Charles Phelan

Consumers seeking debt assistance are faced with a bewildering assortment of debt companies, services, programs, books, eBooks, and websites. How to tell the scams from the legitimate options? The purpose of this blog post is to help consumers easily spot and steer clear of one particular scam that is growing through network or multi-level marketing schemes.

It goes under different names, such as debt elimination, debt termination, or debt reduction. Such names can certainly apply to legitimate programs as well, and the scammers purposely name their bogus programs with the intention of deceiving consumers and stealing them away from legitimate companies. For the purpose of this post, I’ll refer to it as the debt elimination scam, but be aware that it may be called something different.

So how can you tell this scam from legitimate debt elimination techniques? It’s pretty easy, actually. The scam is based on the bogus “no money lent” argument, where the claim is made that credit card banks cannot loan money legally. Through strange leaps of logic, the scammers claim that credit card banks are actually operating illegally, and so you never really borrowed any money when you used your credit cards! Therefore, you don’t really need to pay anything back. You just have to follow their system and the debts will go away because the banks don’t want this knowledge disclosed to the public!

I realize this may sound ridiculous at first glance, but the con artists are very convincing, and there are dozens of websites promoting this dangerous scam. They refer to publications by the Federal Reserve Board, the Uniform Commercial Code, the Truth in Lending Act, and other public laws to bolster their claims and give an aura of legitimacy to their “program.” I’ve talked with numerous consumers who have been conned out of $2,500, $5,000, even up to $15,000 because they believed the hype that these snake-oil salesmen were peddling. If you’re $30,000, $50,000, or $100,000 deep in credit card debt, it can be very tempting to believe in a magic pill. What if you could pay someone 15% of the debt and make the rest of the debt disappear?

As tempting as the promoters make it sound, the debt elimination techniques they are using simply do not work. About the only thing they accomplish is getting you sued by your creditors. As you might expect, creditors hate this scam, and they come down hard on people trying to use this bogus “no money lent” system. You don’t need to take my word for this. Check out the complaints on ripoffreport.com about Liberty Resources, a debt elimination scam that was shut down in Ohio. Or do some research on New Leaf Associates out of Florida, a scam that was shut down by the Florida Attorney General after consumers were ripped off for millions of dollars. I’ve personally talked to people who were caught up in both of these scams, as well as others who were involved in scams that have not yet been shut down.

More on this scam tomorrow…stay tuned!

This item made the news today: “Late Payments on Credit Cards Showed Strong Decline in Fourth Quarter 2005.” (Source: American Bankers Association’s Consumer Credit Delinquency Bulletin) In the third quarter of 2005, the number of credit card accounts 30 days or more past due stood at 4.74%, while this figure dropped to 4.27% in the fourth quarter.

So why am I predicting that late payment rates will rise in 2006 when Q4 of 2005 shows a decline? Simple. The results from the end of 2005 include the fact that anybody thinking about bankruptcy had already filed before the new rules went into effect on October 17, 2005. So the decline is artificial at best, and hardly the good news that was reported today.

As we move through 2006, my prediction is that the late payment ratio will rise again. The main reason is because the banks are in the process of raising required minimum payments under pressure from the Office of the Comptroller of Currency. This is a well-intentioned attempt by the Fed to help consumers out of the “endless-minimum-payment” debt trap, but the real-world result will be higher default rates. I talk to consumers on a daily basis who are already struggling to maintain the bare-bones minimum payment level. Add just an extra $50-$100 to that minimum payment level, and many consumers will simply not be able to keep up. So I think I’m pretty safe in predicting an increase in the default rate.

As actual results come in later this year, I’ll post the figures here on this blog. The previous record was 4.81% for the second quarter of 2005. I predict that we will set a new default record and top 5.0% for the first time in the third quarter of 2006. Stay tuned …

And, if you’re already feeling the pinch of the higher minimum rates, you should consider the debt settlement strategy as a means of dealing with the problem.

We set a new record for personal bankruptcy filings in 2005, with a total of 2,039,214 consumer filings. That’s a 30% increase over the prior year. Of course, some of the surge has to do with negative publicity surrounding the new bankruptcy law that went into effect in October 2005. Approximately 400,000 of those cases were under Chapter 13, with the rest being Chapter 7 bankruptcies. It will be interesting to see the statistics later in the year, when we will have a better idea of the effect of the new law on the pace of filings, as well as its effect on the ratio of Chapter 7 to Chapter 13.

Lost is all this new data and hoopla over the bankruptcy law is a simple fact: Many of these bankruptcy filings were not necessary. I’m not talking about the usual media disinformation about “deadbeats” taking advantage of the system. That has proved to be a hollow and false excuse for passage of the new law. (See my March 20th post on this subject.) No, I’m talking about the reality that many people are FORCED into bankruptcy when they would truly rather avoid it. Consumers often get pushed headlong into bankruptcy by a combination of (a) predatory practices on the part of banks and financial institutions that profit from consumer indebtedness, and (b) aggressive collection tactics. The Federal Trade Commission logged more than 58,000 complaints last year about collection abuse. Since that is the barest tip of the iceberg (most people just take it and do not complain), is it any wonder that a consumer otherwise motivated to avoid bankruptcy is forced to it by abusive collection techniques? I’m not saying that the collection industry is evil. It provides a necessary function in our economy. Nor do I have anything against people who collect for a living, even though the industry has more than its share of bad apples.

My message here is simple. Bankruptcy can often be avoided by educating consumers about the option of debt settlement, especially the self-help variety, and by teaching them how to deal with collection tactics. I’ll discuss the problems of third-party professional debt settlement in other posts. For now, I want consumers to realize that avoiding a trip to bankruptcy court is simply a matter of (a) getting educated about how the debt collection process works, (b) developing a financial game plan that makes sense for your circumstances, and then (c) getting on the phone with your creditors with the goal of working things out amicably. It’s called taking responsibility and then taking action. It’s as American as apple-pie. It works, and the financial media is irresponsible for not discussing the most viable option of all for debt resolution. So get educated, take charge, and work things out. It really is that simple.

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Charles J. Phelan
Manchester Publishing Company
1835 S. Centre City Pkwy
Suite A-507
Escondido CA 92025

Telephone: (866) 515-2360

Website: https://www.zipdebt.com

Email: [email protected]

Let’s call 2006 the year of the triple squeeze play against the indebted American consumer. With consumer debt at an all-time high, are things getting easier for people? Are there more options available for dealing with problem debt? No. It’s exactly the opposite. At a time when people most need help, they face a tougher set of challenges than ever before when it comes to tackling debt.

Here’s what I mean by the triple squeeze play:

1. The new bankruptcy rules have made it much tougher to qualify for Chapter 7 and get a fresh start, and Chapter 13 bankruptcy also comes with some strict new rules. Basically, the new law says that if you can afford to pay $100 per month to your creditors, Chapter 7 is out and you must file Chapter 13 instead. Instead of a fresh start, you’re looking at a five-year payback commitment. Don’t think you can afford $100 per month? The courts may not agree. That’s because your “allowable” expenses are defined by the IRS collection guidelines, not your actual documented expenses. The new rules also mean more liability for bankruptcy attorneys, who are now required to certify their clients’ financial documentation. This exposes them to greater risk. Consequently, the legal fees associated with filing bankruptcy are on the rise. Many individuals will find themselves “too broke to go bankrupt”!

2. Credit card banks are raising minimum payments under pressure from the Office of the Comptroller of Currency. The idea is to force people to pay down their debts faster, since the existing minimum payment structure was really just a trap for the unwary. Under the previous system, payoff times of 20, 30, or even 40 years were common. To offset this credit card debt slavery, the OCC has forced banks to require higher minimums so that more of the payment goes to reducing the debt balance instead of paying only the outstanding interest for that month. A good idea in theory. But what happens if you are already struggling to keep up with the original minimums? Expect this payment increase to lead to an increase in the number of people defaulting on their credit card obligations.

3. The credit counseling industry is under attack, with the IRS revoking non-profit exemptions left and right, exactly at the point in time when credit counseling has become mandatory under the new bankruptcy rules. To date, more than 30 credit counseling agencies have had their non-profit status revoked. Yet the new BK law requires the debtor to obtain a counseling session with an approved non-profit credit counselor before being permitted to file bankruptcy. By the time the IRS finishes its ongoing audit of the credit counseling industry, we can expect fewer and fewer legitimate agencies to remain in business. Will they be able to keep up with the demand?

The above three factors are coming together in 2006 to make life very difficult for consumers trying to get a handle on their problem debts. This triple squeeze play against consumers is one more reason why I’m a fan of debt settlement, especially do-it-yourself debt settlement. Why go through the hassle of Chapter 13 when you can negotiate your own deals with your creditors and not have to involve the courts? The minimum payments then become totally irrelevant, since you’re haggling over principal, not interest rates or payments. And credit counseling also becomes irrelevant when you take matters into your own hands and negotiate settlements with your creditors. Debt settlement already had a lot going for it before the triple squeeze play of 2006. Now it makes even more sense.