Charles Phelan

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!”

I’m writing this as we wind up 2008 and head into the new year. This has been a very busy year here at ZipDebt, to say the least. This, of course, is a just sign of the times economically, and I’m expecting 2009 to break new records in terms of the number of people seeking assistance. It’s been so busy, in fact, that I’ve been delayed in writing about a few topics that I’d like to share my thoughts on. As time permits, I’ll be writing about the new rules imposed on credit card banks by the OCC. I also plan to write more about the financial crisis of 2007-2008.

For anyone looking to gain a better understanding of what happened to our economy, I highly recommend “The Trillion Dollar Meltdown” by financial writer Charles Morris. The book was published early in 2008, so it doesn’t discuss the stock market crash and panic that occurred in October 2008, but my understanding is that a revised edition will hit bookstores in early 2009, renamed “The Two Trillion Dollar Meltdown”! You won’t find a more lucid explanation anywhere, and if you’re wondering what the heck a synthetic CMO is (collateralized mortgage obligation), this is the book you want.

To my regular readers, clients, fans, (and critics too) — best wishes for a safe holiday and a Happy New Year!

If you read this blog on a regular basis, you know I frequently write about the debt elimination scam. I’m usually coming at it from the angle that companies offering these services are fraudulent. The owners know they are ripping people off by selling a system that simply doesn’t work. But every once in a while I hear from someone who’s not trying to sell debt elimination as a service. They write as individuals, true believers in what I call the “conspiracy theory of global finance.”

The tendency to believe in conspiracies is rampant in our society. The Kennedy assassination, fluoridated water, UFO phenomena, the 9/11 attacks, vaccines — these subjects have all been the focus of conspiracy-minded individuals, some of whom are obvious candidates for the “tin-foil hat” award. I guess aluminum foil is supposedly pretty effective at blocking alien mind-control signals… ?

One of the most popular areas for conspiracy-mongering has been the global financial system. Some of the theories are overtly anti-Semitic, blaming Jews for all the financial evils in the world, while other are more subtle in their rhetoric. The bizarre legal and financial theories behind the debt elimination movement are in the latter category.

It’s all about the secret wheeling and dealing that happened in the early decades of the 20th century and resulted in the establishment of the Federal Reserve system and fractional reserve banking in general. Once you believe that the core financial system of world commerce is an insidious scam – you know, the system that has helped lift the living standard of billions of human beings around the world — then all remaining logic and critical thinking goes right out the window.

What follows is a classic example, starting with an opening email salvo from my new cyber pen-pal (name changed for privacy):

“Hello,

I came across your website and found it interesting, however it is grossly misinformed. I have personally discharged over $40,000 worth of unsecured debt using the exact methods you claim to be fraudulent.

I did this using the FDCPA regulations, a couple of simple letters, and information found in the book “Modern Money Mechanics.” Banks actually commit fraud when “loaning” money in several ways. One way is that a bank leads people to believe there is an actual loan made in acquiring a credit card or student “loan”, when in fact the money is created out of thin air by making an entry into a computer. Furthermore, the money that is created is entered as a CREDIT in the person’s name.. which is in capital letters. This is known in Black’s Law Dictionary as the Strawman.

The fact of the matter is that the entire credit industry IS operating fraudulently. When you research it as I have over the past three years, just HOW fraudulent is absolutely mind boggling. I realize as I write this that you have a vested interest in NOT telling people the truth, or perhaps even wanting to know it yourself because it would effectively put you out of business. However the fact remains that you are telling people blatant lies out of ignorance.

Were you to do some research and discover the truth for yourself, you might then work for real justice in the world, and perhaps change your product and service to something which is based in Truth rather than that which is perpetuating a myth and which is harming everyone.

In the meantime, you might find a couple of movies intersting (sic) :
“The Money Masters” – available on YouTube or DVD.
“Money As Debt” – Available on YouTube also.
If you would like copies of the actual letters I used please let me know and I will be happy to forward them to you.

Sincerely,
Allen”

OK, so in his very first email message to me this tactful fellow accuses me of being grossly misinformed, having a vested interest in deceiving the public, and telling blatant lies out of ignorance. Nice way to start off a dialogue with a total stranger, right?

Now, I have a confession to make. I actually enjoy sparring with these folks. It’s pretty sick, I admit it, but it’s a form of amusement and entertainment for me, what can I say. My first reaction was to launch into attack mode, but I figured I would give this guy the benefit of the doubt first. Here’s my reply:

“Allen,

You are “grossly misinformed” about my supposed lack of knowledge of the system you are such a fan of, but I don’t have time to debate with you. I’m too busy helping people who have been ripped off by “crusaders for justice” like yourself, who told them they could legally walk away from their debt obligations with no consequences, only to find they got laughed out of court, lost their cases, and started seeing wage garnishments.

Extraordinary claims require extraordinary proof. Please tell me the name/county of the court where your cases were heard, along with the civil case docket numbers. Don’t send me any documents directly, please. Only documents that I can retrieve directly from the court will meet the standard of evidence required here. Let’s have the case citation(s) where a judge ruled in your favor on the basis of the “no money lent” argument.

Sincerely,

Charles J. Phelan
President/Founder
Manchester Publishing Company, Inc.”

This is my standard technique for dealing with “experts” who write to me, tell me how full of baloney I am on this particular subject, and then claim they were successful using the techniques I warn consumers against. My first response is always the same. “Prove it.” Give me the documents, *court* documents where a real-life judge pounded the gavel and agreed with your cockamamie legal theory that “no money was lent” by the creditors. I’ve been asking for proof for nearly a decade. I’m still waiting.

So how did he reply? By backing up his mental dumpster and unloading it in my email inbox:

“Actually I’m not a fan of a fraudulent system that takes advantage of others, which is why I work to bring it down rather than to support it by buying into the lies.

I didn’t go to court on any of the cards that I got charged off.. which was every one of them. Contrary to what most people believe, it’s actually quite easy to do because the banks don’t WANT to go to court, or their little scam would be revealed and a finding against them would set a legal precedent that bring the whole house of cards down around the world.

All I did to accomplish that was exactly as I said in the earlier email. I challenged the banks for fraud on the contract and fraudulent conveyence (sic) and the debts were charged off for the following reasons:

1. There is NO legal and binding contract.. only a promisory (sic) note which creates the funds to discharge.

2. There is NO disclosure of the actual accounting procedures. If there were the banks would be forced to tell people that the monies created were created as a CREDIT to the account of the Strawman, and NOT a debit. This means that the individual has legal right to the monies from the start and is under no obligation to pay them back.

They entire system is a scam that originally began in 1913 and was subsequently pushed through Congress a few years later. When done correctly the FDCPA, and the FCRA can easily be used to get an unsecured line of “credit” charged off. It is also possible to obtain the remainder of the monies in a given account in cash. As I said, the money was assigned as a credit and not a debit to the individual and is therefore legally ours to begin with.

As I said earlier, if you want to know more, watch “The Money Masters”, “Money as Debt”, and read “The Creature From Jeckyl (sic) Island”. That will bring you up to speed on what the World Bank and the Federal Reserve is REALLY up to.

In closing, I’m sure there are idiots out there who scam people. In fact I recently read about one in Florida who took thousands and never did the work promised. But that there are idiots in every walk of life, and a few bad seeds don’t change the fact that what I am saying is true. If you want, I’ve given you enough information that you can find out for yourself. And as I said, once you do, I can provide you with the necessary tools if you decide you want to alter your course a little.. and I won’t charge you a penny.”

OK, so where do I start? This is so wrong on so many levels that it’s difficult to know where to begin. But let’s begin with the obvious. No legal paperwork. All this person accomplished was to get their debts charged off. Um, hello? That happens automatically! Don’t pay a credit card bill for six months, and voila, charge-off time. A charge-off just means the creditor records the loss on their books. It doesn’t mean they will stop trying to collect afterwards.

Anyway, I was getting a bit annoyed with this chap’s self-satisfied smug tone, so I decided to let him have it with both barrels.

“Allen,

Listen carefully, please. Both your emails were very insulting in tone and approach. You’re writing to a professional, not some clueless newbie. I do this for a living. I’ve seen it all, every trick in the book. I have been aware of everything you are describing for a decade or more and know a hell of a lot more about it than you apparently do. You’re just another in a long line of people who thinks he has discovered some big conspiracy, and can’t resist emailing me to tell me how wrong I am. What a laugh. I read Jekyll Island years ago. It’s complete crap from start to finish. Griffin is a John Birch whack-job, and his book was thoroughly debunked by legitimate scholars long ago. That’s as deep as your “research” went? Griffin? LOL.

If you don’t have court cases ruling in your favor, then all you did was temporarily chase away some collection agencies via the various documents utilized by the monetary protest crowd. Creditors drop cases all the time, or choose not to sue, for a variety of reasons that have absolutely nothing to do with what you think it does. You, like everyone else tilting at windmills out there, are completely clueless about what a pile of bulls**t you have chosen to put your faith in. You apparently don’t even understand what a charge-off is! You didn’t “get” your creditors to record charge-offs. That happens automatically. You’ll get sued sooner or later by a debt purchaser, or two, or three. If you enjoy the legal fight, bully for you. But 99% of consumers don’t want to go that route.

Did you, or did you not, purchase goods and services to the tune of $40,000 via the credit cards? Are you saying you received NO value whatsoever from the purchases made with the credit you claim was illegal? If you had not had those credit cards, how would you have obtained those $40k worth of goods or services? Don’t you understand what “consideration” means in the context of a business transaction? From my perspective, all you did was stiff your creditors to the tune of $40k. But that apparently does not conflict in any way with your values or ethics. Sorry. Call me old-fashioned, but I’ll side with the OCC, FTC, and every single state AG out there, and continue to advise consumers to steer clear of conspiracy-theory-based techniques that simply do not work for the vast majority of people who attempt to implement them. I’ll continue to do what I know DOES work — good faith negotiation and settlement. If you want to preach otherwise, get your own website.

Sincerely,

Charles J. Phelan
President/Founder
Manchester Publishing Company, Inc.”

A little harsh, perhaps, but hey, he started it, right? (You have to give as good as you get sometimes with people who are a bit thick in the skull.) His response?

“My apologies if I was coming off like I was being condescending.. I wasn’t. As with you, I am a professional and hold two degrees.. one in Electrical Engineering and a Doctorate in Philosophy.. so obviously I didn’t just fall off the potato truck.

My only intent from the start was to inform you of the truth, not to try and make you believe it. I’ve researched this for over three years, and the information I have portrayed /is/ accurate. However, you are certainly entitled to believe that Jeckyl (sic) Island isn’t true, or that the system we are living with is ethical and in integrity. The choice is entirely yours.

Please don’t bother responding, no further dialog on the subject is necessary or desired.
The best,
Allen”

Translation: “Gosh, you hurt my feelings. I don’t want to play anymore.” So there ends the exchange, which is too bad, because I was having so much fun. You’ll notice, however, that he failed to answer a single relevant question that I raised. “I know I’m right, and you can’t confuse me with facts to the contrary.” That was the essence of his defense. Our monetary system is a scam, therefore I never spent any real money, blah, blah, blah.

The core point I was trying to get across to this person was the concept of business “consideration.” I focused on that because someone who has two college degrees really should know better (not to mention they should also be able to spell better). How can you study Philosophy, obtain a PhD, and not understand basic logic? The debt elimination promoters often rely on the assertion that no consideration was received by the debtor because the creditor was not out any of their own actual money. Baloney! You can read the linked Wikipedia entry on consideration for further detail, but the core idea is that in a business contractual situation, consideration must be involved for it to be a valid contract, where consideration is defined as value paid in exchange for a promise. Simple enough.

By arguing that no value is received by the debtor because the bank is extending credit and not loaning money directly, the true believer in debt elimination is overlooking basic reality. When you use a credit card to purchase goods or services at a retailer or other business, the mere fact that you had the convenience of using credit constitutes consideration. Look at it this way. If you did NOT have a credit card, you’d have to write a physical check or pay in full with cash, right? Because the creditor extended you a credit facility in the form of that little piece of plastic, you didn’t need to pony up money out of your bank account to pay for the item. That fact alone means you were extended consideration in the transaction, because otherwise you would not have been able to conclude the transaction under such convenient terms and would have had to directly negotiate credit terms with the merchant. So this blows away any and all objections by the debt eliminator that no consideration is involved. Crash. Down comes the whole kooky house of cards.

Anyway, all this person accomplished was to rip off his creditors for $40,000, *temporarily*. Since he never resolved anything, and thinks that the process stops with charge-offs (which is actually when the collection process just starts kicking into a high gear that can last for *years* to come), he will be exposed to multiple lawsuits in the coming months and years. This is my beef with all such mumbo-jumbo “magic bullet” techniques. They never result in any of the debts actually getting resolved in a final manner. A debt settlement letter accomplishes that resolution. You pay X dollars by such-and-such a date, and you’re done, period. And you have it IN WRITING FROM THE CREDITOR. Game over. On to the next debt, etc.

I doubt the above will convince a true believer. But I figured I would go ahead and post this exchange for its educational value. If I can spare one consumer from falling into the insidious trap set by the scam artists who sell these bogus “programs” for thousands of dollars, then I’m happy to keep sparring with true believers in the conspiracy theory of global finance. Anybody else out there want to take a shot at convincing me I’m wrong on this subject? 🙂

Since the financial meltdown in September 2008, I’ve been asked on a daily basis what effect the financial crisis will have on debt settlement. Will it be easier to settle now? Will the banks get tougher and make it more difficult to settle since they’re hurting for cash? The purpose of this long overdue blog post is to provide readers with some answers on this subject.

So far, it’s still “business as usual” in the world of debt settlement. Just as the passage of the new bankruptcy law back in 2005 had a lot of people wondering if it would negatively affect debt settlement, so also the financial crisis has everyone curious about the same thing. Yet the change in the bankruptcy law had very little effect at all on the settlement strategy, and I believe the same to be generally true of the financial meltdown.

Having said this much, I should note that I have noticed some *slight* changes – a little softening by one creditor here, a little more willingness by another creditor there to discuss settlement, and so on. I’ve also noticed, however, that the banks are doing more outsourcing to collection agencies, and this outsourcing is taking place earlier in the collection process than it used to. The reason is because the banks are being hit with a bubble of delinquent credit card accounts and do not want to add staff internally to handle the collections.

Normally, the major credit card banks handle their own collection activity internally up to the point of charge-off, and only outsource after they have officially written off the debt. Since collection agencies in general are more difficult to deal with than the banks directly, this is making some creditor negotiations a little more complicated. But at the end of the day, I’m still seeing the same settlements in situations like this that I would have expected had the client been still talking directly with the bank and not an outside agency. So we call this the “rent-an-agency” effect, and where it seems to be a new tactic for a particular creditor, it’s not having any measurable effect on the outcome of the negotiations.

My prediction is that as time goes by, and the wave of charge-offs increases in 2009, it will get a little easier to settle with the major banks. But I don’t think it will make a huge difference one way or the other. Let me put it this way. There are a number of important factors that go into a successful outcome on a debt settlement program. The financial crisis will be one of those factors eventually, but not a make-or-break factor.

The news is neutral to slightly positive from my perspective, and will probably continue to become better and better for the consumer in terms of settlements. But the effect of the crisis will never be anywhere near as important as a client’s ability to raise the funds needed to settle with! That will always remain the most important single factor in achieving success with the debt settlement strategy.

So if you’re looking into debt settlement, now is as good (or better) a time as any!