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Why FREE Debt Settlement Advice Can Often Be the Most Expensive

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Virtually every single debt relief company offers a “free consultation” where you can call a toll-free number and speak with a counselor about your situation. Depending on whether you’re seeking debt settlement advice or information about credit counseling, there may be different titles for this position, such as “debt counselor,” “certified debt consultant,” or “senior debt advisor.”

Buyer beware! After 16+ years in the industry, I can tell you firsthand that such titles are meaningless. The reason is because there is no government agency certifying the credentials of individual debt consultants.

This is not the case with most professions involving financial products or advice. If you want to sell insurance, for example, you have to get a license from your State’s Department of Insurance. Yet there is no such corresponding license for the people who dispense debt settlement advice or make debt-related financial recommendations.

As a result of this lack of oversight, what prevails in the marketplace is a SALES mentality.

Even at many so-called non-profit credit counseling agencies, counselors are expected to “enroll” a sufficient number of callers, or they lose their job to someone who’s better at signing up new clients. And of course, a number of large debt settlement firms utilize aggressive high-pressure sales tactics via boiler-room operations. (Fortunately, this approach has been largely squashed by an October 2010 rule-change by the Federal Trade Commission which banned advance fees for third-party debt settlement firms.)

So whether you’re looking for debt settlement advice or information on other approaches like credit counseling or bankruptcy, be wary of the “free consultation.” Too often, you’ll simply be speaking with someone who has a financial incentive to sign you up for an expensive program or service. With thousands of dollars in potential commission income at stake, can you really trust a “debt consultant“ to provide you with objective advice?

Here at ZipDebt, we provide free consultations too. And while this might seem like a contradiction to what I wrote above, there are three key reasons why our consultation process is totally different from the sales-driven approach:

Our training course (“Charles Phelan’s Debt Settlement Success Seminar™”) includes a thorough discussion of ALL legitimate debt relief options, and provides a decision-tree to assist consumers in choosing the mathematically correct approach for their financial circumstances. We first educate you so you can make a fully informed decision on which course of action that makes the most sense given your particular situation. We don’t take a one-size-fits-all approach to debt relief.

We offer our program with an ironclad 365-day moneyback guarantee. This gives consumers an opportunity to fully review the training material before making a final decision on whether or not to implement a debt settlement strategy vs. other approaches like bankruptcy or credit counseling. And of course, our refund policy makes it totally pointless for us to “sign people up” just to make a sale, as this would just lead to refunds requests based on the decision-tree information provided in the training program!

At ZipDebt, we do not employ sales representatives. Consultation requests are handled ONLY by a seasoned professional. Further, we do not pay any form of commission or incentive compensation for “sign-ups.” This ensures that the advice you will receive is unbiased.

The key point here is that you should beware of “free” debt settlement advice, or free debt-relief advice in general. Make sure it really is free, meaning with no strings attached (like a big fat commission for enrolling you!), or it may just be the most expensive advice you ever receive!

If you would like to discuss your financial situation with us and get some good solid advice (minus any sales pitch), please go to the consultation request page and follow the simple instructions provided there. We promise to give you a straight answer on whether or not debt settlement is right for your situation.

DIY Debt Settlement Myth #10: My Credit Score Will Be Better If I Hire A Company To Settle My Debts

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This is the tenth and final post in a series discussing the most common myths about do-it-yourself debt settlement, as compared to hiring a third-party company. In this article, I’ll discuss the myth that settlements negotiated by professional debt relief firms carry less credit damage than self-negotiated settlements.

Before the FTC really started to crack down on the industry a couple of years ago, the entire subject of credit damage from settlements was downplayed to avoid scaring off potential clients. But if the credit objection was raised, sales reps would often claim that their company would negotiate a more favorable credit rating than the client could on their own. This myth doesn’t come up as often as it did a few years ago, but it’s still sometimes repeated online in debt-related articles, on landing pages for debt relief lead-generation sites, and during sales presentations.

Unfortunately, it’s a fact of life that settlements are damaging to your credit score. There really is no way around this, and there is no magic solution for this problem. Remember – debt settlement is best viewed as an alternative to Chapter 13 bankruptcy, so credit damage is already part of the overall financial picture anyway. The simple reality is that settlements get reported as settlements, period. The reporting language may say, “account settled for less than full balance,” or some variation on that theme, and the code attached to the entry is definitely negative compared to an account held in current standing. There is literally nothing that any company or individual negotiator can do to change this. All of the major banks have existing language in their settlement agreement letters that specifies how they will report, and these policies in turn are subject to the Fair Credit Reporting Act. Even if they wished to – which they most certainly do not! – creditors are not going to forgive a chunk of money AND do extra work to help you clean up your credit in the process. Why should they?

The above notwithstanding, I certainly have no objection to consumers making the effort at requesting a more favorable reporting on their settlements. It’s just that one should never give up a good settlement over this minor detail. When I do see exceptions, typically they pertain to debts that have been sold to a debt purchaser and are also beyond the legal Statute of Limitations. Under those conditions, it’s possible to get the purchaser to remove their separate derogatory entry upon settlement. However, the charge-off entry by the original creditor will usually still be there anyway, so the improvement will be incremental at best.

I have also seen techniques promoted that are very risky, just to give a potential customer the impression that the company has a “better” system for handling credit reporting on settled accounts. For example, some outfits claim they can have language inserted into the settlement letter that classifies the written-off balance as a disputed amount. Supposedly, this results in avoiding a 1099-C on the forgiven debt, and also gets the account reported under disputed status (and potentially even deleted outright). The problem with this approach is that it totally negates the value of the settlement agreement letter, leaving the consumer exposed to further collection activity – a far worse outcome than simply dealing with the expected credit impact of a reported settlement.

The bottom line is that there is nothing special a debt settlement company can do to reduce the damage to your credit score associated with reported settlements, so there is no credit-related advantage to be gained by paying someone else to do the negotiating. Further, it’s not all that difficult to restore your credit after completing the settlement process anyway. So there is very little reason to be concerned about this issue in the first place.

Myth busted. Settlement companies have zero influence on the manner in which settlements are reported on your credit file. Self-negotiated settlements will be reported in exactly the same fashion as professionally-negotiated settlements, and you can restore your own credit later on anyway.

DIY Debt Settlement Myth #7: A Debt Settlement Program Will Stop the Collection Bombardment

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This is the seventh in a series of posts discussing the most common myths about do-it-yourself debt settlement. It’s common knowledge that your phone is going to start ringing off the hook the moment you begin missing payments on your credit card accounts. Virtually all major creditors have automated dialing systems that are triggered off the lack of a payment being recorded by the due-date, and the bombardment can be truly unbelievable. Some creditors program their systems to call you dozens of times per day, in an attempt to get you on the phone and wear you down until you make a payment (whether or not you actually have the funds to do so).

One of the chief reasons people hire debt settlement companies is because they don’t want to deal with this bombardment of collection phone calls and they believe enrollment in a company program will put a stop to it. However, as I’ve written in other posts in this series, the banks do not recognize any need for debt settlement companies to exist in the first place. So there is no formal program that provides any sort of protection against the normal collection process utilized by creditors. Any debt settlement organization that promises you will not receive any collection calls while in their program is actually in violation of FTC rules for key disclosures required by such firms, one of which is to make it clear they can’t stop the calls.

There is only one way that a debt company can get your phone to stop ringing. They can send a “cease & desist” notice to your creditors, along with the Power-of-Attorney you granted them to handle your case. Yes, this will usually get your phone to stop ringing off the hook, since most banks will respect a firm request to cease communication via telephone. However, nowadays this is equivalent to waving a red flag in front of a charging bull. I’ve seen numerous situations where an account that could have been settled for 25-30% instead went quickly to lawsuit status (hello 80%!) after receipt of a cease communication notice. Once a creditor gets the idea you will not communicate with them, why should they go easy on you? What choice have you left them but to pursue a legal remedy against you instead?

Don’t make a tough situation worse by using obsolete and dangerous tactics that will only backfire on you. It’s a very simple matter to manage the collection barrage using call screening techniques that you can easily learn from a good coach. There is no magic to it, just one or two tricks of the trade. You establish a dedicated number for this purpose, and then proactively manage the frequency of contact you have with your various creditors. It’s not difficult at all to get the phone to quiet down so you can go on living your life and working through this process with a minimum of stress and worry. It is totally unnecessary to pay someone else to stop the phone from ringing, especially when the only tactic they can use will greatly increase your risk of litigation.

Myth busted. Under FTC rules, debt settlement companies must disclose that they cannot stop collection calls, and there is no viable method of stopping the collection process that doesn’t increase risk of litigation. Consumers can easily manage the collection process on their own by using simple call screening techniques, combined with proactive communication with their creditors.

DIY Debt Settlement Myth #5: I’ll Be Protected Against Lawsuits If I Enroll With A Debt Settlement Company

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This is the fifth in a series of posts discussing the most common myths about do-it-yourself debt settlement. As consumers shop for a debt relief solution and talk with the sales reps at various debt settlement firms, one of the first questions they will usually ask is, “What about creditor lawsuits? Won’t they just sue me to recover what I owe?”

There’s no question that taking the path of private debt negotiation carries some risk of legal action. In general, the longer you take to settle your delinquent accounts, the greater the risk being sued meanwhile. (This is a key reason why we always encourage our clients to negotiate all their settlements as quickly as possible.)

However, the responses you get will vary depending on how ethical the company is in terms of key disclosures. Sales reps for debt settlement firms are always trying to find creative ways to deal with this key objection, so they can “close the sale.” Before the FTC stepped in and amended the Telemarketing Sales Rule to restrict debt settlement companies from misrepresenting their services, we used to hear a lot of outright falsehoods, such as, “They can’t sue you while you’re in our program,” or, “Don’t worry, we won’t let that happen to you.”

[NOTE: For the purpose of this article, I am ignoring the so-called “attorney model” debt settlement firms, where supposedly an attorney is assigned to monitor your file and help with any legal situations. I will discuss attorney-based companies separately in a later post in this series.]

Nowadays, after the rule change and a series of enforcement actions, we hear less of this blatant lying than before. However, sales reps working for traditional debt settlement companies still tend to downplay the risk of legal action. Further, many of the companies that generate “leads” for the debt settlement industry use mailers or online ads that give the impression that consumers are “applying” for enrollment in a formal program, either a government sponsored program or one the banks fully recognize.

Without actually saying so in plain English, these companies are trying to create the impression that a consumer who enrolls with their program will somehow be protected from aggressive collection practices. Yet time and time again, we hear consumer complaints along these lines: “I signed up with this company to settle my debts for me. One of my creditors sued and they did nothing about it. Now I have a judgment against me and had to file bankruptcy anyway, but the debt company refused to refund my money.”

There are two reasons why consumers frequently get sued by their creditors even when enrolled in a traditional debt settlement program. First, as I discussed in the previous post in this series, the banks do not actually recognize the need for third-party debt settlement. We have testimony to that effect by bank representatives during the FTC hearings on the industry. So there is no formal enrollment taking place, and therefore no procedure that will cause the bank to suspend its normal collection activity, which may include litigation.

Second, and perhaps more importantly, involvement with a debt settlement company can actually INCREASE the risk for legal action. I refer to this as the “footprint” problem of debt settlement. A negotiator cannot talk to your creditors on your behalf unless you first grant them a Power-of-Attorney. Yet once that Power-of-Attorney is received by the creditor, the account is flagged as a third-party settlement account, and the normal collection process is short-circuited. Rather than helping, the negotiator’s involvement actually hurts the consumer by accelerating the placement of their accounts to legal status, when otherwise it might have not happened (or taken much longer to develop).

Myth busted. As demonstrated by numerous complaints filed by consumers, as well as many enforcement actions by the FTC and Attorneys General for various states, enrollment in a debt settlement program does NOTHING to decrease the risk of litigation faced by consumers who are delinquent on their credit card debts. In fact, due to the “footprint” problem of debt settlement, the involvement of a debt settlement firm may actually INCREASE the risk of lawsuits and also accelerate the timeframe in which they occur.

DIY Debt Settlement Myth #4: Settlement Companies Get Better Deals Because They Have Relationships With Creditors

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This is the fourth in a series of posts discussing the most common myths about do-it-yourself debt settlement. The claim that debt settlement companies have relationships with the major creditors is a major part of the sales presentation for traditional settlement programs. I call this the “volume” objection, and of course, it’s total nonsense.

The pitch goes something like this: “We are a big company and every day we settle large blocks of debt. The creditors know us and work with us and we do bulk settlements with them, so we can get you a better result than you’ll be able to negotiate on your own.” The picture created in the client’s mind is that they are enrolling in a formal program – a program that is RECOGNIZED and PERMITTED by their creditors, similar to a non-profit credit counseling program (aka “debt management plans”).

Unfortunately, this sales claim is totally bogus! The major credit card banks lobbied heavily to get the entire debt settlement industry shut down, and the draconian ruling by the FTC in October 2010 has gone a long way to accomplishing that aim. During the hearings that led to the FTC ruling, we heard directly from the banking industry that they did not view the debt settlement industry favorably, and that they do not recognize the need for such firms. At best, the relationship is an adversarial one, and the banks still view any intervention by a for-profit service as being against their own interests. In the context of the major bank creditors, the notion of “bulk settlements” is just a fairy tale made up by the settlement company’s marketing department.

What about collection agencies or collection attorney firms? Here, there is some truth to the statement that a debt settlement company may have relationships with other third-party entities like agencies or attorneys. However, that does not necessarily result in a lower overall percentage on negotiated settlements. And even if there was a better discount available through such connections, any savings would be more than gobbled up by the fees involved. For example, let’s say the best you can do with an agency yourself is 40% of a $5,000 balance, or $2,000 net payout. The settlement company negotiates it down to 30% instead, or $1,500 payment to the creditor. The fee, however, is 25% of the $3,500 savings, or $875, so the total payout is $2,375. Better deal, worse result! You would still have been better off handling the matter yourself.

Myth busted. Even the largest debt settlement firms have zero influence over the settlement parameters of the major credit card banks, and “bulk settlements” are just so much marketing hype. Even if there were deeper discounts available through professional negotiation, any savings gain would be more than offset by fees. Consumers save more overall by excluding the fees and negotiating on their own.

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

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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.