Charles Phelan

The Buffalo News has run two articles highly critical of the local debt collection industry. The first article, “Merchants of Debt,”focuses on the large collection industry presence in the area. Many of the complaints made by consumers about collectors are against firms located in Buffalo, which is a major hub of the collection industry.

The article quotes Federal Trade Commission official Peggy L. Twohig as saying, “The whole nature of the industry is there are incentives to be aggressive.” Talk about understatement! The $1,000 federal penalty for violation of the Fair Debt Collection Practices Act has not changed in decades. Many agencies view the occasional fine as a cost of doing business. Meanwhile, the amount of debt available for such agencies to work has grown enormously in recent years.

Collection industry spokespersons routinely claim that many of the complaints are groundless and that real abuses only happen in a small percentage of the cases. Yet ex-collectors say that the pressure to produce is always top priority, while managers look the other way on compliance issues.

Some of the worst offenses seem to be by collection law firms. Lenahan Law Offices went bankrupt last December under the weight of regulatory fines. And Giove Law Office was banned from collecting debt in Idaho for threatening debtors with criminal charges. But non-attorney agencies have also come under fire. Top industry agency NCO Financial paid $300,000 in a settlement with Pennsylvania’s Attorney General to resolve more than 800 complaints against the firm.

The second article, “Wide-Open Market for Debts Feeds Abusive Tactics,” focuses more on the industry practice of purchasing delinquent debts for pennies on the dollar and then dunning debtors to make a profit. In the past, debt purchasing was not as common as it has become in recent years. Banks would continue to retain ownership of the debt and hire third-party collection agencies on a commission basis. Since the banks did not want their own reputations damaged by abusive collection tactics, there was at least some oversight to maintain compliance. Now, however, it’s more common for the bank to sell off bad debts and turn a blind eye to collection tactics. The courts have ruled in several cases that banks are not liable for collection activity that occurs after the debt has been sold. So it’s open season for debt purchasers.

I personally do not object to the concept of debt purchasing or even third-party debt collection. I happen to think that the debt collection industry provides a necessary function in our economy. I do feel, however, that regulations need to be enforced to a much greater degree than they are at present. In addition, tighter rules need to be established for the collection of purchased debt. That end of the industry is the main source of the increase in consumer complaints. More than 40% of the complaints received by the FTC about debt collectors allege that consumers were being harassed over debts they did not owe. That’s not surprising, given that purchased debt is often several years old. Junk debt comes with very little documentation. Often, the purchaser takes a shotgun approach and duns everyone in the nearby area with the same name that’s on the account. Stories are multiplying about people being hassled and threatened over debts that aren’t theirs in the first place.

It’s clearly time for Congress to take a fresh look the Fair Debt Collection Practices Act, with an eye to increasing penalties for violations, and the addition of rules that pertain to debt purchasing.

A new national survey was released today showing that Americans are more worried about not being able to pay their bills than they are about terrorist attacks. The survey was co-sponsored by the Center for American Progress, a non-partisan think tank. “Public Recognizes Debt as a Fast Growing Problem in U.S.” discusses the survey in more depth and contains a link to the actual publication in PDF format.

Several interesting facts jump out immediately from the published report:

1. Nearly half (47%) of those surveyed reported household debt as a serious problem, and more than 80% reported debt as a somewhat serious problem for their household.

2. Nearly everyone surveyed (86%) believes that the number of Americans having trouble with household debt has increased in the past 5 years.

3. The public is more worried about falling into debt, particularly from medical bills, than about being the victim of a terrorist attack or a natural disaster, with 48% of respondents stating their top worry as “not having enough money to pay bills.”

4. Credit card debt is the leading type of debt among senior citizens, to a greater extent than for any other generational subgroup.

5. Only 51% are able to pay off their entire credit card bill every month.

This survey publication comes on the heels of an announcement last week by the Federal Reserve that revolving debt had climbed to $813 billion in May. The increase in May alone was $6.7 billion, up 10% from the prior month’s increase. (Note: Revolving debt is primarily credit card debt.)

Clearly, the debt burden on the American consumer is mounting relentlessly, month after month.

MP Dunleavy, columnist for MSN Money, just published an article that ZipDebt readers may find of interest. The article is titled, “Losing at Balance-Transfer Roulette,” and it tells the story of two 25-year olds struggling with credit card debt. Both of the women whose stories are told in the article played the balance- [Read more…] about ZipDebt Quoted in MSN Money Article

When Congress passed the bankruptcy reform bill last year, they included Section 1229, which asked the Federal Reserve Board to conduct a study to determine whether the “indiscriminate” extension of credit to consumers had contributed to the increase in bankruptcy filings.

The report is a treasure trove of fascinating little tidbits of information. Here are a few examples:

1. In 2004, 71% of American families held general-purpose credit card accounts, up from 16% in 1970.

2. 56% of families carry a balance on bank-type credit cards, and 24% hardly ever pay balances in full.

3. As of 2004, outstanding debt on credit cards was $645 billion.

4. An average of 8.9% of families were late at least 60 days on a debt in 2004.

5. Profitability of credit card banks is nearly double that of commercial banks.

6. More than 5.2 billion credit card solicitations were mailed in 2004, up from 2.7 billion in 1995.

7. The response rate on credit card solicitations has dropped from 1.4% in 1995 to 0.4% in 2004.

There’s a lot more in the report, but the above gives the flavor of the type of data published by the Fed about the credit card industry.

Predictably, the report produced by the Fed concludes that the credit card banking industry is not to blame for the increase in bankruptcy filings. Specifically, “…this review finds that as a matter of industry practice, market discipline, and banking agency supervision and enforcement, credit card issuers do not solicit customers or extend credit to them indiscriminately or without assessing their ability to repay debt.”

Did we expect anything different from the Federal Reserve? Not really. Frankly, the study was simply not deep enough to penetrate the real issues at hand. If the banks are so good at determining repayment ability, then why do I keep talking to people who have far more credit than annual income? Why do the credit card banks make more than 30% of their profit from the delinquent status of their customers (late fees or penalties)? Since the only income data they gather is what’s on the application, how on earth do the banks determine ability to repay in the first place?

To be sure, the report does state that “…certain specific industry practices of late have been deemed by regulators to potentially extend borrowers’ repayment periods beyond reasonable time frames and have been the subject of extensive supervisory attention and guidance.”

Translation: It takes 20 or 30 years (if not longer) to pay off balances via minimum payments, which results in a situation most of us would simply call “highway robbery.” So the Office of the Comptroller of Currency has forced the banks to increase their minimum payment levels and bring down the repayment period.

Where the Fed report gets really interesting though is the conclusions regarding the bankruptcy trend. After citing several economic studies, some of which contradict each other, the report states that “…the longer-run trend in bankruptcy filings is historically related to a number of factors, including an increase in revolving consumer credit use and, perhaps, a decline in the stigma associated with bankruptcy. It also appears that the decision to declare bankruptcy is typically triggered by unforseen adverse events such as job losses or uninsured illnesses.”

Oh, so THAT’s why all those people file bankruptcy every year? I never knew it was because they have more debt, they lose their jobs, or they get injured. How could we have known?

Seriously though, the Federal Reserve report clearly shows a correlation between consumer bankruptcy filings and the inflation-adjusted amount of revolving credit per household. At the same time, it concludes that the credit card banks have nothing to do with this. So if I have this correctly, the Fed is saying that increasing consumer debt has contributed to the increase in BK filings, but the banks do a good job of managing credit risk so the increase in debt which led to the increase in bankruptcies is not their fault. Am I missing something here?

ZipDebt is an idea that I had after leaving my position as an executive with a large debt settlement operation. The idea is simple enough: Why can’t people do this themselves for a fraction of the cost?

The name is itself is nothing special. I wanted an Internet domain name that would be short, easy to remember, and contain the word “debt.” Unfortunately, just about every possible permutation was already taken – again, because there are a zillion debt websites. But “ZipDebt” gets the point across. “No Debt.” That’s the goal.

Anyway, the idea behind the name is to provide the American consumer with a NEW debt resolution option: The do-it-yourself-with-coaching program — affordable, effective, and different from what anyone else in the debt industry is doing or offering.

Most of the existing solutions don’t work. Borrowing against equity is often a trap. Credit counseling has a documented failure rate of 75%. Chapter 7 Bankruptcy is more difficult to qualify for, and Chapter 13 Bankruptcy is a much tougher program after the new law went into effect in October 2005. Debt settlement companies are up against increasing regulatory pressure and creditor backlash in a simultaneous squeeze play against the industry. Plus the fee structure of the industry is simply not in the best interests of the consumer. (See my earlier post on this subject.) Yet the mathematics of debt negotiation and settlement (minus the fees) makes a lot of sense for a wide variety of financial hardship cases.

So I recorded my Debt Elimination Success Seminar and established this website to offer it for sale, initially selling only the seminar without any coaching. After a while, I started getting questions from customers. Although I made the audio seminar as comprehensive as possible, every situation is different and collectors are pretty good at scaring people. So I started getting a lot of emails for follow-up advice. Hence the idea of coaching folks by email, which has worked out very well. You can see some of the more recent results in later posts on this blog.

Lately, I’ve shifted the emphasis a bit, from an audio-seminar that includes some coaching to a coaching program that includes a training seminar. More and more clients have told me that the seminar is great, and it really helps them to understand the whole negotiation and settlement process, but it’s the coaching they find invaluable. When you consider that the cost of the coaching program is well under 10% of what most settlement companies charge, it certainly makes sense to negotiate on your own (with help from yours truly). It means you can get out of debt much faster, since all your resources are going toward getting rid of debt and not toward fees. I should add that I really have nothing against the settlement companies. It’s just that it makes more financial sense for consumers to do this on their own.

If you have questions or concerns about this approach, then please feel free to request a free 20-minute phone consultation with me.

Recently, I ran across a website that purported to show consumers how to set up a new credit file. Here’s a direct quote: “Now, you can set up a brand new credit file, totally separate from your existing one. This process of achieving AAA credit, with your new credit file, takes less than 30 days & not only is this 100% LEGAL, it’s your RIGHT!”

Just to set the record straight, this is a LIE. There is NO legal means of establishing a new credit identity. For someone with a poor credit history, stuck with high interest rates or unable to get credit at all, an offer like this can seem pretty attractive. However, the creation of a new credit identity is illegal, period. The practice is called “file segregation,” and the scam involves the use of a 9-digit Employer Identification Number (EIN) or Tax Identification Number (TIN) in place of the regular Social Security Number.

If you are tempted by one of these schemes, DON’T DO IT! Even if you are foolish enough to break the law, it’s simply not worth the risk. That’s because it’s only a matter of time before the two separate credit files merge. When that happens, the credit bureaus will place a nice big FRAUD flag on both files, and you will never get credit again for anything — ever. That would be the best-case scenario. Under the worst-case scenario, you could be looking at jail time, civil fraud penalties, or both.

Here’s what the Federal Trade Commission website has to say regarding this practice:

“It is a federal crime to make any false statements on a loan or credit application. The credit repair company may advise you to do just that. It is a federal crime to misrepresent your Social Security number. It also is a federal crime to obtain an EIN from the IRS under false pretenses. Further, you could be charged with mail or wire fraud if you use the mail or the telephone to apply for credit and provide false information. Worse yet, file segregation likely would constitute civil fraud under many state laws.”

Until the government started throwing people in jail for selling bogus file segregation programs, scammers were routinely charging $3,000 and up for this “service.” Nowadays, you probably won’t find anyone stupid enough to offer such an illegal service directly. Instead, the game is to sell eBooks for $25, $50, even $150 that explain how to set up a new credit identity. Naturally, they put disclaimers on their websites that the program is only sold for “information” purposes, and other fig-leaf phrases designed to protect them from legal blowback. This still qualifies as a scam in my opinion, because the true facts are not being disclosed and consumers are being ripped off thereby.

There are also numerous websites promoting a newer variation on this scam, which involves obtaining a brand new Social Security Number. Because there is no EIN or TIN involved, they claim that this makes it legal. Wrong. It’s still fraud. According to the Social Security Administration website, a new social security number (which is sometimes issued in cases of ID theft) cannot be obtained if the intent is to avoid the law or legal responsibilities.

So any attempt to obtain a new SSN for the purpose of creating a new credit file does not constitute a legal or valid reason. Also, what the promoters of this technique neglect to point out is that the original purpose of your Social Security Number is to track your earnings contributions into the Social Security program. If you set up a new SSN, how will you receive the benefits to which you are entitled under the original number? If you have been working for any length of time, this could cost you plenty in the form of lost Social Security retirement benefits.

There are indeed legitimate ways to improve your credit. However, trying to game the system by setting up a new credit file is definitely not the way to go.