Charles Phelan

There is a “hidden” component to the real estate and financial crisis, and it gets very little attention by the media. I’m referring to the problem with second mortgages on homes that have lost market value during the real estate crash. Banks are being allowed by the Treasury Department to keep large portfolios of second-lien mortgages on their books at values close to those before the bubble burst.

Some estimates indicate that up to 50% of at-risk properties include this type of loan, so it’s a huge problem. There are more than $1 trillion in outstanding second-mortgage loans, with more than 40% of that concentrated among the four largest lenders. With housing prices down more than 30% average since 2006, many of these second liens are either completely without equity as collateral, or very close to it. Today, the major banks are carrying these notes at 86-93% of book value, when some estimates indicate that they are actually worth only 40-60 cents on the dollar on average.

Many consumers are unaware that it’s often possible to settle with creditors on second mortgage obligations for greatly reduced principal balances. Why would a second lender agree to a settlement on a debt that is secured? Simple. Once the property drops in value below the level where even the first mortgage is under water, then the second lender is completely exposed and is very unlikely to recover anything by way of foreclosure. In that situation, a settlement for even 10-15% of the face value on the mortgage often makes sense for the lender.

For example, let’s say you purchased a home for $300,000, with $30,000 down payment and a first mortgage of $270,000. Later the property appreciated in value $400,000 when the market was at its peak. Like so many Americans, you borrowed against the increased home value and took out a home equity line of credit (HELOC). With the home valued at $400,000 against a mortgage of $270,000, you had $130,000 of equity to work with. Being prudent, you didn’t borrow all of that, only $100,000. So you had a first of $270,000 and a HELOC for $100,000. Then the real estate crash happened. Your $400,000 house is now worth only $250,000, less than you originally paid for it. This means that the first mortgage of $270,000 is itself under water, since the house would sell for less than you owe on the loan. And therefore the second lien is 100% exposed. There is no collateral at all remaining to cover this note. In practical terms, this type of obligation can be settled the way any unsecured debt (like a credit card account) can be settled.

At ZipDebt, we’ve been assisting some of our clients to settle second mortgages, and the results have been nothing short of amazing. We’re seeing 10-15% settlements routinely, even less in some cases. But it’s important to understand that not all second mortgages can be settled, nor is it appropriate to use this strategy in all cases where the property is distressed. Sometimes there are other solutions more appropriate to the specific situation. It really requires a detailed analysis to determine whether a second mortgage or HELOC is suitable for the settlement approach. There are a number of key factors involved, such as whether the home is primary or a rental property, whether the state the property is located in is a “recourse” or “non-recourse” state, the specific type of mortgage contract involved, and of course, the equity figures relative to loan face values.

UPDATE: April 5, 2012

As of April 2012 we are offering PAID CONSULTATIONS ONLY on second mortgages or HELOCs, and no longer offer free consultations on this subject. Our fee is only $150, and includes 30 days of follow-up support via email. We made this change because our experience has been that each mortgage situation is totally unique, and requires careful analysis and discussion before a solid recommendation on strategy can be made. We have had so many inquiries on the topic of second mortgage or HELOC settlement, that we felt a paid consultation would be the most efficient method of assisting consumers to avoid scams and make the correct strategic decision. For additional details, please visit our other website at SecondMortgageAdvice.com.

UPDATE NOVEMBER 26, 2012:

Gerri Detweiler of Credit.com recently interviewed me on Talk Credit Radio on the subject of second mortgage and HELOC settlements. This is an in-depth podcast that covers a lot of important information consumers need to know on this topic. If you’d like to learn more about debt settlement as it pertains to mortgages or HELOCs, this is the audio file you’ve been hunting for! Click here to download the full podcast free of charge.

The original version of my do-it-yourself debt settlement training course was launched in 2004. After three years of working one-on-one with consumers as their debt coach, I had gained so much additional information that I started including a 55-page written update to the existing material.

This new content was incorporated into the completely revised 2008 version of the audio seminar, which expanded the recorded material from five hours to nearly eight hours. The program includes live coaching support, so it has not been necessary to revise the training material since the last release. However, a lot has happened since 2008, and prospective clients are justified in asking whether the material remains up-to-date.

After a thorough review of the course material, I’m pleased to report that about 95% of the recorded audio content of the existing version is still fully applicable to debt settlement in 2011. In terms of the core tactics of the strategy, nothing important has changed, and the system outlined in the course has proved *extremely* effective for clients. (See our reported results here.) So rather than re-recording a new version of the audio seminar, I have provided the key updates in the written Workbook included as part of the course.

What follows is an excerpt from the updated 2011 version of the Workbook for the Debt Settlement Success Seminar™:

General Update for 2011

The financial world is very different today from what it was in 2008. Bank failures, government bailouts, the foreclosure crisis – it’s certainly been an amazing period to live through. For consumers who need to tackle their debt problem, however, the good news is that debt settlement remains a powerful and effective strategy. This is especially true of do-it-yourself debt settlement (or more precisely, do-it-yourself with the assistance of a top-notch coach). In fact, it’s even easier today than ever before to settle your own debts. Settlement has become mainstream. Over the past three years, the banks have trimmed more than $160 billion of outstanding credit card balances. Many of those accounts were settled directly by consumers, with no need for third party intervention by “professional negotiators.” And while no creditor makes it easy to settle an account, virtually all of the major credit issuers are still settling in 2011, just the same as during the peak of the financial crisis during 2008-2010. As far as the banks are concerned, it’s business as usual, and the old principle of the “bird in the hand” still applies, just as it always has and always will! The three main changes that have developed since 2008 are discussed below, and for each individual audio track, the Workbook material to follow will note any important differences associated with updates for 2011 forward.

What’s Different in 2011?

1. Over the past three years, credit card debt balances have fallen by more than $160 billion, down to “only” $797 billion at the end of 2010, versus $957 billion at the time the 2008 course was recorded. Most of this reduction was due to charge-offs, and that included a great deal of settled debt. The bottom line is that over the past three years, settlement of delinquent debts has become a mainstream activity at the major credit card banks.

2. When the 2008 course was recorded, the Credit CARD Act of 2009 had not been passed yet. This new Federal law went into effect in February 2010, with the intent of helping consumers to avoid getting into trouble with their credit cards by making illegal various bank tactics like “double billing,” universal default, and due date tricks.

3. The debt settlement industry itself has completely changed. In the 2008 version of the audio course, I discussed the 15% front-loaded fee structure of the industry at large. After a ruling by the Federal Trade Commission that went into effect October 27, 2010, debt settlement firms are no longer permitted to charge in advance of performing services. The result is an industry in total chaos, with many firms closing their doors, while others try to survive by implementing a completely untested business model. With what’s happening today in the debt settlement industry, it makes more sense than ever to take the DIY approach (with guidance from a coach). Why trust a company with your settlement funds when they might not be around a few months from now?

If you’re not sure whether debt settlement makes sense for your situation, we’ll be happy to talk with you by phone and answer your questions. Our pledge is to give you a straight answer on whether this strategy is a good fit for your financial circumstances.

In my post of October 27, 2010, “The Future of Debt Settlement,” I discussed how firms were responding to the advance fee ban imposed by the Federal Trade Commission, and that three groups had emerged. The first group are the companies exiting the marketing place completely—these were mainly the marketing outfits that will now set up shop peddling some other product or service. The second group are the “loophole” diehards, which are firms attempting to circumvent the FTC rules by altering their business models. Early indications are that the FTC (and various state Attorneys General) are taking aim at this group, and lawsuits are already under way against one of the large companies still charging advance fees. It’s the third group that I want to write more about today – the firms that have “seen the light” and are now compliant with the FTC’s fee limitations. Frankly, it’s still this bunch that worries me the most!

Several of the problems with the new “FTC Compliant” debt settlement companies already existed before the rule change took place. I’m referring to excessive program durations, accounts not getting settled until after charge-off, and increased risk of legal action.

Creditors Won’t Wait 36-48 Months to Get Paid!

The “FTC Compliant” firms are still mostly quoting 36 to 48 month programs. Folks, this is an absurd length of time to be at debt settlement. If you want to get sued, tell your creditors it will take 3-4 years to pay them. I’ve written extensively on this subject, so I won’t rehash it here. Background information is available in my blog post of September 19, 2008, “The Myth of the 36-Month Debt Settlement Program.”

Automatic 6-Month Delay Until Charge-Off

None of the major credit card banks will talk directly with third party debt settlement firms. This means that “professional negotiators” can only talk to collection agencies, third-party to third-party. What this means for the consumer is an automatic 6-month delay on having any accounts settled. Virtually all the accounts will have to go past charge-off, thereby greatly increasing the risk of legal action. Before a negotiator can even have a conversation on your behalf, 6 very dangerous months have to go by with no movement from your side. By tackling the job yourself (with our guidance) you can have the majority (if not all) of your debts settled BEFORE charge-off. See my blog post on our “Debt Settlement Success Rates” for further insight.

Increased Risk of Legal Action

No third-party debt settlement company can talk to a creditor on your behalf until they first send your Power-of-Attorney. Otherwise, the creditor or collection agency is blocked by privacy laws from speaking with someone about another person’s account. But the problem is that the Power-of-Attorney document ITSELF is enough to increase legal risk! If you send a POA document to an original creditor, it creates a “short circuit” in the usual collection process and causes the creditor to accelerate potential legal action. And even when negotiating with collection agencies, the risk still remains that the original creditor becomes aware of it and reneges on the deal. We have recently had instances where one major creditor routinely refused to accept the final installment on settlements negotiated by third-party firms, and clients were experiencing problems with those settlements. By contrast, settlements negotiated by clients directly with this creditor went without a hitch.

Understand this key point – the mere FACT that you are using a third-party WORKS AGAINST YOU and causes more problems than it’s worth.

The above problems all have nothing to do with the FTC rule change, and traditional debt settlement companies have not solved any of these major flaws in the business model. If you use a debt settlement firm, you are likely to be sued SOONER rather than later. It used to be that you had to pay up front for that privilege. Now there are plenty of debt settlement firms that will get you sued by your creditors without charging in advance for the service. 🙂

The above problems are bad enough, but there’s an even more significant problem on the horizon:

Will Your Debt Settlement Company Still Exist 12 Months from Now?

Until 10/27/2010, about 99% of the debt settlement companies out there were all charging 15% in advance of services being performed. Very few firms were using the old model of charging a percentage of savings. In fact, out of 1,000 or so companies, I could count on two hands (with fingers left over) the number of firms that did *not* charge up front prior to the FTC ruling. And even those firms still charged a combination of administrative enrollment plus monthly fees, in order to generate some revenue while waiting for a file to reach the stage where negotiation fees could also be earned. Under the new rules, these firms can charge *nothing* in advance – no retainer, no down payment, nothing. Nor are monthly fees permitted. Literally, any third party debt settlement firm must wait for the client to build sufficient savings, then negotiate a settlement before they can earn one dime on that customer’s file.

In case you have not figured this out yet, the purpose of the FTC ruling was to KILL THE DEBT SETTLEMENT INDUSTRY. They wanted to kill it without actually making third-party debt settlement illegal – that would have been going too far and would have been overturned by legal challenges. But since they handled the change as a modification to the Telemarketing Sales Rule, the FTC has effectively BANNED DEBT SETTLEMENT AS A LARGE-SCALE OPERATION. Do you know of any other industry where a company is required to work for many months with NO deposit in advance or work performed? I can’t think of any industry that would survive such a business model. No large company can survive, let alone grow to a larger size, with the business model that the FTC has imposed on the industry.

Yet numerous companies are “going for it” as we speak, attempting to make the new rules work (while the managers get their own resumes in order!). I’m very concerned that consumers will now be lured by the promise to “pay nothing out of pocket until we settle your debts!” The marketing is already in place for this – and consumers are being told that it “won’t cost anything to sign up” for a debt settlement program. In terms of fees, that is now a factual statement. However, the true cost is most definitely a very real one! If the debt settlement firm in question goes out of business or files bankruptcy in 6-12 months (due to steeply falling revenues), where will the consumer be then? When a debt settlement firm goes under, consumers often have an impossible time getting any monies refunded that have been accumulated for settlements.

To illustrate that I’m not just being pessimistic here, I’ll cite a notice about the bankruptcy filing of Able Debt Settlement, a firm in Texas. Between May 2009 and April 2010, the company claimed earnings of $890k, or an average of $74k per month. For the period July 2010 to January 2011, earnings dropped to $261k, or $37k per month. That’s a 50% drop in revenue! No firm can survive this radical a change, and I therefore predict that we will see a very long list of such bankruptcy cases in coming months.

If you are a consumer considering debt settlement – no matter how long your firm has been in business prior to October 2010, they may not be around a year from now. So why hire them in the first place? What happens if they go under and you can’t get your money back out? In the Able Debt Settlement BK filing, they listed between 1,000 and 5,000 creditors. That means CLIENTS were named as creditors to be included with the bankruptcy petition. Goodbye, refunds!

If you’re going to do debt settlement, do it right. Tackle the job yourself. Get educated. Get a coach. Give us a call. We’re here to help.

Last July, I published “Debt Settlement Done Right,” which included ZipDebt’s success-tracking statistics for the period 2006-2009. I have now updated the figures to include the pool of clients who enrolled during 2010. The updated stats show that we are getting even better at what we do best – coaching consumers how to settle their debts quickly and safely on their own, with no need for debt settlement companies or the sky-high fees they charge.

Here is the hard data on ZipDebt Success Rates. For the exact methodology employed, please see the July 2010 post.

ZipDebt SUCCESS RATES (Cumulative) 2006-2010

1. Total Number of Clients @ 1,953
2. Number of Refunds @ 53
3. % Refunds/Total @ 2.7%
4. Coaching Not Included (Basic) @ 300
5. Insufficient Contact to Determine @ 640
6. In Progress @ 173
7. Pool of Coached Clients @ 787

8. RESULT A_ COMPLETED @ 341
9. RESULT B_ 80% Finished @ 238
10. RESULT C_ 50% Finished @ 50
11. RESULT D_At least 1+ Settlements @ 113
12. RESULT E_Filed BK @ 45

13. BASE SUCCESS RATE (= RESULT A + B) @ 74%
14. 50%+ SUCCESS RATE (=A+B+C) @ 80%
15. SUBSCRIPTION SUCCESS RATE (A+B+C+D) @ 94%

BASE SUCCESS RATE – This is the most conservative definition of “SUCCESS” relative to my program. The group of “Completed” plus “80% Finished” clients are all success stories. These are people who made the program work and achieved the desired outcome, or felt they had matters well in hand at the end of their service agreement. I am proud to announce that based on this simple criteria of “getting the job done right,” ZipDebt has a base success rate of 74%. *No other program* can touch it – not traditional debt settlement, not credit counseling, not even Chapter 13 bankruptcy. ZipDebt wins, period, hands down.

50%+ SUCCESS RATE—People often learn enough in their first 6-12 months with me to keep going on their own. Some people choose to renew to extend their coaching service, while others really take the DIY-spirit to heart and finish out on their own. Including clients who were approximately half finished with their settlements upon expiration of the coaching service, the success rate climbs to 80%.

SUBSCRIPTION SUCCESS RATE—Considering that 94% of clients reported at least one successful settlement during their coaching subscription, I am very confident that virtually every one of these customers would agree that they received full value in return for the cost of their subscription fee.

To my competitors: There is no way around it. My results blow the doors off anything else in the debt settlement industry. Can we please stop with the marketing nonsense that consumers are better off using “professional negotiators” to settle their debts? My data clearly shows this often-repeated claim to be FALSE. Consumers do BETTER haggling on their own, period. If you debate this conclusion, put up or shut up. Provide data better than this if you can. Otherwise, quit telling lies to consumers!

To consumers considering debt settlement: It’s not for everyone. It’s imperative that you be a good fit for this approach in terms of your financial situation, and that includes having access to sufficient resources to negotiate your settlements within 6-12 months. ZipDebt clients are so successful because they move FAST – approximately 9 out of 10 of our settlements are negotiated BEFORE CHARGE-OFF at 180 days of delinquency. By contrast, these ratios are reversed in the settlement industry, with the vast majority of settlements taking place AFTER charge-off. This automatically creates much higher LEGAL RISK for the client.

If you think settlement might be the answer for your situation, please read my 32-page report (and the $100,000 report if your debt balances are in the six-figure ballpark). And feel free to request a free 20-minute consultation. We’ll give you a straight yes or no answer on whether this will work for you.

If you are carrying a very high debt balance of $100,000 or more, you’ll want to read our new report: “$100,000 in Credit Card Debt! Financial Survival Tactics for High-Balance Debtors & Small Business Owners”

Here is a brief summary of the report’s contents:

1. When you owe $100,000 or more of unsecured debt, traditional debt reduction methods like debt roll-up simply DO NOT WORK anymore. You’ve reached “critical mass,” where the debt is about to explode out of control (or already has).

2. Debt management plans (offered via so-called non-profit credit counseling agencies) are not even effective for the $10,000 to $30,000 debtor they are designed for. You won’t get rid of your $100k debt load through credit counseling!

3. You have the right to declare bankruptcy, but most high-balance debtors will be stuck with Chapter 13, where some percentage of the debt (or in some cases 100%) has to be repaid over 5 years, under court supervision.

4. You have much greater personal privacy via debt settlement than Chapter 13 bankruptcy, and debt settlement also gives you much more control and flexibility in juggling your finances.

5. Most small business owners rely on their personal credit to obtain financing for their businesses. Personally-guaranteed business cards can be settled just the same as personal credit cards. Larger lines-of-credit can also be settled, although sometimes a little more “paperwork” is involved.

6. Many people wonder whether “the banks will still settle” now that the financial crisis of 2008-2010 seems to have subsided. Settlement was around long before the crisis happened and will continue long afterwards. It’s what banks have always done to reduce their losses on collection accounts. But the game HAS changed, and you need to know what you’re doing before you step into it uninformed.

7. The wrong way to go about debt settlement is to take your time and stretch it out to 36 months (as presented by most debt settlement firms). If you take too long, you will greatly increase the risk of creditor lawsuits. This defeats the purpose of avoiding bankruptcy in the first place.

8. The right way to do debt settlement is on a Fast-Track™ basis. By understanding the mechanical processes employed by the major credit card banks, and using those processes to your advantage, it’s totally possible to settle a large block of credit card debt in a lightning-fast 6-9 months. (NOTE: You probably DO have the resources to make settlement work this quickly, even if it’s not immediately obvious to you how.)

9. One of the worst tactical mistakes you could make is to hire a debt settlement company to “do the negotiating for you.” Recent rule-changes by the Federal Trade Commission have thrown the entire industry into chaos, and a company that’s here today could easily be gone tomorrow. Worse, just the act of hiring one of these companies could greatly increase your risk of getting sued.

10. You can get on the phone and settle your debts yourself. In fact, the creditors’ mechanical collection systems are already designed to settle with YOU, not with a third-party company. To obtain the best possible settlements per creditor, all you need is some training and coaching to help you avoid mistakes, tricks, and traps, and some moral support to help you “stay the course” when the going gets a little tough.

If you are carrying sky-high debt balances, this report is tailor-made for your situation. After reading it, feel free to request a free 20-minute phone consultation, and we’ll help you figure out whether this strategy is a good fit for your specific circumstances.