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!
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.
Steve Rhode says
Excellent article. Really!!!!
Thanks, Steve! Glad you stopped by the blog. I really admire the work you’ve been doing keeping the settlement industry honest. 🙂
Michael Riley says
Charles, you did a great job explaining this so even a Marine can understand what’s going on. Thank you.