Charles Phelan

I’m fed up with the sales practices of the majority of debt settlement companies. Every day I talk to consumers who seek my advice after talking to settlement companies. Some of the stuff they were told makes me wonder what planet these company executives are living on. Don’t they know that settlement companies are getting shut down left and right by regulatory authorities? The Attorney General in Florida seems to be “shooting fish in a barrel” at the moment. Four settlement operations have been taken down in Florida just in the last few months.

So I’m inspired to offer some helpful “advice” to the owners and managers of settlement companies. (WARNING: What follows is satire, as in “irony,” as in “I’m joking.”)

20 Tips for Running A Successful Debt Settlement Operation

1. Start your settlement company with no prior experience in financial services, and never having negotiated settlements for anyone. Who cares if you have experience? You’re going to outsource the “back-end” to a settlement processing operation anyway.

2. Don’t bother joining any industry associations or attending any trade conferences so you can stay informed on regulatory changes and acceptable industry standards and practices. Just add a bunch of fake logos and seals at the bottom of your website so you look credible, and save all that monthly dues expense.

3. Hire a bunch of sales “closers” and pay them straight commission so they will sign up anyone and everyone with a credit card debt, whether or not debt settlement is a good fit for their situation. Call them “debt consultants” so the consumers think they are talking to experts.

4. Generate leads by buying an auto-dialer and calling consumers across the nation. Don’t worry about the Do-Not-Call Registry maintained by the Federal Trade Commission. That can’t possibly apply to pre-recorded messages from a financial services firm that has had no prior business relationship with the consumer.

5. Saturate local TV and radio stations with ads that say, “Save your credit! Settle your debts for pennies on the dollar. Guaranteed. Call 1-800-CON-GAME.”

6. Tell consumers that going through a debt settlement program will greatly improve their credit score and not have any negative effect whatsoever.

7. Tell your customers that “this is a bank supported program,” and that the creditors are really patient and have no problem waiting four years to get paid.

8. Assure new customers that it’s fine to “max out” their credit cards with cash advances before they start the program. You’re fee is based on the size of the debt load, so you might as well have the enrolled debt be as large as possible.

9. Charge as much as you can get away with without losing business to competitors. Take at least 15% of the debt up front, and insist that the client pay every dime of your fee before you obtain a single settlement for them. If they drop out because of creditor pressure or legal problems, that’s less work you’ll need to do on the back-end anyway.

10. When a prospect tells your sales rep they are thinking about bankruptcy, train your reps to helpfully explain that “bankruptcy is no longer an option since they changed the law in 2005.”

11. Make sure you have at least 1,000 clients before you spend any money on building your customer service department. Don’t worry about all those frantic customer calls and complaints meanwhile. They don’t have any money saved up for settlements yet anyway because they are still paying off your fee.

12. When a prospect balks at your suggestion they stop paying their bills and pay you instead, have your reps patiently explain that the banks really don’t care. They have insurance and tax breaks that will cover the loss anyway.

13. Promise your clients that you’ll stop all the collection calls by sending out your Power-of-Attorney along with cease communication notices to every creditor on the list. When this causes immediate placement with collection attorneys, pretend that this is the first time a creditor has ever reacted harshly to such a notice.

14. Assure your clients that there is no possibility they might get sued by a creditor. When a client does get sued, tell them to just ignore it because the creditor won’t be able to collect when they get a judgment anyway.

15. When a client calls and asks for a refund, refuse and be completely rude about it, or better yet, just don’t bother returning their phone calls. How dare anyone ask for their money back anyway? It’s past the 3-day recission clause in the contract, so tough luck.

16. When the Better Business Bureau starts sending you inquiries based on the complaints they are receiving, just ignore them. You’re not a member anyway, so who cares?

17. Don’t bother determining which states it’s legal to offer settlement services in. There’s no Federal law that applies, so it’s ok to offer your service in all 50 states, right?

18. To sign up the maximum number of people, let your reps enroll people into programs up to 89 months in duration. Ignore the fact that this is 3 years longer than the Statute of Limitations in most states.

19. Have your clients save up for settlements by sending their money to a bank account that you have access to. That way, when you run short of operating capital, you can just make up the shortfall by borrowing money from your clients.

20. Finally, don’t keep any accounting records and shred everything so if you do get a visit from the Attorney General, they won’t be able to prove you’ve done anything wrong.

Follow the above helpful tips faithfully, and you too can join the legions of entrepreneurs who have learned to successfully exploit the financially distressed American consumer! You deserve your piece of the action. What are you waiting for?

“With all the recent problems in the financial sector, is it getting easier to settle with the banks?” I’ve been hearing this type of question a lot lately. The past year or so has seen an avalanche of economic problems, beginning with the downturn in the real estate market, the subprime mortgage fiasco, the banking credit crunch, liquidity problems, the Fed shoring up the economy with multiple interest rate reductions, the bailout of Bear-Stearns (the fifth-largest investment banking firm on Wall Street), and so on. It’s logical for consumers considering debt settlement to wonder if all this grim news is “softening up” the credit card banks for better settlement deals.

The answer is, well, “no and yes.” No, because overall, it’s really just “business-as-usual” in the settlement industry. I personally have seen no drastic changes in settlement practices as a consequence of recent economic problems faced by the banks. You have to remember that we’re talking about huge companies, and they do not change direction quickly or easily. If you’re in a small sailboat, it’s pretty easy to turn and start tacking in another direction. However, if you’re in a massive oil tanker, it takes a long time to safely change direction. (Just ask the guy who piloted the Exxon Valdez into the coast of Alaska.)

On the other hand, some creditors have softened up a little, so that’s the “yes” part of the answer. But it’s important to understand that the banking industry is not one big monolithic enterprise. Different creditors behave differently. So while some of the banks seem to be slightly easier to settle with lately, others have gone in the other direction and stiffened their resistance to losses. Generally, this all translates to somewhat lower settlement percentages with some banks, and somewhat higher percentages with others. So overall, nothing much has changed from my own perspective, where I deal day-in and day-out with a wide range of consumer debt obligations.

Bottom line: It’s still the same game as it ever was, and consumers should not count on “extra” help from the banks they’re trying to settle debts with. As time goes by, current economic conditions may yet have a deeper effect on settlement practices, but so far there has not been much of a noticeable difference.

Regular readers of the ZipDebt Blog know that I routinely warn consumers about the notorious “debt elimination scam.” This is the type of program where the promoters claim that you never actually borrowed any money on those credit cards, because … wait for it … your signature on the credit card application is worth exactly as much money as the credit limit extended to you.

Essentially, the core of the argument made by these people is that credit card debt is not *real* money. Yet they are usually more than happy to accept payment of their huge fee ($2,500 minimum, and usually a *lot* more) by having you take a big cash advance against one of your credit cards with no plan to repay it. That’s fraud, of course, but they don’t seem to mind one little bit.

I write today about a “new” variation on this debt elimination scam. I put “new” in quotes because this latest crop of con-artists are promoting it as such, yet it’s really been around for a very long time. The twist on the debt elimination scam is one where the company *takes over the debt obligation itself*! They make the claim that through contractual law procedure, they can use the banks’ own contracts to assume your debt liability and then deploy their arsenal of secret legal tactics to force the bank to discharge the obligation. Presto! Like magic, your debt is erased.

It’s all still based on the bogus “no money lent” argument that has been rejected repeatedly by the courts, and warned against by the Office of the Comptroller of Currency. Let’s see. Who should you believe? The “network marketing” sales agent trying to make a buck off you, or an agency that is part of the Federal Government? Tough call, right?

Anyway, this new variant on the debt elimination scam is all wrapped up in legal-sounding jargon and packaged into a very convincing sales pitch. But the notion of altering the terms of the contract is not new at all. It’s been around for years and it’s called “novation.” Novation is nothing more than the substitution of a new contract for an old contract, often involving a change of parties to the transaction. Another relevant legal term is “assignment,” where contractual rights are transferred outright from one party to another.

The problem for the scammers is that novation requires that all parties to the contract must consent to the novation. And the banks have language in their agreements that precludes “assignment” of the debt to another party in the way that the debt elimination folks want. So how do they get the bank to agree to such a change? By using a technique called “accord and satisfaction.”

The way it works (in theory) is that you send the bank a payment with “restricted endorsement” language. That’s where you write a bunch of legal mumbo-jumbo on the back of the check, which basically says, “If you cash this, you agree to all these modified terms.” The theory is that this creates a brand new contract. The thinking is that the bank will not catch this, since they process so many thousands of checks every day. So the idea is to “fool” the bank into accepting the new terms. Supposedly, you can build into the “new contract” all kinds of clauses that work in your favor.

Accord & satisfaction, of and by itself, is not actually a scam. It is a legitimate legal concept often used to settle contractual disputes between parties. But the way it’s employed by “debt elimination” scammers is definitely bogus. Most states have their own version of legislation that protects creditors from such nonsense. In California, for example, you have to send such a notice in the form of a letter, and it must be sent to the corporate correspondence address, and NOT to a regular high-volume payment center. Further, the creditor has up to 90 days to reject such a payment and return it due to an unacceptable restriction on the endorsement. So you cannot legitimately smoke this by a creditor and expect any success thereby. Here is a link to the relevant California Code on accord and satisfaction.

There was a debt company called Briggs & Baker that got shut down by regulatory authorities for routinely practicing this type of scam. Here is the FTC press release that discusses official action against this pair of thieves. It reads a lot like some of the complaints against debt settlement companies, but this outfit was basically practicing the “accord and satisfaction” trick, obviously with very little success. It’s only a matter of time before the outfit peddling this latest incarnation of the debt elimination scam gets a visit from their friendly state Attorney General’s office or a legal team from the Federal Trade Commission. Let’s hope it happens sooner rather than later!

Continuing our discussion on “Crazy Stuff Collectors Say,” in this post I’ll deal with a common statement made by collectors.

In the first post in this series, I wrote about the myth of “bankruptcy insurance,” where the collector attempts to convince the debtor that the creditor actually *prefers* they just go ahead and file bankruptcy, rather than agreeing to a settlement, because the creditor supposedly has insurance that will cover bankruptcy-related losses. It’s a load of hogwash, of course, and there is no such thing as bankruptcy insurance. The purpose of the false statement is to reach into the debtor’s head and remove the perceived leverage that comes with the right to file bankruptcy.

Along the same lines, there is another similar statement frequently made by collectors. I first heard this one many years ago, when I was trying to settle a debt on behalf of a client. I explained the client would be forced into bankruptcy if they could not achieve settlements across the board with their creditors. The collector proceeded to tell me that he would “race” my client to the filing, file a lawsuit, and get a judgment before the client could file for bankruptcy. So they would have their judgment and the client would need to pay up anyway. I nearly fell out of my chair laughing. When I recovered, I informed the collector he needed to go back for additional training. What he was attempting to do was use a technique on a professional negotiator that no pro would fall for.

Lately, I’ve had clients report similar statements made by debt collectors. When the debtor explains they are seeking to avoid bankruptcy by using settlement as an alternative, the collector makes the claim that they will quickly get a judgment and then the debtor will be on the hook even if they filed bankruptcy. They try to convey the impression that once a judgment is recorded, an unsecured debt becomes like a secured debt that cannot be dismissed in a bankruptcy.

Nothing could be further from the truth. The bottom line is very simple: Bankruptcy trumps civil judgments, period.

In fact, one of the main reasons people file bankruptcy is to put a stop to civil lawsuits by creditors, or to stop active wage garnishments! It doesn’t matter whether the bankruptcy is filed before or after the judgment is recorded. The bankruptcy attorney has to take the correct steps to overturn garnishments or liens that are in-force, but assuming the attorney does his or her job correctly, then the bankruptcy will include all judgments and put a stop to any in-process lawsuits. Further, the bankruptcy MUST include such judgments, because a bankrupt debtor doesn’t get to favor some creditors over others, and judgment creditors do not have priority over other creditors who have not sued.

So here again, we have a common pattern of debt collectors purposely misleading debtors in an effort to gain the psychological advantage in the negotiation. Don’t be fooled.

Creditors do NOT want you to file bankruptcy. That’s why thousands of settlements take place every day in this country. Further, collection agencies REALLY don’t want to see you go bankrupt, because any commission they might make will vanish at that point. Remember you DO have leverage in these negotiations. Don’t let a collector trick you into thinking otherwise.

Three of my previous posts were on “Crazy Stuff Collectors Say.” In case you missed those posts, here are the quick-links to the previous articles:

Crazy Stuff Collectors Say – Part I
Crazy Stuff Collectors Say – Part II
Crazy Stuff Collectors Say – Part III

I wanted to follow up on this theme, because lately I’ve been hearing a lot of reports from clients on a tactic that seems to be getting more and more play. It’s been around forever, but I’ve been hearing it used much more often recently. Here’s how it goes:

You get a voicemail message (because you’re screening your phone calls) from a collection agency or a collection attorney firm. “This is Joe Smith with XYZ Company. I have your case file on my desk – number 12345. I strongly recommend that you have your attorney call me immediately.”

Scary sounding, right? Nope! Just a debt collector trying to get you to call back for another dose of verbal abuse and strong-arm collection pressure.

Third-party debt collectors are not permitted to threaten litigation unless (a) they are in a position to bring said litigation, and (b) they have been authorized by the creditor to file a lawsuit. But the above voicemail message technically does not violate that rule. Notice the technique. They did not say they were going to file a lawsuit. Instead, they referred to a “case number,” and you automatically think “court case” when they meant their internal file reference number. Next, they are telling you to have your attorney call them. You immediately think, “Oh, no! I must be getting sued!”

Folks, this is a BLUFF, and that’s all.

The collectors using this technique are usually the LEAST likely to bring an actual lawsuit. It’s a tactic used frequently by agencies located in a different state than yours. It’s getting harder and harder for these collectors to reach debtors, as more people become aware of their rights under the law. So this is a common tactic employed to create what I call a “false sense of urgency.”

If you are on the receiving end of collection activity and you get this type of voicemail or message, remember it’s most likely just a collection tactic to get you to call them back. If you think you might have been sued, but you’re not sure, then simply call your local courthouse and ask. It’s that simple.

People keep trying to reinvent the wheel when it comes to debt negotiation and settlement. It’s not rocket science, and there are really only a few simple principles that need to be followed to avoid problems. It’s the fancy footwork and dodgy tactics that cause all the trouble.

Here’s a good example. Recently, I’ve been asked by several people about a recommendation they came across on the Internet regarding debt settlement letters. I have not yet been able to locate the source of this spectacularly bad “advice,” so I don’t know the exact language of the recommendation. But the basic idea is that a special clause be added to the settlement letter with the aim of avoiding income taxes on the cancelled debt.

A little background first. When a creditor forgives or cancels a debt, and the portion forgiven is $600 or greater, the creditor is required to report that to the IRS on Form 1099-C, Cancellation of Debt. This amount must be claimed as ordinary income by the debtor on their income tax return for that year.

Someone apparently thinks they have invented a way of dodging the tax issue by getting the creditor to add a clause to the settlement letter that the unpaid balance is “in dispute,” or words to that effect — the theory being that no tax liability can result from a debt that is in dispute rather than formally cancelled or forgiven. In other words, if the written-off portion is classified as being “in dispute” rather than cancelled, then the creditor does not need to issue a 1099-C, and if you get audited you produce the letter to prove to the IRS that no agreement was reached.

This is a DANGEROUS technique that should NOT be used.

The purpose of a settlement letter is to document PERMANENT RESOLUTION of the debt. It’s a document that proves once and for all that you are done with that debt forever. And proper documentation is ESSENTIAL to the settlement process. The main reason is because of the massive $100 billion debt purchasing industry that scoops up millions of old debts for pennies on the dollar, with the aim of making a hefty profit on what they collect. Mistakes happen all the time.

People who settle only based on a verbal agreement may find that their supposedly settled debt was sold to a debt purchaser, who simply refuses to believe the account has been settled. “Prove it!” they will say. Without a settlement letter, you don’t have a leg to stand on. It’s your word against theirs, and don’t expect any cooperation from the original creditor. They already lost money on you and won’t want to spend any more labor-hours trying to help you fix your own problem two years later.

If you have a rock-solid settlement letter, then none of this is a problem, and you can instantly put to bed any issues that might crop up along these lines. However, if you have DISPUTE language in the settlement letter, then you do NOT have a settlement letter at all! You are left wide-open to collection activity and possible litigation in the future. You will not be able to prove this settlement was a formal settlement acknowledged by both you and the creditor.

This is a good example of someone trying to be too clever for their own good. No one wants to pay more taxes than necessary. But by trying to make a settlement letter do double duty like this, you run the risk of collection activity on the unpaid balance. Further, there is usually no reason to have such language added in the first place. The IRS allows debtors to exclude 1099-C amounts from income to the extent by which they are insolvent at the time of settlement.

A majority of people who pursue debt settlement are insolvent (i.e., they have a negative net worth), and therefore do not need to pay taxes on the forgiven balances anyway! What a shame to blow a nice settlement over something that was never even an issue in the first place.