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.