do it yourself debt settlement

$8.5 Million in Credit Card Debt Settlements by ZipDebt Clients in 2011!

January 31, 2012 by Charles Phelan Leave a Comment

In 2011, clients of my ZipDebt program reported settlements totaling more than $8.5 million of debt, primarily credit card debt balances. Here are the actual statistics:

ZipDebt Settlement Results for 2011

Number of settlements reported __568
Debt balances settled __$8,557,873
Amount paid for settlements __$2,752,917
Client savings __$5,804,956
Average account balance __$15,067
Average settlement result __32.2% (balance at time of settlement)

To put these figures in perspective, first you have to remember that ZipDebt is a “boutique” rather than a large firm. During 2011, with just one other person helping me with coaching, our clients saved nearly $6 million off their balances. Every single one of these settlements was SELF-NEGOTIATED. So much for the oft-repeated claim (by debt settlement sales reps) that consumers can’t negotiate their own settlements!

Here are some important additional data points:

Out of the 568 reported settlements for 2011, 445 of them were negotiated BEFORE CHARGE-OFF.

Two out of three settlements were negotiated directly with the ORIGINAL CREDITOR, without the involvement of any external collection agency or law firm.

Debt purchasers were involved in only 12 of the 568 settlements, or roughly 2% of the total. (Contrary to popular misconception, it’s not always easy to settle with purchasers, and this end of the industry is where many lawsuits take place.)

Clients reported a total of 11 creditor lawsuits. This translates to a risk factor of 1.9% per account.

Let’s put it all together. What does the above data tell us?

ZipDebt clients work quickly, settling about four out of five accounts before the charge-off deadline, and nearly all accounts within a 12-month timeframe.

ZipDebt clients negotiate most of their settlements (66%) with the original creditor, meaning fewer situations where it was necessary to negotiate with a collection agency or law firm.

The average settlement result of 32.2% blows the doors off the results published by ANY traditional debt settlement firm (assuming that you can FIND any published results!).

The legal risk for a properly coached DIY debt settlement client is FAR BELOW that of clients enrolled in traditional 36-month debt settlement programs.

All of the above was accomplished with a fee structure that represents a small fraction of what most companies charge.

Do you want to settle your debts quickly, pay less money out of pocket, eliminate steep “negotiation fees,” and reduce your legal risk to the maximum extent possible? If yes, then don’t hire a third-party debt settlement company! Get the education, training, and coaching support that you need to be successful at this process on your own.

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.

ZipDebt vs. Traditional Debt Settlement – How Do We Stack Up Against the Competition?

December 27, 2011 by Charles Phelan 4 Comments

In my blog post on “The Future of Debt Settlement,” published a little over a year ago, I assessed the state of the debt settlement industry in the wake of the FTC rule-change that banned the advance-fee model for third-party debt settlement. To summarize, in that earlier post I described the in-progress breakup of the industry into three different groups: (1) companies closing down or suspending all marketing operations, (2) companies seeking loopholes that still permit advance fees to be charged, and (3) those firms attempting to comply in good faith with the FTC rule-change.

It’s difficult to put statistics to the number of closures, since the debt settlement industry has always been murky in terms of publicly available information. But one metric is membership in the industry’s trade associations, and by that standard a large majority of such companies have gone out of business. USOBA (U.S. Organizations for Bankruptcy Alternatives) has stated that its membership roster has declined from around 200 to only 30 companies. And the AFCC (American Fair Credit Council) is down to about 35 firms from an initial 220 members. These figures represent a membership decline of approximately 85%. However, since both of these organizations published new policies requiring their members to be fully compliant with the FTC ruling, it’s possible that many of these former member-companies are still in existence and have merely dropped their trade association memberships as they continue seeking “creative” (i.e., non-compliant) revenue sources.

What about those “loophole diehards,” as I call companies still trying to charge hefty upfront fees? There are a number of firms still attempting to exploit the so-called “attorney model” for debt settlement, on the theory that attorneys are exempt from the FTC ruling. At least one of these firms has been on the receiving end of multiple lawsuits filed by Attorneys General from various states, and while they are still a big problem for unwary consumers, it is only a matter of time before we see such companies exit the marketplace under regulatory pressure. That will leave two essential choices for the consumer seeking relief via debt settlement: the “FTC-Compliant” firm and the do-it-yourself approach.

In a March 2011 blog post titled, “Consumers Should Still Be Wary of the New ‘FTC Compliant’ Debt Settlement Companies,” I explained why people should still watch their backs when hiring a firm that claims to be FTC-compliant. Please refer to the March post for full details, but briefly, there are four key reasons why “buyer beware” still applies even to the companies not charging upfront fees:

1. Program durations of 36-48 months are still being routinely quoted by these companies. Take that long to settle your debts, and the odds are heavily in favor that you WILL be sued by one or more of your creditors. (At ZipDebt, we coach our clients to complete their settlements in a 6-12 month timeframe, which greatly lowers the legal risk associated with this approach.)

2. The major credit card banks did not suddenly turn around and start working with these firms after October 2010. So this means consumers need to wait past charge-off (after 6 months of non-payment) for their “professional negotiator” to even begin the process of settling their accounts. (At ZipDebt, approximately 90% of our clients’ settlements are negotiated before charge-off.)

3. Hire a third-party debt settlement company, and you can expect a much higher risk of legal action, not a lower risk. Consumers often get the false impression that they are “protected” by enrolling in a debt settlement program with an established company. Not true! In fact, just the opposite is true! If you wanted to get sued sooner rather than later, just hire a third-party debt company who sends out a Power-of-Attorney to your creditors. (At ZipDebt, we do not use POAs. Clients negotiate on their own with our guidance and coaching. Our clients have a fraction of the legal risk of clients enrolled with third-party firms.)

4. How do you know your debt settlement company will still exist a few months from now? With companies closing left and right, there have been numerous examples of clients being left in the lurch with no idea what progress (if any) has been made on their debt accounts. The financial pressures that companies are experiencing are enormous, as they attempt to convert from charging 15% front-loaded, to a percentage-of-savings fee on the back end. Many (if not most) firms attempting this conversion to FTC-compliance won’t be around for another year. They have made it to this point by using the revenue from “grandfathered” clients enrolled prior to 10/27/2010, where the fees are still coming in advance. Those revenue streams are drying up now, and 2012 will be a very tough year for most of these companies. Many will not survive another year of these market conditions. Why hire a company if you aren’t sure they will be there when you need them most?

ZipDebt pioneered the approach of do-it-yourself debt settlement combined with professional training (via audio CDs) and live coaching (delivered via email and telephone). Our results are published here and here. (Note: In 2012 we will publish updated statistics.) We challenge readers to find a better published track record anywhere in the debt settlement industry. We believe that ZipDebt clients settle faster for less total money out-of-pocket vs. ANY competing company or approach other than Chapter 7 bankruptcy. Of course, good luck to anyone trying to find the published track records of other companies in this industry to compare us against. Even today, the vast majority of companies do not publish their results at all! And the ones that do only disclose what they are required to, instead of a more detailed analysis of what is actually happening with their clients. When you examine the results of those few firms that actually do provide this type of data, it becomes immediately clear that traditional debt settlement programs result in higher legal risk and higher total cost to the client than my ZipDebt approach. (Note to skeptics: Please feel free to provide published data to the contrary, but I will not be holding my breath waiting for you!)

As with any business model, when you are successful, you see a steady stream of others trying to ride on your coattails and exploit your hard work for their own greedy ends. There’s an old saying: “Imitation is the sincerest form of flattery.” But whoever said that was not the owner of a business that has been ripped off countless times by copycats and quick-buck artists. For example, I’ve had people take my 32-page report and just sign their name to it. Others have settled a few debts based on my advice, then try to set themselves up as “experts” in debt negotiation. Some have written books or e-books based on my material, without any type of credit or source citation. Still others have set up DIY debt settlement websites based on “coaching,” with training materials that sound all too familiar. And so it goes.

Again, BUYER BEWARE! There are at least half-a-dozen active websites attempting to copy my business model. How do you evaluate the difference between ZipDebt and its competitors and make the right choice?

How to Compare ZipDebt to Other DIY Programs

• BBB Ratings – A+ for zipdebt.com as an accredited business, vs. C, D, or F ratings for competing firms (or NO ratings at all, meaning it’s a very new company).

• Moneyback Guarantee – ZipDebt offers all programs with a 365-day moneyback guarantee, compared to 30 days for most competing firms (not enough time to properly assess the information).

• Time in Business – I have been assisting consumers with debt settlement since 1997, and ZipDebt has been online since 2004, far longer than any of the copycats.

• Who Are They? – I operate with full disclosure and provide detailed information about who I am and my background in this industry. Compare this to the faceless “corporate” websites offering DIY programs where you have no idea who is behind the product.

• Live Coaching – We deliver coaching via email and telephone, tailored to the client’s specific list of creditors and unique financial circumstances, not just generic advice provided via online forums or blogs.

• Published Track Record – We publish our results so clients have proper insight into what can actually be achieved with this approach. Good luck finding published results from ANY competing DIY solution.

• We Do Not Refer to Third-Party Companies – We do not receive any type of compensation for “up-selling” from DIY to the far more costly third-party programs the way some other so-called DIY sites do. We only do DIY-with-coaching, and we never refer prospective clients to ANY traditional third-party settlement firms.

We’re confident that once you’ve done your research, you’ll agree that ZipDebt is the ONLY choice for do-it-yourself debt settlement, and in fact, we are the most prudent and rational choice for debt settlement in general. To learn more about our approach, please read our free 32-page download, “How to Eliminate Your Debts Quickly and Safely Without Filing Bankruptcy.” You’re also welcome to request a free 20-minute phone consultation. We’ll give you an unbiased recommendation on whether or not this approach is suitable for your financial situation.

Debt Settlement Letters – Myths & Misunderstandings Galore!

October 14, 2011 by Charles Phelan 286 Comments

In my 14 years as a debt settlement professional, I’ve reviewed thousands upon thousands of debt settlement letters. Last year alone we had about 1,200 of them to review and approve on behalf of our clients. If there is one subject I know well, it’s how to document a settlement! There is nothing especially difficult about it, but I continue to be astonished at the amazing amount of bad information floating around on the Internet about this subject. In this blog post, I will set the record straight. If you want advice on how to protect yourself during a settlement transaction, you’ve come to the right place.

A word to the wise: You can either listen to someone like me, who reviews settlements on a DAILY basis, or make your decision based on some discussion forum where amateurs rule the day and the occasional “expert” weighs in with his or her opinion. I have seen cases where the exact opposite of the correct advice was given by so-called experts. So ignore my advice at your own risk!

1. NO LETTER, NO DEAL, NO EXCEPTIONS – EVER!

I have only one unbreakable rule for this game we call debt settlement. No letter, no deal, no exceptions, ever! In the course of negotiating settlements, you will sometimes run into lazy or misinformed debt collectors who refuse to grant a proper letter. They may use a variety of excuses, such as “There isn’t time and we need to get this handled today,” or my personal favorite: “This is a recorded line, sir. It’s all on tape, so you won’t need a letter from us.” This, quite frankly, is nonsense. If there were a problem later, how would you ever obtain a copy of that recording? You’d have to file a lawsuit against your creditor and obtain it through the discovery process. Good luck with that approach! It can be a real heartbreaker to think you have a good settlement, only to have the creditor take your lump-sum and treat it as a regular payment on the full balance and later deny ever having approved a settlement. Without a proper agreement letter, that is precisely the risk you take. The good news, however, is that getting a settlement letter is easy enough to accomplish.

The most important point to bear in mind here is that a settlement is a CHANGE IN CONTRACT between you and your creditor. The creditor’s own agreement language (i.e., the fine print on your credit card application) will always insist that any change to the agreement must be approved by the creditor and put in WRITING. So when necessary, you can apply some verbal ju-jitsu and use the creditor’s own policy to get what you need. When verbal agreement has been reached but the collector is balking at sending a letter, take this approach:

YOU: “If I accept this settlement it will modify the terms of my contractual agreement with XYZ Bank, correct?”

REP: “Yes.”

YOU: “Well, doesn’t the fine print in your original agreement state that any changes must be made in writing?”

REP: “Um, uh, let me get my supervisor for you.”

Escalate politely if necessary, but stick to your guns all the way up the food chain. If you don’t have a proper settlement letter, then it’s your word against theirs and you should not fund the settlement, period. By following this simple rule, you will save yourself a lot of grief.

2. FAX COPIES ARE FINE

The majority of settlement letters are forwarded via fax, and this is totally fine for the purpose of documenting the transaction. The creditor may or may not follow with a hard copy by post, but the fax copies have stood the test of time and consumers have been able to safely rely on this method for years. I cannot think of a single instance where a settlement was later disputed by a creditor when the only issue was documentation via facsimile rather than hard copy.

3. YOU WANT IT ON THEIR LETTERHEAD, NOT YOURS!

In the past decade-plus, I have overseen more than 10,000 settlements. In ALL cases without exception the agreement was documented on the LETTERHEAD of the CREDITOR, collection agency, or collection attorney representing said creditor, and NEVER on the consumer’s own letterhead. This is the correct method for the consumer handling their own negotiations, and it’s also the method employed by virtually all professional negotiation firms. Only inexperienced negotiators use the method of trying to get creditors to sign self-generated settlement letters.

There are books, e-books, websites, and a number of online “coaching” programs (aka inexperienced people trying unsuccessfully to copy what I do at ZipDebt) that claim you should mail a stream of offer letters to your creditors. This is a BAD IDEA! I don’t care if there are a few examples here and there where a creditor did agree to sign an offer letter as proposed by the client. The problem is that 99% of the time this method will FAIL. The reason is that all the major credit card banks have existing template language for documenting their settlements. The language has been pre-approved by the creditor’s legal staff. So you’re not going to get a manager at one of these banks to sign your stupid settlement letter and agree to your terms! And by insisting on doing it this way, you’ll be potentially costing yourself good settlements.

The correct technique is to verbally negotiate your settlement by telephone, and then to request a proper settlement letter be faxed to you before you present payment.

Aside from the reality that bank executives won’t sign off on your settlement letter, another reason I am opposed to working it the other way is the FOOTPRINT problem associated with any letter writing campaign. If you are using some type of “settlement system” that you purchased, think about how creditors will react when they start receiving the exact same letter over and over again from lots of different consumers. Their computer systems will catch on to this quickly, and before long, these letters will be classified as THIRD-PARTY generated. That is the kiss of death for a good settlement. Once the bank realizes you are using a system – a system that they are very much NOT in favor of! – then you can expect your account to be flagged for a different track of collections than the usual one. I’ve even seen this approach trigger early lawsuits or arbitration filings by the creditor.

Let me put it this way: Sending a series of pre-formatted settlement offer letters to your creditors is like repeatedly whacking a sleeping rhinoceros on the top of the head. Sooner or later the beast is going to wake up and have you for breakfast!

4. ANATOMY of a GOOD DEBT SETTLEMENT LETTER

Here is a simple checklist on what a proper debt settlement letter must include:

• The letter must be on the bank or agency’s letterhead
• The letter must be dated
• Your account number should be clearly identified (it’s fine if they only show the last 4 digits)
• The transaction must be described as a “settlement” or “settlement in full”
• Amount of settlement payment is stated correctly
• Payment due date(s) are stated clearly and correctly
• Individual payments sum correctly to the total amount to be paid on the settlement

Notice what this list does NOT include. It does not include a requirement for a physical signature. Surprised? Don’t be. About 99% of settlement letters don’t get physically signed. Trust me on this. It’s ok. Just like I have never seen a single settlement go sour because the creditor sent the letter by fax, I’ve also never seen a settlement go bad because the letter lacked a physical signature.

Guess what else is missing from this list? You’ll notice that there is nothing about how the settlement gets reported to your credit report. Why? Because it doesn’t matter. You can argue until you are blue in the face, and you’ll never get a creditor to alter the language by which it reports settlements, nor should you care in the first place. All settlements get reported as “settled for less than full balance,” or words to that effect, and they carry the same credit score code no matter what words are used. If it doesn’t get reported correctly, you can dispute the entry later on with the three major credit bureaus. But you can forget trying to have your creditor forgive 50% or more of your debt and also help you clean up your credit at the same time! It simply doesn’t work that way, and many an amateur has blown a perfectly good settlement over this point. Negotiate your settlements, THEN worry about your credit!

If you need professional advice on documenting your settlements, steer clear of the myths and misunderstandings you’ll find online, and give us a call at 866-515-2360. What we do is not based on theory, but rather on what has WORKED and has proven EFFECTIVE for thousands of clients in resolving problem debt.

NEW! DOCUMENT REVIEW SERVICE
Update: October 31, 2013

ZipDebt now offers document review for settlement letters and collection letters or notices. Have your document reviewed by Charles Phelan for a one-time low fee of $100. One business-day turnaround. Click here for more information or to order document review.

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

January 28, 2011 by Charles Phelan Leave a Comment

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

November 30, 2010 by Charles Phelan Leave a Comment

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

October 27, 2010 by Charles Phelan 3 Comments

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.