Charles Phelan

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!

Given that the whole country is still in the grips of the most severe financial crisis since the Great Depression, with millions of Americans falling behind on credit card payments, you would think that this would be boom times for the debt settlement industry. Well, I for one am truly glad that I do not own or manage a debt settlement company! The industry has been under attack for many years, by regulators, consumer groups, and of course the credit card banks. Lately though, the bad news for the industry just keeps coming thick and fast.

The New York Times recently published an article that essentially describes the entire industry as being far more harmful than helpful to consumers. I feel sorry for any settlement sales rep trying to “sign up” consumers who have read this article first!

Consumer Reports then joined in the fun with an article that basically calls debt settlement companies “scams.” Ouch! (Full disclosure: Yours truly was interviewed a couple of months ago by a reporter from Consumer Reports. Sorry guys, I only told the truth!)

But the industry’s problems don’t end with bad press. The Illinois Attorney General’s office recently sued two prominent debt settlement firms, and those cases are pending resolution.

Then came the kicker – an announcement by Andrew Cuomo, Attorney General for New York, that his office had launched a nationwide investigation into the debt settlement industry, with subpoenas issued to 14 prominent firms. It will be very interesting to see the published report issued after the investigation is completed, but I doubt there will be anything positive in it with respect to most of the companies listed.

Hopefully, all this negative publicity will make consumers more aware of the pitfalls of using a debt settlement company.

IMPORTANT: The reason for all these attacks by media and regulatory bodies has nothing to do with the concept of *negotiating a settlement*. Settlements, after all, are what the banks do in order to reduce their losses. Rather, the problems are with the *companies* that charge huge fees to do something consumers can do just as well on their own (better, actually). Folks, stay away from third-party settlement companies! Learn how to negotiate and settle your own debts. If you are a good fit for settlement in the first place, there is absolutely no reason you can’t learn to tackle the project on your own, with a little help from ZipDebt. 🙂

Recently I was trying to find a way to explain to someone how I conduct myself in the business world. It’s sometime difficult for me to explain why I do things the way I do. My “business model” often makes no sense to others, simply because I make decisions that are often surprising to people who don’t know where I’m coming from. One example is the lack of paid advertising links on my website. I have a high-traffic website, free of any external paid advertisements, and sometimes website owners get in touch wanting to pay me for ads they wish to place on my site.

I always say no, and they are amazed. “You don’t want to earn thousands per month in ad revenue?” Well, no, I don’t want your debt-related service ads on my website, because that would make it a junk website like every other one out there. My website is different from others, on purpose. How would it make any sense for me to strongly criticize third-party debt settlement companies or debt elimination scam promoters, only to turn around and get paid for running their ads on my website? Sure, it makes business sense, but it would not meet my standard of ethics.

Here’s another example. I often hear from debt settlement company representatives or owners who want to license my do-it-yourself debt settlement training materials. Their idea is to offer it side-by-side with their front-loaded 15% fee traditional settlement program. “Hey, we’re paying all this money for debt leads, and some people don’t have enough debt to qualify for our $15,000 minimum. We can sell those people your program instead.” No, thank you. People with less than $15,000 of debt are not good candidates for debt settlement in the first place. In fact, most of my clients have a LOT more debt than that. But my attitude doesn’t make much sense to the person who is only focused on the bottom line.

The best way I can explain my approach to business conduct is by using an analogy from “Star Trek.” In the original TV series produced in the 1960s, the creator of the show (Gene Roddenberry) came up with the idea of the *prime directive*. Star Fleet officers were sworn to respect alien cultures that were less advanced, and not to interfere in the natural development of other civilizations. (Yeah, I know. Captain Kirk violated the Prime Directive just about every other episode, but the idea is still a good one.) 🙂

So what does this have to do with ZipDebt? Well, the ZipDebt “Prime Directive” is based on a very simple principle – the consumer’s best interests ALWAYS take first priority over my bottom line. My prime directive is to HELP consumers with their debt issues, even if that means *leaving money on the table*. From my perspective, if you enroll someone in a 48-month debt settlement program that you know is doomed to fail, just so you can make a buck, that means you are a dishonest crook, period. When I do a consultation with someone, I tell the truth. It’s really that simple.

If I don’t think settlement will work in your situation, I will tell you that, straight up, even if it costs me a sale or a refund later on. If I think you need to go see a bankruptcy attorney, I will tell you that. On the other hand, if I think you should use debt roll-up instead, where you pay back your balances in full, I will tell you that as well. People are frequently astonished that I never push to “make the sale” or “close” them on my service.

So the ZipDebt Prime Directive is really nothing more than simple honesty and personal integrity. Yet by conducting business in this fashion, it sets me apart from more than 99% of the people operating in this industry. And that, my friends, is a sad comment on the times we live in.

It helps sometimes to put things in perspective with a little math. On a daily basis here at ZipDebt, clients report successful settlements on their debt accounts. I finally had a chance to take a closer look at the numbers for 2009 so far. For the months of January and February 2009 combined, clients have reported settlements that resulted in more than $1.1 million in savings.

In other words, creditors forgave more than a million dollars worth of unsecured debt balances. Virtually 100% of these settlements were negotiated by clients on their own, with training and coaching assistance from yours truly.

I should also point out that the $1.1 million saved does not include the additional savings achieved by using the do-it-yourself approach. Clients saved at least another quarter-million dollars in fees that traditional settlement companies would have charged to accomplish the same results. And of course, that leaves aside the fact that many of those settlements would not have taken place through a third-party debt company. That’s because of the backlash triggered by the use of a settlement company, which often prompts the creditor to escalate early to aggressive collection agencies or attorneys, resulting in a much higher settlement percentage, etc.

If you are wondering, “Will the banks still settle in this financial crisis?” there is your answer! More than a million bucks worth of debt in just two months – gone, vanished, out of clients’ lives forever. I feel pretty good about that, and it’s results like these that motivate me to keep going. I have a tough job that involves far more work than most people realize (especially my copycats and imitators). But as long as I’ve been doing this, it’s still a wonderful feeling to see the settlements roll through and witness the positive effect it has on clients’ lives.

Here we go again. Two different consumers have informed me that a “debt consultant” (i.e., sales rep) at a settlement company made a specific claim about the 1099-C taxable income issue. The pitch is that if the client handles the negotiation themselves, they will be issued 1099-Cs by the original creditors and the forgiven balances will be fully taxable. Naturally, they also claim that if their company is contracted to handle the negotiations, they have some special method for getting around the 1099-C issue.

So we have two lies in one sales claim. That takes real creativity (or desperation). The first lie is that the forgiven balance is fully taxable when you get a 1099-C. That is false for the majority of debt settlement clients, due to the “insolvency” exemption. If you have a negative net worth, the IRS permits you to exclude the 1099-C amounts from income up to the amount by which you are negative. Therefore most debt settlement clients don’t have to pay taxes on the 1099-C amounts.

The second falsehood is the claim that a settlement company has some method of avoiding the issuance of the 1099-C in the first place. Nonsense! This is a blatant lie, period.

I’m not sure what magic-bullet technique these guys are claiming to have for eliminating the 1099-C factor. One possibility is a truly stupid tactic where you dispute the forgiven balance – the exact opposite of what you want to achieve through the settlement process. I wrote about this a couple of years ago, in my blog post on “How to Ruin a Perfectly Good Debt Settlement Letter.”

Anyway, leaving aside idiotic tactics that will only backfire, it simply DOES NOT MATTER whether you settle the debt before or after charge-off. Either way, the creditor is REQUIRED BY LAW to issue a 1099-C for any forgiven amount of $600 or greater. Purposely waiting until after charge-off, the way one rep phrased the claim, does not create a path for avoiding the 1099-C. And if you were to follow this wonderful “advice,” it would also cost you some of the best potential settlements. (Some of the best deals available happen before the charge-off deadline via negotiation with the original creditors.)

What’s going on here is that it’s getting tougher and tougher for these settlement company sales reps to “close the deal.” Their huge fees are a tough sell, and smart consumers do their homework before signing a contract. Many of them find my website, realize that all is not as they were told, and start thinking about taking charge of the project with help from ZipDebt. The sales rep finds out they lost another big commission, and they start thinking of ways to convince people they should not handle their own settlement program. Hence the new “angle” on the tax issue.

Then again, now that I think of it, there may be some truth to their claim. Since many of their clients will either be forced into bankruptcy or get sued into paying back 100% of the debt anyway, then I suppose they can make the case that there will be no 1099-C forms issued. No settlements = no forgiven debt = no 1099-C next January. 🙂

Folks, don’t believe the hype. It’s YOUR debt. Step up to the plate and take responsibility for it. Steer clear of the settlement companies making false claims.

Here at ZipDebt, I’ve been hearing the same questions on a daily basis:

“What effect is the economic crisis having on debt settlement?”

“With everything going on with the banks these days, is it easier to settle, or tougher?”

“What effect will the bank bailouts have on debt settlement?”

The pattern has already started to become clear — 2009 will be a great year in which to settle credit card debts. The “catch” is that you have to be a good candidate for debt settlement in the first place, and that has little or nothing to do with what’s going on in the economy.

Let me put it this way: It doesn’t matter how “easy” it gets to settle with one bank or another. If you don’t have money to settle with, then it doesn’t matter very much, does it? The client’s ability to raise settlement funds will ALWAYS be the #1 factor in achieving a successful outcome.

That said, there are definitely some interesting things going on with the banks these days. As I discussed in a previous post (11/3/08), we’re seeing more “rent-an-agency” situations, where the original creditor uses outside collection labor earlier in the process than before. However, that factor alone is not very significant, since the settlement results are approximately the same either way. (OK, third-party collectors can often be more annoying than most bank employee collectors, but that’s just the way it is. If you get a good settlement, who cares how rude the collector was about it?)

One of the positive effects, in terms of settlement, is that collection agencies seem more willing to cut to the bottom line. Often, collection agencies receive assignments for three months, and it was normally the case that you had to wait them out until near the end of the assignment in order to get a favorable deal. Nowadays, you can often get a good settlement soon after the file is placed with the agency. Many collection agencies are hurting because the home equity ATM machine has dried up, and all the threats in the world can’t change the fact that consumers simply don’t have money to pay the debt with.

Some effects of the financial crisis seem to be affecting creditors across the board, while other effects are specific to an individual creditor. For example, some banks have previously been willing to stretch settlements over 4-5 months. Across the board, we are seeing less of that now, because Federal guidelines indicate that losses must be declared within 90 days of settlement. This translates to fewer 4-5-month settlements and a lot more 3-month plans, because the banks don’t want to risk their eligibility to receive bailout money and they are being more compliant. One major creditor has changed structure to become a bank (instead of a non-bank financial company), and that’s led to a major push to clean up their books on delinquent accounts. Some superb settlements are temporarily available with this creditor, and also higher risk as well. So it’s a mixed bag in terms of how individual companies are reacting.

Someone asked me the other day, “What will happen if the banks are nationalized?”

The answer is, “I don’t know.” Nobody knows. Not even the banks – especially the banks! It could make it much easier to settle, or it could add red tape that makes it more difficult. We simply do not know what effect nationalization would have in general.

Folks, I’ve been at this game since 1997, and I have seen a lot of changes since then. But one constant theme remains – it’s been “business as usual” that entire time. The process involved in obtaining a settlement is basically the same as it was a decade ago. There have been a lot of twists and turns, particularly with respect to the debt settlement industry itself, and as time has gone by, it makes less and less sense for a consumer to hire a third-party company. Ten years ago, I would have said that it would be extremely foolish to attempt settlement on a do-it-yourself basis. Today, I would say that it would be extremely foolish to hire a settlement company when you can do a better job yourself!

So things do change. But all of the individual factors, whether small (like 3 months versus 4 months to pay a settlement) or large (like the tidal wave of credit card debt that is pushing into default in 2009), will always be less relevant the client’s ability to make a reasonable offer.

If you are carrying an unsustainable level of credit card debt, and you would otherwise be facing Chapter 13 bankruptcy, then consider the debt settlement strategy as an alternative. The banks are settling debts on a consistent and predictable basis. The conditions are in place for 2009 to be a very good year for this strategy. Tackle your problem now, while you still have some resources to work with. Don’t be one of the people who say, “Gee, I sure wish I had listened to your training course a year ago, when I still had some money to settle with!”