to charge-off, or a quick recovery after charge-off via external collection agencies. Settlement firms enrolling consumers into 36-48 month programs are misrepresenting the realities of debt collection in the current financial environment. Mounting risk of legal action is totally ignored by these sales-driven organizations.

When adjustment has been made to reduce targeted enrollments to consumers who are truly qualified for debt settlement (i.e., Chapter 13 candidates with sufficient available resources for a successful “fast track” settlement strategy), what is left is a greatly reduced pool of prospective clients. Simply put, if debt settlement was presented properly, meaning only to people who qualify for it, then there would not be more than one thousand such firms in existence today.

The reality is that debt settlement services are being “sold” rather than bought. Over-promotion of this approach has led to a backlash by the major creditors, in turn making it more difficult for consumers who attempt to negotiate their own settlements. So I welcome disclosure requirements that would assist people in properly understanding this approach as it fits among the range of options available to debt-stressed consumers.

The above concerns about disclosure and suitability notwithstanding, this writer remains deeply concerned about the FTC’s proposal to fully eliminate the ability of debt settlement firms to charge any fee whatsoever in advance of having achieved settlements on behalf of clients. While I have personally coached many consumers to handle their own settlement negotiations, I recognize there will always be some continued need for third-party representation in the debt settlement arena. Some consumers are overly fearful of the process, some are truly incapacitated or disabled and require outside assistance, while still others simply do not wish to tackle the process of negotiating on their own. So while I do believe that one thousand or more debt settlement firms is far too many for the true size of the market for this type of program, that does not mean the FTC should take action that will effectively eliminate the entire industry.

By forcing debt settlement (as conducted by third-party representatives) into the non-profit sector, and eliminating any potential for for-profit service companies to work in this industry, the FTC is effectively handing this entire segment of the debt industry over to the existing network of non-profit companies currently delivering credit counseling services to consumers. This, in my opinion, is a disaster in the making. Why? Simply because it will automatically mean that the essential core basis for third-party leverage is effectively removed. I refer to the well-known fact that consumer credit counseling organizations already receive a significant portion of their income directly from the creditors who sponsor their services in the form of the “fair share” agreement. Such organizations who choose to also operate in the debt settlement arena will automatically be operating with a major conflict of interest, making them subject to pressure from lenders – pressure to accept higher settlement percentages than would otherwise be the case. Some may challenge this prediction – but a little common sense will indicate otherwise. Why should a bank accept a 40% settlement offer from one of the counseling organizations it routinely accepts debt management proposals from, when a little pressure from the top to “hold the line” at 60% will result in higher collection recoveries (in theory)? The original intention of the debt settlement approach was to provide consumers with access to a service organization that had no direct ties with the clients’ creditors – freeing the organization to truly place consumers’ best interests as top priority. Take away this core feature by only allowing non-profit companies to work in this sector (i.e., companies that are already beholden to the major creditors), and the results will automatically be inferior to what clients can currently achieve – either through third-party settlement programs (properly implemented) or on their own with training and coaching. If the FTC rule on “no fees in advance” is implemented as proposed, it will be the consumer who suffers the most – and the FTC will therefore be achieving the exact opposite of its intended effect.

This writer recommends that the FTC consider adopting the fee structure proposed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) model legislation for regulation of debt settlement firms – a project which has already been under way for several years, with several states having already adopted rules based on this model. This would provide a reasonable fee structure that eliminates the worst abuses within the industry, while avoiding the unintentional forcing of the industry toward non-profit companies who simply will not deliver the best results for those consumers who most need it.

Finally, with respect to the question on whether the definition of “debt relief services” in the proposed rule-change should be expanded to include “debt relief products,” the expanded definition is completely unnecessary and should not be implemented. Clearly, products in the form of books, tapes, CDs, or printed matter (whether hard-copy or online) contain speech protected under the First Amendment. The marketing of such products is already regulated under existing laws pertaining to deceptive trade practices, and the FTC already has adequate authority to deal with deceptive marketing of such products. Further, where the true intention of the product offering is to “up-sell” consumers to a full-service debt program, then the proposed rule-change would already govern, making an expanded definition of “debt relief service” redundant and unnecessary.

Sincerely,

Charles J. Phelan
President/Founder
Manchester Publishing Company, Inc.
www.zipdebt.com
[email protected]
Toll-Free Direct Line: 1-866-515-2360

Since the whole financial world melted down about a year ago, I’ve been so busy here at ZipDebt coaching clients that I’m overdue to post various updates to the main portion of the website. As a consequence, I’ve been getting more and more questions like: “I see that your debt settlement audio seminar was released in 2008. Is the information still up to date? Should I wait for a new version?”

The first version of my Debt Settlement Success Seminar was published in 2004, and the 2008 version was four years in the making. I have no plans to release a new version of the audio training course anytime soon.

Virtually 100% of the information contained in the 2008 version of the seminar is still valid. Yes, a lot has happened in the financial world in the past 18 months! However, nothing has really changed with respect to the *mechanics* of debt settlement.

Also, and this is a VERY important point – all three of my program levels (Basic, Enhanced, and Premium) include a Personal Telephone Strategy Session. The purpose of that phone conversation is to lay out the roadmap for you – specific to YOUR list of creditors, balances, and other pertinent factors. There are a lot of differences between the major credit card banks, and settlement practices, tactics, and policies do change on a frequent basis. In the training course, I don’t get into specific creditors by name, because things change too fast in that regard. What has NOT changed are the basic principles of this system – that’s why all the content of the CDs is still valid and extremely useful.

What does change from time to time is the percentage a bank might settle for, or the tactics they might employ during the collection process. Sometimes the lowest I’ve seen in several months with a particular bank is 40%, and then all of a sudden a bunch of settlements start coming through at 35%, and so on. This is where live coaching is essential to the process.

The bottom line is that the audio course will teach you the system – after that, we fine-tune your “debt settlement roadmap” (via the Strategy Session) based on CURRENT creditor trends, who you’re up against on your specific list of accounts, what your settlement resources are, and so on.

So please don’t wait around for the 2009 or 2010 version of the seminar kit – the 2008 version + live coaching support remains THE state-of-the-art DIY debt settlement system available today.

Beginning in 2000-2001, several major credit card banks started using a tactic called “consumer arbitration” as part of the collection process. It was a rigged game from start to finish, and I’m pleased to report that consumers have finally won a major victory, thanks to a lawsuit filed by the Attorney General of Minnesota. Forced arbitration, used as a collection tactic, is about to go the way of the dinosaur. It’s been a long time coming, and this is a huge win for consumers.

First, a little background. The original idea behind arbitration is to provide businesses and individuals with a means of resolving disputes outside the formal legal system. Instead of lawsuits, why not sit down with a neutral arbitrator and negotiate an out-of-court compromise? Makes sense, right? This also goes by the name of “alternative dispute resolution,” but is usually simply called “arbitration.”

The banks all originally started including *mandatory arbitration* to their credit card contracts with the aim of blocking consumer class-action lawsuits. In other words, the banks were tired of being on the receiving end of class-action lawsuits, so they inserted a clause that basically says, “Use this card, and you waive your rights to sue us, and are required to use the arbitration process for dispute resolution.”

Leaving aside the questionable legality of forcing consumers to give up their day in court, the real fireworks began when the banks started using it the OTHER WAY AROUND – as part of the collection process. The banks would forward delinquent files to a collection law firm, who would then send a demand notice coupled with a threat of filing an arbitration claim. The supposedly neutral arbitrator they used was the National Arbitration Forum (NAF). If the consumer failed to comply and resume payments, the file went to the NAF for “arbitration.” The NAF would then promptly grant an “award” to the credit card bank. This award represented nothing more than a piece of paper, and did not carry the same legal weight as a formal court judgment. However, the bank (or the law firm that initiated the action) had the option of forwarding the award to a law firm in the client’s home state, where it could then be converted to a legal judgment against the debtor.

Here’s the problem: Arbitration, by definition, is supposed to be conducted by a NEUTRAL third party that has no conflict of interest – that is, no direct involvement with either party to the dispute. Yet the National Arbitration Forum was literally nothing more than a rubber stamp for the credit card industry. The creditors hardly ever lost! They got their award almost every single time, with exceptions being very rare. Statistics (assembled by consumer groups rightfully concerned about this tactic) indicated award rates in excess of 94% in favor of the creditor. Basically, it became nothing more than a paper mill – a corrupt system that in the end had nothing to do with its original intention.

Yet this sad state of affairs dragged on for nearly a decade. Flash forward to 2009, and the Attorney General of Minnesota decided that enough was enough. The MN AG sued the National Arbitration Forum. The AG’s written complaint is a thing of beauty, the product of some very expert detective work performed by the AG’s staff. The complex web of interlocking relationships between the banks and the forum has to be seen to be believed. Heck, Bernie Madoff could have learned a thing or two from these guys!

Rather than admit any wrongdoing, the NAF “voluntarily” agreed to suspend all consumer arbitration activity, citing a litany of self-serving excuses for this abrupt shift. Since virtually all of the NAF’s business came from the credit card banks, this essentially means that the NAF is no more, at least relative to consumer debt arbitration. Folks, this is a major win for consumers.

The fireworks are far from over though. Hundreds of thousands of consumers were victimized by this rigged procedure, and the class action suits against the NAF (and their cohort banks) are just kicking into gear now. The fun will likely drag on for several years, with the class-action attorneys being the only real winners. But at least it means that consumers will no longer need to dread the “kangaroo court” that was the National Arbitration Forum.

Predictably, one major creditor just announced it will forgo the mandatory arbitration clause from their card agreements. Naturally, the announcement was pitched in such a fashion as to make it seem like they were being high-minded. In reality, it was nothing more than self-interest. They can’t arbitrate anymore anyway, now that their captive arbitration forum has folded its tent, so why not get a little PR value out of a major announcement on a new consumer-friendly “no mandatory arbitration” policy? The other major credit card issuers will probably jump in soon with similar announcements. Time will tell whether or not they craft some other equally duplicitous collection scheme.

The purpose of this blog post is to warn consumers looking into do-it-yourself (DIY) debt settlement that a lot of bogus information is being published online about the DIY approach to debt negotiation and settlement. Just as most of the online information published by debt settlement firms is misleading at best, a lot of the DIY material coming out now is produced by that same crowd, and is therefore equally misleading or simply wrong. So there are copycats, imitators, and direct rip-offs of my ZipDebt program popping up all over the Internet. Buyer beware! These folks are completely clueless about what it takes to coach consumers on settling their own accounts.

A little background information will help you understand what’s going on. First of all, debt settlement is not my invention, although when I started in 1997 I was one of the first people negotiating credit card debt on behalf of U.S. consumers. My current approach to debt settlement, however, IS my invention. As far as I know, I was the very first person to provide a do-it-yourself (DIY) training program for debt settlement, combined with *personal one-on-one live coaching support*. There may have been one or two flimsy DIY debt settlement e-books floating around before I started ZipDebt in 2004, but I’m not aware of anyone before that working the way I do. When I started ZipDebt, no one else was out here with me in the trenches, working directly with consumers, *coaching* them to negotiate and settle their own debts without third-party representation. So I guess that makes me a pioneer. And one definition of “pioneer” is the guy with the arrow sticking out of his back.

I started feeling those arrows in my back about a decade ago, when I published online the original version of my consumer report about debt settlement, “How to Eliminate Your Debts Quickly and Safely Without Filing Bankruptcy.” Not long after that, I discovered that someone had copied my booklet word-for-word, signed their name to it, and then published it on their own website. After a phone call from my attorney, the other fellow backed down, blamed the “error” on his web designer, and pulled my report from his website.

That scenario was repeated many times over, and to this day, whenever I read various websites published by debt settlement companies, I still find exact wording of mine all over the place. It tends to show up in company FAQs, as well as the side-by-side comparison chart that I invented to visually illustrate the difference between minimum payments, credit counseling, and debt negotiation. And the sales presentation too. As a writer, I’ve come to expect the rip-offs and copycats, and I mostly ignore them unless they are so far over the line that I feel compelled to take action. I don’t get too excited about such things because I know that the imitators will be gone in a year or so anyway. They never last. How could they? They aren’t prepared to do the hard work necessary, or they would not have copied me in the first place, right?

Nowadays though, I see knockoffs, copycats, and imitators all over the place. “Do it yourself debt settlement! Save thousands in fees!” Ads like this are starting to pop up all over the Internet. What’s happening is that the debt settlement industry is under tremendous pressure from consumer groups and various regulatory officials like Attorneys General at the state level, and the Federal Trade Commission as well. (For further discussion, please see my blog post, “Debt Settlement Industry in the Crosshairs.”) Hardly a week goes by where we don’t see another debt settlement firm sued by an Attorney General or the FTC. (Here is a link to an article discussing the recent shut-down of one of the industry’s worst violators – Allegro Law Group.) It’s getting tougher and tougher to make a go of it as a third-party debt settlement firm. Also, there are clear indications that industry regulation is coming soon. It’s been too long in coming, but it’s very likely that a new Federal bill will get passed in the next 12-18 months. That bill, depending on how it finally turns out, will probably regulate the industry out of existence, at least as it exists in its current form. Gone will be the huge fees, rip-off contracts, and lack of licensing requirements. Very few settlement firms will survive what lies ahead. The people who own these companies are seeing the writing on the wall.

So let’s say you own a settlement firm and you see the train wreck coming. What’s the logical solution? Hey – let’s set up a do-it-yourself settlement program! Do a little research, and up pops ZipDebt. Hey, if this guy can do it, so can we! Let’s buy a copy of Phelan’s course, change it up, and sell DIY settlement instead.

I’ll leave out a very complicated discussion as to the marketing costs of debt settlement, and skip to the bottom line. These companies will fail at trying to do the DIY settlement model the way I do it. I’m not bragging or being arrogant here – it’s just that I already know it won’t work because the cost to market debt programs *in large volume* greatly exceeds the fees that a consumer is willing (or should be willing) to pay to learn how to do something themselves. Companies get away with charging huge fees for traditional third-party settlement programs because consumers have the illusion that they are buying a professional negotiator’s services all the way down the road. But paying 15% of your debt to handle it yourself simply will not fly. So there will be all kinds of ridiculous fee models, and none of them will work because of one simple fact: As long as they gun for large monthly volume of enrollments, they will have to purchase “debt settlement leads” at great expense. And it will cost these companies more to acquire a new client than they will be able to charge for the service. The result is a very unprofitable business model. If you have ever wondered why ZipDebt has no true competition, that is the reason. My monthly budget for advertising? Zero dollars. I only make a living at this because I am NOT trying to “sign up” gazillions of new clients on a monthly basis. Besides, I am trying to keep what little hair I have left, and coaching people is a LOT of work! 🙂

Now, not everyone out there dabbling in DIY settlement is out to soak the consumer, and I do not mean to imply that is the case. I don’t have a monopoly on this approach, which after all, is really nothing more than teaching people how the collection process can be turned to their advantage. It’s not exactly rocket science! However, the quality of the advice I’m seeing out there is very poor, and I want consumers to understand that just because someone claims they can coach you on DIY settlement does not mean they know what they are talking about.

Here’s a good example of bad advice: One article I read recently on the DIY approach informs consumers that debts are best settled *after* charge-off takes place at the 180-day point. WRONG! That is horrendously bad advice, since with most creditors you’ll be better off negotiating a settlement BEFORE charge-off, where you can get a better deal with the creditor before a collection agency gets in the game (and with far less risk of litigation). The reason this person wrote that comment was because they did not know any better – they had been promoting a regular debt settlement company, and with those outfits, most debts *do* only get settled after charge-off. Why? Because the banks don’t directly talk to settlement firms! (And also, settlement firms charge so much up front on the fees that the average consumer doesn’t have any money to settle with before then anyway.) If you took the information in this article at face value, you would have a very false impression of the way DIY settlement should be conducted. But this person, posing as a “guru” in the debt industry, gave people the exact wrong advice, based on his prior knowledge of how third-party debt settlement works.

Another example – I just reviewed a website that offers an e-book for sale on DIY debt settlement. On the sales page for the e-book, the author makes the statement that it is not necessary, when settling with an original creditor (i.e., the bank itself), to obtain a written agreement on the settlement. Further, the author states that the banks will not agree to issue such letters anyway, and because the phone calls are recorded, it’s safe to settle on the basis of a verbal agreement.

Folks, this is the single WORST piece of debt settlement advice I have ever seen. There really is only one unbreakable rule in this game – no settlement letter, no deal, no exceptions – EVER! Granted, there can be some “tricks of the trade” involved in extracting such letters from creditors, but it’s not a difficult thing to accomplish. I assure you — ZipDebt clients NEVER agree to settlements without first having proper documentation in hand. The reason the above “professional” advice is so horribly wrong is because, quite simply, the banks are not to be trusted! Recorded conversations mean nothing, because you will never be able to obtain a copy of that recording unless you sue the creditor to obtain it. Good luck with that if something goes wrong!

We insist on settlement letters because people who settle on a verbal basis have no leg to stand on when the bank continues trying to collect on the unpaid balance and simply pretends the settlement was never authorized. Also, sometimes banks “accidentally” sell the forgiven portion to a debt purchaser. Then it’s your word against theirs, and guess who will come out on top. When you have a settlement letter, you can put that situation to bed in five minutes by faxing over a copy of the agreement letter. Without a letter, it’s almost impossible to resolve that type of situation.

If you want to negotiate and settle your debts, ZipDebt has all the information you need to do the job quickly and safely. Skip the websites, e-books, and “forums” filled with amateur advice, and come to the source! Learn the state-of-the-art tactics for settling your debts, from someone who does this on a daily basis, day in and day out, week after week, month after month, year after year. Just as you should not fall for the settlement company sales pitches, you should also be skeptical of this new crop of “experts” on do-it-yourself debt settlement. The moral of the story is the usual one – let the buyer beware!

Congress recently passed the “Credit Card Bill of Rights,” and the new law was signed by President Obama and will go into effect in 2010. I’ve been getting a lot of inquiries about whether or not the new legislation will have an effect on the debt settlement process, so in this blog post I’ll take a look at the changes and discuss some of the potential benefits (and pitfalls) for consumers.

Back in 2005, there was a lot of discussion about the change in the bankruptcy law, and we heard a lot of speculation on what effect the changes would have on the debt settlement process. As I wrote in an article published in August 2005, my prediction was that it would be “business as usual,” and there would be no effect whatsoever on debt settlement. That prediction proved to be totally accurate. Well, my take on the new credit card law is that it will still be “business as usual” when the new law goes into effect next year, and the banks will be settling accounts just as they always have.

A summary of the major changes to the way credit card banks are allow to conduct business under the modified rules can be found in this Boston Globe article.

What do I think of the new law? It’s partly a fig-leaf designed to give political cover to Congress. A lot of these folks will be up for re-election in 2010, and with millions of consumers hopping mad at the banks, politicians want to be able to say they stood up to the banks and voted in favor of credit card reform.

There are some pretty good provisions in the bill. For example, the requirement for simplified contracts will really help. It will no longer be necessary to have a law degree and an electron-scanning microscope to read the 30 pages of fine print that is a modern credit card agreement.

Better yet, some of the really outrageous industry practices will be blocked. Universal default, where Bank “A” gets to jack your interest rate because you fell behind on payments to Bank “B” will be a thing of the past. Retroactive interest rate increases on existing balances will be gone, as will double-cycle billing and a number of other truly sneaky practices.

So overall, I do believe this bill is beneficial to consumers. It will probably help many people to avoid falling into the clutches of the credit card trap. But for consumers who get into financial trouble and fall behind on payments, the trap will still be there, and this is why debt settlement will not be affected by these rule changes. All of the factors that motivate a bank to reduce the loss at time of charge-off will still be in place. But hopefully fewer consumers will get in trouble and need to take such a strong dose of medicine to solve their financial dilemma.

That said, the reason I still call this bill a fig-leaf is because the single most important provision the law could have included was stripped out. I’m referring to an interest-rate cap. Let’s face it, folks. We have legal loan-sharking in this country. There should have been a rate-cap included with the bill, but the banks got their way on that all-important factor. (See my blog post from April 12, 2006 on why we have legal usury in this country nowadays.)

Also, let’s be candid here. Credit card banking, by definition, is a predatory industry. Take away the revenue stream from late fees, over-limit fees, and penalty interest, and the banks would have posted losses in the years where they were otherwise profitable. Does anybody seriously think that the math wizards at these institutions won’t simply craft new ways to soak the American consumer in order to remain profitable? We’re already hearing about the restoration of annual fees for credit cards, and that’s just the start.

In the context of debt settlement, there is absolutely nothing in this new law that will affect how the settlement process works. Consumers who fall behind on their credit card payments will still be treated to a bombardment of collection calls and threatening letters. People will still be misled by an army of “debt experts” ready to take their money for rip-off “programs” that don’t work as advertised. And yours truly will still be here doing his best to help people sort out the truth about debt settlement from the hype and the nonsense.

One final word to the wise – expect debt collectors to start telling tall tales about how “the rules have changed, so we can’t settle anymore.” It happened when the bankruptcy law changed, and it was total bunk then. It’s already happening today, as collectors try to exploit the news headlines to trick and confuse consumers about their options. So if a debt collector tells you that “we can no longer settle because of new Federal guidelines,” don’t believe it for one minute!