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ZipDebt Releases New Report: “$100,000 in Credit Card Debt!”

Debt & Credit

ZipDebt Releases New Report: “$100,000 in Credit Card Debt!”

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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.

$16 Million in Credit Card Debt Settlements by ZipDebt Clients in 2010!

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Who says you can’t settle debts on your own? In 2010, clients of my ZipDebt program reported settlements totaling more than $16.2 million of debt, primarily credit card debt balances. In my blog post of July 2009, “Debt Settlement Done Right,” I outlined my success tracking statistics and included a progress report on settlement activity through mid-year. At the time, we reported 737 settled accounts representing more than $10 million of debt. By year end, the figures had increased to more than $16 million settled and more than $10 million in SAVINGS. Here are the updated statistics:

ZipDebt Settlement Results for 2010

Number of settlements reported___ 1,193
Debt balances settled___ $16,251,722
Amount paid for settlements___ $ 5,376,767
Client savings___ $10,874,955
Average account balance___ $13,623
Average settlement result___ 33.1%

I will repeat a point I made in the July post. When you research debt settlement, you’ll come across numerous press releases where company executives boast of their firms having settled $100 million of debt over a period of several years. Remember, we’re talking about larger companies with 25-50 employees (much larger in some cases). Well, so what? During 2010, with just one other person helping me with coaching, our clients cracked $10 million in savings. Why do our clients do so well? Clients can settle more debt faster when they are not held back by huge fees.

As became clear during the recent FTC investigation of the debt settlement industry, the industry average for settlements is right around 50%. Add the usual 15% in fees (whether paid in advance or as the accounts are settled), and the average client is looking at around 65% total repayment.

Let’s do some math here. Say you owe $50,000 in debt. You hire a debt settlement company. Assuming they settle everything with no problems (which is a very large assumption!), you’re looking at a payout at 50%, or $25,000, plus fees of $7,500, for a total of $32,500 out-of-pocket. (To keep the math simple, I’m ignoring any balance inflation during the process.) Let’s round up from 33.1% and assume you do 35% using the ZipDebt Program. Your payout would then be $17,500, plus $777 for the program fee, or $18,277 total. That’s a difference of more than $14,000! The average ZipDebt client does 28% better!

Simply put: For most clients, a margin of 28% on large debt balances would spell the difference between SUCCESS and FAILURE at the debt settlement strategy. This is precisely why ZipDebt has the best track record in the industry.

If you owe $100,000 or more, the difference becomes even more pronounced — $15,000 in fees, $65,000 total payout versus $777 in fees and $35,000 in settlements, for a difference of more than $29,000. That’s a lot of dollars back in your pocket.

The more you owe, the more you are penalized by traditional debt settlement company fee structures. Why should you pay more because you owe more? It takes no more work to settle an account with $20,000 balance than it does a $10,000 account, yet the fee will be DOUBLE. Do the work yourself (with our guidance), and skip the huge fees. You’ll be out of debt much FASTER as a result.

High-balance debtors owing $100,000 or more should read my new FREE REPORT DOWNLOAD (PDF file): “$100,000 in Credit Card Debt: Financial Survival Tactics for High-Balance Debtors & Small Business Owners.” (Heck, even if you owe a lot less, read it anyway – most of the information will still apply to you.)

IMPORTANT! Don’t be fooled by all the new marketing for “FTC compliant” debt settlement companies. It used to be that they charged a lot of money up front to get you quickly sued by one or more of your creditors. (All the major banks HATE debt settlement companies, and that has NOT changed in 2011!) Now, they will get you sued without charging you in advance for it. It is much SAFER to handle the project on your own with some expert coaching.

If you think debt settlement might be right for your situation but would like more information after reading our free materials, please feel free to request a 20-minute phone consultation.

Make 2011 the year you tackle your debt problem. A lot of others have paved the way in front of you, and the trail is clearly marked. Now it’s YOUR turn!

Automated Debt Settlement Systems – More Trouble Ahead for Unwary Consumers

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In my October column, I wrote about the future of the debt settlement industry in the wake of the FTC ban on advance fees. As I noted, the companies attempting to comply with the FTC ruling concern me more than the “loophole diehards,” who I believe will go out of business or be shut down anyway. Many in the “compliance” camp are already promoting untested business models as though they have been operating this way all along.

Among the group of companies that attempt to comply with the FTC rules will be some firms that take a slightly different approach. Some will attempt to *automate* their systems as much as possible. If they are to have any chance at all of making the percentage-of-savings model work on the long run, they will be forced to streamline their operations to keep overhead to an absolute minimum. Even if they sell “education packages” as a fig-leaf to gain some front-end revenue (as many firms are also proposing), it still won’t stem the tide of red ink, especially if they continue to run operations based on overhead figures from the boom years.

So … how do you go about automating a debt settlement operation? For starters, you make it less of a third-party approach and more of a do-it-yourself approach (sound familiar?). You accomplish this by laying off human beings and replacing them with websites and software, perhaps supplemented with online forums and chat groups. We’re already seeing examples of this, so I need to explain carefully why these new automated debt settlement programs are a potential train wreck for consumers lured by them.

When I refer to “automated debt settlement programs,” I mean programs that are based on *any* automated process (software based or not) that is designed to lead the consumer down the path of settling their debts, and with *live support* reduced to a bare minimum. The consumer signs up with the “settlement company” (which is now little more than a website), and registers all their debt information online. Part of the marketing pitch is that “all the forms and letters are included.” Consumers are given the illusion of a “system” that works via the process of automatically generated letters to be mailed to the creditors. The system may be set up strictly as a DIY model, where there is virtually no interaction with the company or its representatives and everything is done online via the website and email. Or the true purpose of the program may be to later “up sell” the consumer to a full service third-party program based on the percentage of savings model (after the consumer runs into trouble using the methods they were taught). Either way, it’s important to provide the illusion of a “system” that gives the customer “something to do” while they are trying to save up money for settlements. And this is usually set up as a series of automated letters that go out to the creditors on a regular basis. What type of letters are we talking about here? There are three main types — hardship explanation letters, settlement offers, and cease communication notices. All three of them are a BAD IDEA! Once in a while we may use a hardship letter or a settlement offer, but only under special circumstances, and we NEVER use cease communication notices. (Such letters are the single fastest method of prompting a lawsuit!)

Let me be 100% clear on this. The letter writing approach DOES NOT WORK. The banks don’t settle based on a back-and-forth flow of letters. If you want the best possible settlements, you first have to understand exactly how the mechanical collection system works at the major banks. (That’s where my program comes in.) Then you have to get on the phone and do some haggling! My method is based on negotiating settlements via live telephone calls to your creditors, not via letters by mail. In fact, my materials contain very few template letters. We hardly ever use letters anyway, except in specific technical situations. Instead, we negotiate by telephone, get our agreement worked out verbally, and then ask the creditor to write up the settlement on *their letterhead*. We do not do it the other way around, as per some of these unproven automated systems.

Why am I so down on having clients write letters to their creditors? With the collection calls being such a hassle, isn’t it easier to just write letters? I base my recommendation firmly on my personal experience in coaching thousands of consumers to settle their own debts. I tested a variation on the letter approach back in 2004-2005. When I launched the first version of my seminar, I included a hardship explanation letter for clients and advised them to send one monthly to keep in communication with their creditors. What I learned was that clients who relied on the letters did not get the desired results. Better settlements were almost always achieved through telephone haggling.

Worse, I discovered that the template letters were creating a recognizable FOOTPRINT. These letters all have basically the same language, so the banks caught on quickly. I promptly suspended use of such letters when it became clear that clients risked having their account flagged for early litigation by using this technique. That was a long time ago, yet numerous debt companies still use such obsolete tactics. I predict that we will be treated in 2011 to a whole bevy of new “automated debt settlement” programs that use this dangerous approach. But the bottom line is that there will be no feasible means of getting around the “footprint” problem caused when the same letter gets sent over and over again to the banks. Sooner rather than later, consumers enrolled in such programs will start seeing early litigation from the major credit card banks. If you intend to pursue debt settlement, do it right and avoid such pitfalls. Get in touch with us for a free 20-minute consultation and we’ll help you decide whether or not this is the right strategy for you.

The Future of Debt Settlement

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Today, October 27, 2010 is “D-Day” for the debt settlement industry. The second part of the recent FTC rule change goes into effect today, banning advance fees for third-party debt settlement. So it seems like an auspicious occasion on which to blog about the future of debt settlement. In my August blog post, I wrote about my expectations for the future of the industry, and in this article I will expand on those remarks based on what I’ve observed since.

Based on their respective strategies for dealing with the new rules, the industry is breaking down into three broad groups. Let’s take a closer look:

Debt Settlement Firms Closing Down Sales Operations

Call center marketing operations can easily be adapted to sales of other products and services, so the “cowboys” who entered the industry after the subprime mortgage market dried up will just close up shop and open under a different name to sell something else. A lot of the companies that were around before that will do the same thing, since they also rely heavily on the front-loaded fee model to drive sales. Some debt companies have already closed their doors, or shut down their front-end sales operations, but we will see many more closures in coming months. My best guess is that at least half of the 1,000+ firms that have advertised debt settlement services in the past couple of years will be gone by the end of 2010, or will remain open but without any sort of sales or marketing operations. Instead, they will just milk revenue from the existing group of clients for as long as possible, until they finally close their doors and leave any remaining customers in the lurch. (Remember, the FTC ruling does not apply to those clients who were *already* enrolled with a debt settlement company program, only to those enrolled after the effective date of the rule change. So firms are still free to work their existing client database as per the original fee agreements, provided they do not continue to enroll new clients without complying.)

Debt Settlement Firms Pretending to be Something Else

I call this second group of companies the “loophole die-hards,” because executives of these firms are desperately trying to find a way to keep the cash cow going. Who wants to give up the 15% gravy train if there is a way around the new rule that still allows upfront fees? There has already been a lot of chatter in the industry about various loopholes for getting around the new rules. For example, the FTC ruling is a *telemarketing* rule change, and it applies to all third-party debt firms that use ANY form of advertising designed to get people to call and talk about the service. (It does not only apply to outbound telemarketing calls the way some suppose, but also to *inbound* sales calls that are generated by advertising designed to solicit said calls.) So some genius got the idea that by meeting *face to face* the rule will no longer apply. Voila! We get to still charge up front!

Wrong. Aside from the fact that in-person meetings will simply blow the roof off the marketing costs involved, it will be nearly impossible to set appointments with prospective consumers without using the telephone at some point in the process, particularly to get the consumer to inquire about the service in the first place. So this is a pretty dumb idea even at first glance. Yet there are companies desperate enough to be *seriously* moving forward with this approach. (Stay tuned!)

My expectation is that the FTC (or the newly minted Consumer Financial Protection Agency) will take action one-by-one against the loophole die-hards. The FTC ruling is really very extensive and quite thorough. I doubt that any “loophole” firm will survive an FTC enforcement action. Look for some test cases within 6 months.

Debt Settlement Firms Attempting to Comply with the New Rules

There will be numerous debt settlement firms that make a “show” of compliance with the new FTC rules. A number of them have already attempted to capitalize on the recent news by issuing press releases trumpeting their “support” for the advance-fee ban. (Of course, most of these same firms fought bitterly against the fee ban before it passed!)

Frankly, *this* is the group that worries me the most! For reasons I will explain below, I believe that the majority of these new company “converts” will FAIL and close their doors within 12-24 months. I fear that many thousands of consumers are going to learn the hard way that the new debt settlement model is no more effective than the old one. (By “new model,” I mean no upfront fees, and total fees limited to a percentage of negotiated savings, versus the “old model” of charging 15% of the total enrolled debt upfront.) The new model will be a little better, in the sense that consumers at least will not be bilked of the upfront fees. But they will pay the price in other ways.

What follows is a discussion of the major problems associated with third-party debt settlement, as it will be practiced by those firms that attempt compliance with the fee ban.

Problem #1: Totally untested business model

Thousands of consumers will now be tempted to sign up with firms that are implementing a brand new untested business model. It doesn’t matter that XYZ Debt Settlement, Inc. has been in business for 10 years. If they were previously basing their program structure on the upfront fee model (as were 99% of firms), they will need very deep pockets to finance continued operations while the conversion happens. If they continue enrolling people into 36-month programs, they will have to wait to get paid over a 3-year period. Trust me on this, folks, it’s impossible. No company will survive it for long, not without a great deal of investment capital (which is extremely difficult to come by these days). They are just trying to do it because they literally have no choice other than risking FTC litigation for non-compliance, or closing their doors completely. “Why not give this a try?” That is the litany being heard in the boardrooms of debt settlement firms across the country. So dozens of firms will be literally gambling their future on a totally untested business model. It would be foolish for any consumer to participate along with them in that experiment. But consumers WILL be tempted, simply because they will have the mistaken belief that, “It won’t cost me anything to sign up” for a debt settlement program. However, fee or no fee, enrollment in a debt settlement program will still come at a heavy price, in the form of lost settlement opportunities prior to charge-off, greatly increased legal risk, and outright failure at the settlement process (aka bankruptcy).

Problem #2: The 36-month debt settlement program doesn’t work anymore!

I’ve written previously on this subject, and it’s even more true today than before. The reason long-term debt settlement programs are ineffective is because lawsuits are inevitable if the program is dragged on that long. People drop under mounting legal pressure. What works best is “fast-track” debt settlement, defined as all accounts being settled in 12 months or less (ideally 6-9 months). The programs these firms will be selling is the complete OPPOSITE OF WHAT ACTUALLY WORKS in 2010 and will work as we move forward into 2011. (Please see my article, “Debt Settlement Done Right,” for further insight on my approach to “fast-track debt settlement.”)

Problem #3: No debts get settled for the first six months!

Debt settlement companies don’t get the time of day from any major credit card bank. In fact, the banks were active in lobbying and promoting this latest FTC rule change. They wanted the industry to be shut down completely, but a ban on advance fees amounts to the same thing from their perspective. Just because the debt companies aren’t charging fees on the front end now, that doesn’t mean the banks will be any more amenable to working with them. Why should they? Some of big banks mail out settlement letters on their own, even before the account is 90 days late (not usually the best deal, but it certainly gets people thinking about settling their own debts!). Others will routinely agree to settlements before charge-off at 180 days late, almost in mechanical fashion. There is enough do-it-yourself debt settlement already taking place with direct offers made to consumers via mail and telephone that the banks see no reason at all for professional third-party “negotiators” on the consumer side. And the banks are quite correct on this point. Consumers don’t need professional negotiators just to get settlements that happen as a routine part of the collection process anyway. Trust me on this, folks – a LOT of consumer credit card debt has been settled in the past two years without the help of debt settlement companies.

The consequence of the banking industry’s stiff-arm tactics against the debt settlement industry is that consumers entering debt settlement programs will automatically miss out on some of the best deals, which happen BEFORE charge-off. (Charge-off is the point where the account is written off as a bad debt, after which it usually gets assigned to a collection agency.) For that first six months, the settlement company won’t even be able to TALK to the banks. This means that consumers will have to wait beyond charge-off before they see any settlements. Who wants to wait SIX MONTHS to start seeing results? Some of the BEST settlements can be had just prior to charge-off, right when your debt settlement company is sitting on its hands, powerless to talk with anyone at the bank about your account. Folks, it does *not* need to be this way. With my ZipDebt approach, the majority of my clients are nearly *finished* with their settlements when they hit the 6-month point, with maybe 1-2 remaining accounts (if any) to be cleared up after charge-off.

COMPLETELY DONE with settlements in 6-9 months, versus *just getting started* — which sounds better to you?

Problem #4: Greatly increased risk of lawsuits!

It’s important that consumers researching debt settlement from October 27, 2010 forward understand this crucial point about LEGAL RISK. Hiring a debt settlement firm *greatly increases* your risk of getting sued by one or more of your creditors, even when the settlement company does not charge upfront fees. There are three key reasons for this:

First, as noted above, the 36-month program doesn’t work, so taking this approach automatically increases the risk of lawsuits by dragging out the settlement process far too long.

Second, the fact that none of the accounts get settled before charge-off automatically increases the risk of legal action. Following charge-off, some creditors may choose to use local collection attorneys to recover. The threat of litigation gives the collection attorney the upper hand, and this results in a much higher settlement percentage, when the account could otherwise have been settled for a much lower figure before the deadline.

Third, if the creditors get wind of the debt settlement company’s involvement, they might move accounts early to legal status. When I wrote above about clients having to wait six months before any settlement attempts were made, I was giving credit to the debt settlement company by assuming they were smart enough to lay low for the first six months (so they don’t get their client sued early). Again, all of the top ten credit issuers have a blanket policy against working with debt settlement firms of any stripe. Any firm that makes the attempt automatically gets their client *flagged* as a third-party account. The creditor immediately bring out the big guns and steps up the collection pressure, often via swift legal action. Consumers will only harm themselves by enrolling in such programs!

Conclusion

The FTC ruling will eliminate the upfront fee gouging that was taking place, but it will not solve the other major problems associated with the use of third-party settlement programs, such as greatly increased legal risk. Consumers will continue to be lured by the false promise of 36-month settlement programs that will *still* not perform as advertised.

What is the future of debt settlement? I predict that financially-distressed consumers will still be settling debts on their own for decades to come. The logic of settlement is based on simple financial math, and that will never change. A year from now, however, there will be only a small number of debt settlement firms still operating. That means good news and bad news for the U.S. consumer. A lot of crooks will have been chased from the industry, and that can only be a good thing. Unfortunately, a lot of good people will have been chased from the industry as well. But the main point to take away from this article is that use of a third-party settlement company is ill advised even when there are no upfront fees involved.

So what’s the right way to do debt settlement? First, only choose this strategy if you’re a good candidate for it financially. (If you are not sure on this crucial point, then feel free to request a 20-minute phone consultation, and we will tell you – point-blank – whether or not you qualify.) Second, get our training course, do it yourself and make the calls to your creditors on your own. You’ll actually get better settlements this way! Third, take advantage of our expert coaching to get the best results on your settlements per creditor. We can help you avoid “leaving money on the table,” and we can also help you avoid taking unnecessary risks by trying to push a negotiation too far with a particular creditor. We have MORE experience coaching consumers on self-directed settlements than ANY other company out there. If you have been thinking that debt settlement might be the answer for your situation but don’t trust the debt companies, then you’ve come to the right place. Please get in touch, and let us know about your situation. You can depend on us for an unbiased opinion on your financial situation. If you’re not a good fit for settlement, we will tell you that and make alternate recommendations. If you are a good fit, then we can get your questions answered and help you get started.

Are Consumers Really Paying Down Their Credit Card Debt Balances?

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Just a short post for September, on the subject of consumer credit card debt as reported in the mainstream news media. In next month’s column, I will write more about recent developments in the debt settlement industry in the wake of the recent FTC ruling.

During the financial crisis of 2008-2010, there was a steady flow of articles reporting that American consumers had suddenly discovered frugality, reduced household spending, started paying down debts, and increasing savings. For example, a recent article titled “Consumers Continue to Pay Down Debt,” stated that consumers were “digging out from underneath their mountain of debt.”

As I have read these rose-tinged headlines over the past year or more, I have scratched my head in wonder. That is surely NOT what I have been seeing out here in the field! From my perspective, consumers are not paying off their balances, at least not the folks I’m talking to. Instead, they have been forced to default on their accounts in large numbers due to their own personal financial crises. Millions of Americans have underwater mortgages, or have lost their jobs in the recession. So these headlines and stories claiming that “consumers are paying off their debts” always seemed wrong to my ears.

It turns out that my instincts were correct. We are finally seeing some published numbers that expose the truth behind the scenes, and a major article on this subject recently appeared in the New York Times. According to a recent study by CardHub.com, credit card debt for the second quarter of 2010 decreased by around $12 billion compared with the previous quarter. But charge-offs by the major banks were $21.8 billion during that same timeframe. Since the drop in outstanding debt is *smaller* than the amount that was written off, this means that consumers actually ADDED $9.8 billion of debt during that period. Consumers are not “paying off their debts,” they are DEFAULTING on their debts in record numbers. It’s the exact opposite of what many have been reporting in the financial media. The “deleveraging of the consumer” that we keep reading about is just a mirage, a combination of sky-high default rates combined with the aggressive lowering of open credit limits by the major banks.

In the NYT article, one specific number really jumped out at me – the figure of $832.2 billion for total credit card debt. At the peak of the madness in 2008, we were at approximately $957 billion of credit card debt. So over the past two years, the banks have written off $125 billion, give or take a few billion. That’s a lot of bones, but what startled me is that American consumers *still* owe more than $800 billion on their credit cards! When I recorded the first version of my seminar in 2004, that figure stood at $735 billion, and I was already talking with alarm about “The Great American Debt Explosion.” So have we really made that much progress? Yes and no. Obviously, we’re in better shape with the current $832 billion figure than the previous $957 billion total. But it’s quite clear that a massive amount of consumer debt is sitting out there yet to be resolved. With more than $800 billion of debt still remaining, I predict that debt settlement will remain a viable option for years to come for consumers otherwise facing Chapter 13 bankruptcy.

FTC Enacts New Regulations for the Debt Settlement Industry– Finally!

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On July 29th, 2010, the Federal Trade Commission (FTC) announced new regulations for the debt settlement industry. For background, please see the following ZipDebt blog posts:

FTC Workshop on the Debt Settlement Industry
Debt Settlement Industry in the Crosshairs
Debt Settlement Industry – Big Changes Coming Soon?
Will Debt Settlement Still Exist in 2011?

Frankly, the debt settlement industry should have been regulated years ago. The new rules were far too slow in coming for the tens of thousands of consumers who have been ripped off by shady debt settlement companies. But at least the day has finally arrived. As of September 27, 2010, new disclosure requirements go into effect that will ban much of the deceptive debt settlement advertising that has saturated media airwaves in recent years. And even more importantly, as of October 27, 2010, firms will no longer be permitted to charge fees in advance. This will put an end to the practice of charging 15% of the total debt before meaningful work has been performed. Companies will be required to actually obtain settlements before earning a success fee. (Oh, the horror!) In order to survive the coming changes, companies will be forced to revert to a fee model based on percentage of savings – most likely the old 25% of savings method originally used in the “good old days” of debt settlement.

What will be the practical effects of these new regulations on consumers looking to debt settlement as an option? There are some rather obvious implications, as well as some potential effects that are not readily apparent at first glance.

Among the obvious effects are an expected sea change in the way debt settlement services will be advertised. Yes, I’m sure that some of the sharks and cowboys will go right on advertising the same old deceptive pitch after 9/27, but eventually two or three large marketing firms will get shut down by the FTC. A couple of major enforcement actions will finally convince some of the more stubborn players out there the game really has changed for keeps. Once the drip-drip-drip of false advertising starts to dry up, then debt settlement sales “leads” will also start to dry up and the front-end marketing machine will die down. Many of the call-center marketing firms that entered the field to exploit recent economic conditions will abandon the industry and move onto selling some other type of product or service.

Next, and also obvious — after the advance fee ban goes into effect on 10/27, numerous firms will still be out there operating on the old upfront fee model, or they will try to exploit non-existent “loopholes” that still permit the big advance fees. Here again, a few major enforcement actions to take down non-compliant firms will probably happen before 2010 is over, or early in 2011. I’m sure the FTC wants to prove its point, so look for them to take down one or two firms for continuing to charge non-compliant fees. I also predict that at least one major enforcement action will involve a settlement firm operating on the so-called “attorney model for debt settlement.” Many people in the industry falsely believe they are safe if they have an attorney at the head of their settlement firm. But the FTC has specifically said that the new rule *does* also pertain to attorney debt settlement, so there is no such loophole. Still, some idiot will try, and get shut down for it, thus providing a nice test case for the FTC.

Moving forward past the massive turmoil that will happen well into 2011, there will rise to the top several larger firms that are well capitalized. These firms will make a legitimate attempt to implement debt settlement in large volume using the percentage-of-savings model. The FTC ruling does not cap the percentage of savings fee structure. So provided the much more harsh Schumer bill or the House equivalent (which would cap fees at an industry-killing 5-10% of savings) does not pass through Congress and there are no further fee restrictions implemented, then at least a few reputable large settlement firms will try to remain standing. Some have already announced their intention to comply.

Another potential consequence of the advance fee ban, perhaps less obvious than those discussed above, is the coming shift in marketing demographics for debt settlement. The key question for debt settlement executives will quickly become – How can we actually deliver on our promises to effectively reduce consumer debt through third-party negotiation tactics, and still earn a profit? Once these firms start having to actually EARN their fees (instead of just collecting up front while clients drop out left and right), the target demographic for debt settlement will shift *drastically*. Until now, *anybody* with a $10,000 credit card debt load was “fair game” for industry sales reps. Most companies sold the service based on the long-obsolete 36-month debt settlement program, or worse, fairy-tale 48-60-month programs. All of that silliness will disappear as companies compress the timeframe in which they permit clients to stretch the program. With all the fees at the back-end, the 36-month programs will gradually shrink to shorter and shorter durations. Companies will actually start to perform suitability analysis before taking on clients, to ensure that they are a good fit for the settlement strategy. In short, the reputable firms left standing will quickly begin to learn all the same things I learned many years ago – settlement only works if the client is a good fit for it financially. Just being in debt is not sufficient qualification! The result will be that debt settlement will only be presented to consumers who have a reasonable shot at making it work effectively, and this will be a fraction of the demographic pool the industry had originally targeted. In other words, the debt settlement industry will shrink drastically over the next 1-2 years, leaving only a few large firms and a greatly reduced number of small to mid-sized firms, down from well over 1,000 companies today.

No matter what they do, however, even the legitimate debt settlement firms will still be swimming against the tide. Irreparable damage has been done to the industry’s reputation due to the extremely shoddy marketing practices of the past 10 years. The top ten major credit card banks have taken a unified stand against third-party debt settlement. They won’t talk with these firms anymore. So even the client of these “cleaned up” debt settlement firms will be working at a SEVERE disadvantage. Clients of debt settlement firms will still be required to wait beyond charge-off before the majority of their debts can be settled. This enormous handicap automatically drags out the process and places the client at much greater risk of legal action. Unfortunately, in the current banking environment, hiring a debt settlement company is rather like calling an electrician to come repair your defective house wiring, and then being told the job can only start *after* the fire has already taken place!

There is at least one other important potential consequence of this ruling that might not be apparent at first glance, until you take a deeper look at the economics of trying to run a debt settlement company with no front-end revenue. There remains one possible method of getting some revenue at the outset. The FTC has provided an exemption for “products.” This was a wise exemption, mind you, because any rule change that tried to include books, tapes, CDs, etc., would automatically lead to First Amendment issues. Basically, the lawyers would have had a field day, and any such provision would have been stricken by some court ruling anyway, so the FTC left it alone in order to not weaken the main elements of the rule change.

What does the “products” exemption mean in practical terms? Well, it’s good news and bad news. It’s quite good news for me personally, and ZipDebt clients (current and future) as well, since it means that the ruling does not apply to my business model. I sell a product, and I don’t meet the definition of a debt settlement service provider anyway. So yours truly will still be able to help consumers navigate the mine field of credit card debt settlement, minus the big fees. And let’s face it people – 25% of savings is still a HUGE chunk of money! If you owe $80k, and the firm settles for 40% average, you will still pay $12,000 in fees for something you could have done yourself with a little proper training and guidance. I think $777 is a much more reasonable cost, don’t you? 🙂

So what’s the bad news then? Well, I hope I’m wrong, but I expect that we’ll now be treated to an onslaught of new “products” – debt-related e-books and DIY debt settlement kits, including knock-offs of my own training course, and so on. We’ll have a deluge of debt-settlement related products, all designed to give desperate companies some breathing room –something solid to base a little front-end revenue upon. Most of this material, of course, will be flimsy at best, and much of it will contain outdated advice. Therefore, it will still be “buyer beware” for people looking for help with their debt troubles.

In short, the FTC ruling will help consumers avoid the minefield of debt relief services, especially after some of the worst offenders are chased from the industry. But consumers will still need to do their homework, check Better Business Bureau ratings (you can check ours here), and perform proper due diligence before working with any third party debt settlement firm – especially one that just started hawking books, tapes, and CDs after July 29th!