Charles Phelan

The latest big news in the world of debt and credit is the IRS’ attack on the credit counseling industry. The IRS has canceled the tax-exempt (non-profit) status of some of the largest counseling agencies in the industry. A total of 41 organizations have had their non-profit status revoked, and this represents about 40% of the industry’s revenue. There are at least 740 other agencies that have not yet been audited, so obviously the IRS has concentrated first on some of the bigger players.

IRS Commissioner Mark Everson said, “These organizations have not been operating for the public good and don’t deserve tax-exempt status. They have poisoned an entire sector of the charitable community.”

In addition, the IRS has become very strict on approvals for new applications for non-profit status, with 97 out of 100 such applications rejected.

For more detailed information, here is one version of the basic article that was published online by numerous news sources.

What I find most interesting about all this is the widespread misunderstanding over the concept of non-profit. The tax exempt status associated with non-profit organizations was originally intended to help charitable institutions. So the concept of “non-profit” has been associated in the mind of the average person with “charitable,” i.e., “free.” Yet credit counseling services, even legitimate ones that satisfy the IRS’ criteria for tax-exempt status, are NOT free to consumers. There are always signup fees and monthly fees involved, and these agencies also receive significant compensation directly from the clients’ creditors. Money changes hands. Fees are collected. Sounds like a regular business to me.

But the term “non-profit” makes a powerful impression in the mind of the average consumer. So it’s no surprise that numerous companies have attempted to exploit this association for marketing purposes and monetary gain.

What’s lost in all this though is a deeper question: Why should credit counseling services, or any companies that offer debt management services (including debt settlement), operate under the non-profit model? Last time I checked, this was still America, where it’s ok to MAKE A PROFIT. Whenever any government official discusses this topic, they always refer to “for profit” companies as though they were guilty of some terrible sin. So I ask the obvious question: What’s wrong with (a) helping consumers tackle their debt problems, and (b) making a profit while doing so? Why is this such a bad thing? Consider that companies making a profit can afford better staff, better training, and better equipment. Yes, of course there are bad actors out there that are only in the business to soak the consumer, but just because a company chooses the for-profit model does not automatically place them in that category.

What it really comes down to is this: Most government officials are totally clueless with respect to what it takes to run a successful business in a highly competitive industry. So they automatically assume that anyone who sets up a business to assist consumers while actually managing to make some money in the process must be bad by definition. But there is a major flaw in this logic, in that it completely overlooks the business practices of the credit card industry itself.

Credit card banks operate with impunity and have created a system that preys on the financially disadvantaged. Do we see regulatory scrutiny or enforcement actions against the major players in that industry? No. So I guess the real message is this: It’s ok for the credit card banks to make billions in profit on the misfortune and financial depredation of distressed consumers (think punitive late fees, overlimit fees, 32% interest rates, etc.), but it’s NOT ok for companies to make a profit while trying to help consumers deal with those very same creditors. What’s wrong with this picture?

With all the news these days about identity theft, it’s important to examine your credit report for errors at least once or twice per year. If you’ve been using credit for, say, 10 years or more, the odds are high that you’ll see older accounts still listed on your reports, even though you haven’t used those accounts for several years or more. This commonly happens when you purchase items like furniture, stereo equipment, or appliances through a store’s financing plan. You may have long since paid for the goods in question and never used that account to finance anything else, yet the account still shows as active on your credit file. The typical consumer’s reaction is to request via the original creditor or the credit bureaus that such older accounts be deleted. But don’t be so hasty. This could be a potentially serious mistake.

If there is nothing negative about the credit history associated with those inactive accounts, then having them deleted is not only a waste of time, it can also lower your credit score. That’s because deletion of an older account can reduce the average duration of the accounts listed on your credit file, which might make it appear that your credit history is shorter than it actually is. Since a longer credit history is better, you could end up with a lower score after the unnecessary deletion.

Also, by removing the older accounts, you’re also deleting the credit limit associated with them, which in turn may drive up your debt-to-credit ratio. This could also have a negative effect on your credit score. So be cautious in requesting the deletion of inactive accounts that form part of the overall positive history on your credit file.

Imagine that you loan someone $10,000 with the understanding that they will pay you back on a monthly basis with interest. After a while, they fall behind on their payments, so you call them to discuss their financial status and encourage them to make a payment. But they dodge all phone contact and you’re not sure they are even getting your messages. No return phone calls. No contact. Nothing. Then you receive a letter in the mail that says something like this: “Pursuant to my consumer rights under the Fair Debt Collection Practices Act, I hereby demand that you cease and desist from any further attempt to contact me by telephone. Any further attempts at telephone contact will result in my taking legal action against you for violating my rights under Federal law.”

What would you do in this situation?

1. Meekly go away and make no further attempt to collect?
2. Ignore the demand and continue calling anyway?
3. Turn it over to a collection attorney?

The smartest thing to do in this situation would be to file a lawsuit against the debtor. When you look at it this way, it seems obvious that sending a cease communication notice to a creditor is a pretty dumb thing to do. It makes no sense at all if your goal is to work out mutually agreeable settlement arrangements with your creditors. Yet there are hundreds of debt settlement companies out there still using this obsolete and dangerous technique, not to mention countless debt information websites that recommend this approach and even provide sample letters.

When I first started doing debt negotiation in 1997, I worked hard to get the creditor to substitute my phone number for that of the client, so cease communication notices were rarely necessary because the creditor could contact me for an update any time they wanted to. I would only use cease communication notices with truly abusive creditors, the ones who refused to respect the rules and continued to harass or abuse the client even though they had received my power-of-attorney to speak on the client’s behalf.

Fast forward a few years. In the process of developing the operational procedures for a large debt settlement operation that handled thousands of clients, it became obvious that we would need an army of people just to field the auto-dialed calls from the creditors. Instead of this unworkable solution, we made the decision to coach consumers on how to screen the calls, report abuse, and generally tough out the collection process until we could negotiate realistic settlements on their behalf. This worked fine, and cease communication notices were usually unnecessary. Unfortunately, many other companies took the easy way out and simply sent out “C & D” letters to every creditor in the client’s file. This was done automatically, and without any analysis with respect to the frequency of the calls to the client or the nature of those calls. The result? A bunch of really angry creditors, a big increase in lawsuit activity (what other choice was the creditor given?), and a lot of unhappy clients.

Sadly, years later many companies and websites are STILL using or recommending this technique. Type “cease communication notice” into your favorite search engine and be amazed. I just did it and turned up more than 1.5 million hits!

Sending a letter like this is the exact OPPOSITE of the approach that I teach. What works best is communication in good faith. This is simply a matter of common sense. I’m not saying that you should subject yourself to abuse or harassment. But in that type of situation, a complaint letter is often more effective than a cease communication request anyway. Obviously, you also need to take measures to manage the volume of collection calls, which is simply a matter of screening. But it’s important to keep your creditors informed, let them know you haven’t disappeared or tried to skip out on your obligation, and that your intentions are to work things out when you have the resources to do so. Patient persistent explanation of your situation will win the day in the end.

It’s pretty simple, really. If you want to settle with your creditors, talk to them once or twice per month until you work out a deal. If you want to get sued, send a cease communication notice.

If you’re in a type of business that’s subject to government regulation (designed to protect consumers from some of the more abusive practices of your business model), and you don’t like one or two of the laws, just spend a bunch of money lobbying Congress and presto — no more pesky consumer protection laws to worry about. That appears to be what’s going on in the latest Congressional chicanery designed to stick it to the consumer.

The purpose of the legislation in question (already passed in the House and presently under consideration in the Senate) is to make check diversion companies exempt from the Fair Debt Collection Practices Act. A check diversion company is basically a collection company that partners with local District Attorney offices to go after people who’ve written bad checks. Essentially, these private debt collectors are allowed to pretend they work for the public DA when calling or dunning consumers for restitution on bounced checks. Until now, these outfits were regulated under the FDCPA like any debt collector. If this legislative amendment passes, such companies will be exempt from debt collection law. The industry was already rife with deceptive practices and abusive fees. Now, of course, it will get worse — much worse.

Yes, of course you should never write a bad check, and anyone who does it on purpose is an idiot that deserves to get hounded by debt collectors. But this debate is not about the need for personal responsibility. Rather, it’s a debate about the too-comfortable relationship between public officials and private enterprise. Ask yourself whether it makes any sense at all to:

1. Allow private debt collection companies to pretend they work for the DA’s office, using DA letterheads and threatening criminal prosecution when no evidence of fraud has been presented or documented.

2. Allow DA offices to receive compensation from said private companies.

3. Allow check diversion companies to harass consumers with no regulatory restraint on tactics or techniques.

4. Punish (through excessive fees and bogus threats of criminal prosecution) financially challenged consumers who may make the occasional mistake in balancing their checkbooks, or who run their budget so close to the bone that slip-ups are bound to occur once in a while.

The National District Attorneys Association, according to its president, Paul Logli, supports the exclusion of check diversion programs from the FDCPA in order to “protect prosecutors and check-diversion companies from lawsuits.”

Excuse me? Why do we need to be protecting collection firms from lawsuits? Aren’t they big boys? Can’t they stand the heat? What a silly argument. Sure, okay, DAs are overworked by definition. But out-sourcing and allowing private companies to impersonate DA staff? Come on. What’s wrong with this picture? Did I mention that the DA offices also make a profit on the check diversion deals? This whole deal smells pretty rotten.

You know, I often tell my stressed-out clients that we don’t have debtor’s prisons here in the U.S. anymore. I’m starting to wonder how long it will be before I can no longer say that.

An interesting article appeared last week under the title, “Bankruptcy Law Does Have Supporters.” Well, no kidding. Of course the new law has supporters. How else would it have passed Congress? I’m sure most of the executives in the credit card industry think it’s a pretty good bill. They should know. Collectively, they spent millions of dollars lobbying to get it passed.

Basically, the article in question is a litany of pronouncements by experts (?) who support the new law. But just “follow the money” and you immediately see what’s going on here. With the exception of a law professor from Georgetown University, who likes the “consumer protection” aspects of the bill (oh, brother!), virtually every other authority cited in the article represents the business community in one form or another. Absent are quotes from ANY individual, organization, or association that works with debt-strapped consumers on a regular basis.

To prove my point, take a look at the parade of pro-bankruptcy-reform authorities cited in the article:

A director from the U.S. Chamber of Commerce. Check.

The head of a market research firm that recently published a report on the widespread “abuse” of bankruptcy. Who does the firm conduct its research for? The lending industry. Check.

A spokesperson for the American Bankers Association. Check.

A lobbyist for the National Retail Federation. Check.

Head of a trade association of consumer credit and finance companies. Check.

You get the idea. All of the voices in support of the new law are pro-business. Might these folks be just a little biased? Where are the quotes from the people in the trenches? You, know, like the judges who actually try these bankruptcy cases in their courts? Why aren’t they quoted as supporting the new law? Or bankruptcy attorneys? Couldn’t they find any bankruptcy attorneys who like the new law? Apparently not. And there is a reason for that.

Yes, abuses occasionally happen in the bankruptcy system. People sometimes try to game the system. But — surprise, surprise — abuses will occur under the new law too. The bottom line is that the old system was not broken and did not need fixing. It worked fine. Was it perfect? No. Will the new law correct those imperfections? No. Will it introduce new and unnecessary problems?

At the time, Judge Frank Monroe of Austin called the new law a trap for consumers, characterizing some of its provisions as “inane, absurd, and incomprehensible to any rational human being.” I guess he just doesn’t know what he’s talking about…

In my previous post, I discussed the annual report on the Fair Debt Collection Practices Act issued by the Federal Trade Commission. As noted, the FTC receives more complaints about debt collection than for any other industry. We can expect it to get worse, however, if the collection industry gets it way on a key issue currently under review. Since sweeping changes to rules for telemarketing went into effect in 2003, debt collection firms have also been prohibited from using automatic dialing systems to call consumers’ cell phone numbers. But the industry’s trade association (ACA) is trying to get the Federal Communications Commission (FCC) to change this rule.

If the industry gets its way, we’ll see the number of complaints increase big-time. Currently collectors can only call cell phone numbers by placing the calls manually, which is very inefficient. In fact, many collection agency telephone systems are configured so their collection reps can ONLY handle calls that are placed via auto-dialer. So if the rule is changed, consumers who are behind on their bills can look forward to getting bombarded with cell phone calls in addition to calls placed to the home or workplace.

The ACA claims that inability to auto-dial cell phones will be “extremely detrimental to the industry and consumers” and “creditors will lose billions” if the rule is not changed.

What nonsense. Inconvenient to the collection industry, sure, but detrimental to consumers? Are there any consumers out there who think it will be beneficial to allow collection agencies to auto-dial their cell phones? The only people who think this is a good idea are debt collectors and auto-dialer equipment vendors.

The National Consumer Law Center has submitted a recommendation to the FCC against changing this rule.

It will be interesting to see the outcome on this debate, which has the potential to affect millions of stressed out indebted American consumers. Meanwhile, the message is clear: Don’t list your cell phone number on any credit-related applications!