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.