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65 Percent of People That Enroll in Debt Settlement Programs Bail Before Creditors Contacted

An interesting article out of illinois, Our Opinion: Put curbs on debt settlement companies, contains a very interesting quote from the Attorney General of Illinois, Lisa Madigan.

“What we have learned is that 65 percent of people who initially enroll with debt settlement companies drop out before any communication (with creditors) has been made. Before any of their debt has been settled at all,” says Madigan, whose office has seven lawsuits pending against debt settlement companies. “Those people don’t get a refund. They don’t give you your up-front fees back, they don’t give you your ongoing fees back. You still owe them whatever you signed up for based on that contract.”

She also says,

“For the first few months, all they’re doing is taking their fee. They’re not actually doing any work to talk to your creditors and negotiate a settlement,” says Attorney General Lisa Madigan. “In the meantime, they tell you to stop paying your creditors, to stop paying your credit card bills. By doing that, you have late fees tagged on, your interest rate often goes up because of that, and so you end up with more debt and they still haven’t contacted your creditors.”

These are statements, facts and opinions that I fully believe based on the communication I’ve had with consumers and those inside the industry.

Now some debt settlement companies may come and read this article and say those numbers and statements are not true, and I agree. Those numbers may not be true for their individual company but that does not mean they are not true for the industry at large. An industry that contains a lot of bad actors and companies that are intentionally screwing consumers.

So good companies, if you want the debt settlement industry to get some respect and survive you need to get your trade associations to embrace openness and transparency for member companies and then grow some balls and haul out the trash.

65 Percent of People That Enroll in Debt Settlement Programs Bail Before Creditors Contacted
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • David

    Phew, that was a lot to read. ;)

    If it were up to me my friend I would do all you ask and more. Regrettably this is not my business and I can only make suggestions and run them up the flag pole – which I will by the way. You gave me some pretty powerful information and I do appreciate that knowledge.

    If it were my business I would have done it the way the regulators want it to be done in the first place. Why wouldn’t I? I would kill my competition! Unfortunately I don’t make the decisions. I personally welcome the regulation and wished it happened yesterday. Would clean a lot of riff raff out of this industry and make my job a hell of a lot easier!

    Thank you for response as I really learned a lot from you! Take care!!!

  • David

    You have some good points and I would like to address them.

    -Charge a fair fee based on savings you deliver the customer after the settlement is complete and after the creditor has been paid.

    Problem here is a good majority of these customers will probably ‘stiff you on the bill’ or give you issues on paying a fee ‘after’ the service. Remember who these customers are. They are debtors and the majorities are not very responsible with their finances and would probably have no problems missing a fee payment after the service is complete. Perhaps a 50/50 compromise could be worked out in this situation. Such as a rebate on fees if it’s not settled out for what they were quoted or not settled out at all. Not sure that is the answer or your suggestion is the answer, but I do agree something could change there to make it beneficial for BOTH parties.

    -Encourage settlements within the first 6 months prior to charge off (with the original creditor) rather than 12 months.

    Problem you have here is that most creditors won’t settle with a customer till it is charged off – normally that will take 6 months to happen. The account does have to go delinquent AT LEAST 6 months to even get the account settled down to 40%, which is a standard quote in the industry. I worked in collections for over 10 years prior and know that system fairly well. There are stages in collections with banks and collection agencies and what they will settle for in standard negotiations. In EXTREME hardships, what this plan is really meant for, you may get more lucrative settlements but these accounts still need to be around 6 months delinquent in order to settle near, or better than the 40% range. This is more of a bank policy issue. We have to work settlements with banks and collection agencies based on THEIR policies and procedures. Not ones we can create on our end. Problem is the policies and procedures with the banks are NEVER in the customer best interests.
    Even if the banks would settle with them this early remember who are customers are. They are debtors in a financial hardship. The majority we service won’t be able to settle that quick based on what it is they can afford monthly.

    -Tell consumers that they risk being sued and that longer program lengths, such as 36 months, certainly increase those risks.

    This is ALWAYS disclosed. This also goes back to remembering who our customers are. They normally can’t afford a payment that is structured less than 36 months. That is normally what they are currently paying with their minimums, which will obviously keep them in debt for 20-30 with the high interest credit cards and it’s something they can’t afford. Also, if they can comfortably afford their minimums or even above, this is not the plan for them.

    This is a hardship for people who cannot or will not be able to afford their minimum payments and do not wish to file for Bankruptcy. If we give them a payment that is what they are paying now or even a higher payment, how are we alleviating a hardship? That’s in essence trying to work the system and we won’t even accept them into the plan anyway. It’s a catch 22, but it’s the reality of their situation.

    -It would also prove very successful were you to include as part of your education the fact that the consumer can get as good and sometimes better results by talking directly with their creditor themselves.

    Of course customers can do this on their own. The vast majorities have the common sense enough to know this as well. Just like you can represent yourself as a client in court, operate on yourself when sick, or fix your car when it’s broken. Most customers we service don’t have the time, education or the ability to negotiate with creditors or anyone for that matter. They are paying for a service. As long as they understand what that service is and that it’s being done properly, it is worth it to that customer considering the service. You pay people to do services throughout your life that I’m sure you could do on your own or at least educate yourself on how to. Yet we still pay for these services because we chose to do so.

    On a side note, will the customer get representation if they are sued when they attempt this on their own? No, but we do provide it to them if this does happen. Will the customer have protection and be able to sue a creditor on their own for violations of The F.D.C.P.A.? No, but they will if they hire us.

    I see your points and suggestions but you also need to look at a bigger picture here. Some people do take advantage of customers in bad situations but not all of us do. This is a service that is being paid for. Nothing is being hidden. In fact we go to great lengths to make sure of this. Bottom line is simple. If the customer doesn’t like the plan don’t start it.

    I think more emphasis needs to be placed on preventing people from getting themselves into this position and what the Banking policies and true intentions with customers are. If people really were educated on how the Banks get them into this situation in the first place, or how to effectively manage their finances, I don’t think we would be even having this discussion. I mean, do we even teach our children in school how a credit card works?

    • http://debtbytes.consumerrecoverynetwork.com/94/ Michael@CRN

      David, you are a talented writer and well spoken. I like your style, but not your business model.

      Fair Fee:
      The current regulatory proposals alleviate the concern for being stiffed on earned fees as they allow for 3rd party escrow ala Noteworld whereby fees can be transferred from the consumer account to your company after the performance fee is earned. This would suggest that settlement service providers would only negotiate and present offers when there are sufficient funds in the consumer account that would cover both the creditor terms and the fee. If escrow services are available to the consumer ala attorney sponsored escrow-same difference. Getting stiffed for an earned fee is highly unlikely.

      Settlement prior to charge off:
      I am not sure where or for whom you work David, but settlements are offered prior to charge off all day long. It is SOP with most major credit card issuers. The settlement industry predominately waits until after charge off to approach their job of negotiating for the following reasons:

      • Creditors may refuse to work with them, so charge off is preferred in order to work with assignees or purchasers

      • The settlement company has been charging 6 months in fees which means there may not be enough left in the consumer account to take advantage of pre charge off deals.

      The fact is, some major creditors are trying to get in front of non performing accounts by agreeing to 40%-ish offers at 90 days right now. Throw in the 90 day payment terms many offer along with the reduction and you have a real win/win for both the consumer and the creditor who has reduced their recovery costs.

      File Suitability Issues:
      I agree with you on the catch 22 comment, but let’s dig a little deeper. If 36 month program lengths are required mathematically due to the individuals finances, yet the long program length creates the environment where the consumers risk of being sued increase dramatically, which may result in judgment followed by levy/lien/garnishment, leading to programs being dropped and bankruptcy being filed anyway, wouldn’t the consumer have been better off filing BK in the first place without all the collection grief etc…? The likely answer is yes. But the model your group uses would not have collected fees for 18 months prior to the ultimate result being BK.

      DIY settlement vs the Pro:
      I agree that there are certain people who have no business on the phone attempting negotiations, especially with 2nd tier collection outfits, but shouldn’t everyone be provided with all the detail on how simple settlement truly is? Shouldn’t every consumer be afforded that detail, and only after learning these details, make a decision to engage 3rd party interference? What if the consumer got to do 2 settlements with the original creditors after opening their mail (thereby saving all the fees) and then have a 3rd party handle some of the tougher assignees/buyers who push the limits of collection best practices?

      Side Note:
      As to your side note, are you saying the company you work with provides all legal representation at no additional cost no matter the state, city or county the consumer is sued in? That their settlement program fee includes all of this potential cost? How do you compensate your sales people? How are there funds from the 18 months of fees left to support all legal representation costs? What if the attorney had to drive/fly across state 5 hours and stay in a hotel in order to make an appearance?

      As for FDCPA violations and competent legal representation- A good portion of NACA attorneys specialize in this area and take most of the cases on a contingency. The consumer pays nothing. I fail to see any additional value here. If you are unfamiliar with NACA you can learn more at http://www.naca.net

      David,
      Why is it so difficult for the industry at large to embrace the coming changes that are being proposed at both the state and federal level? They are coming. If a company is capitalized well enough to meet all overhead and expenses for 6 months and maintains the average enrollment that is typical for them over this 6 months, they will be profitable from then on and smiled upon by consumers, regulators and advocates alike. What is the big deal? The only thing that gives pause to this concept that I can identify is the high cost per acquisition due to marketing and media buys or the huge commissions paid out to those that risk their own capital for media and sales (Affiliate Partners).

      What Steve Rhode has done on this site as if through a megaphone is to encourage companies to openly publish transparent qualifiers. He will even offer free exposure! His site is well traveled, full of content and is search criteria friendly for the first companies who chooses to embrace his transparency bullet points. Why not exceed them and be the first company of any size to meet them and beat them by offering a fair success based fee too?
      Go for it!
      .-= Michael@CRN´s last undefined ..If you register your site for free at =-.

  • David

    We charge our fees over the first 18 months of the plan and we will not stretch the program past a total of 36 months. Mathematically, the customer MUST be able to settle out an account within their first 12 months of the plan or we won’t accept them in the program. We actually do an underwriting process with our Attorney model. An Attorney, licensed to practice law in the customer’s state, must review the application and approve it before being accepted. The Attorneys we work with have provided us an ‘encyclopedia’ in regards to underwriting criteria!

    Again, operating this way has lost us a lot of business over the years because there are so many companies out there they will sign anyone up with a heartbeat! This plan is certainly not for everyone and caution should always be exercised by the customer and by the company considering taking them on as a client.

    The customers success should always be the first priority!!!!

    • http://GetOutOfDebt.org Steve Rhode

      David,

      I agree, the customer should always come first.

      Your company had better switch it’s model quickly. The front loaded fee and attorney models are targets for regulators. In fact I just wrote about the attorney model today. See Lawyer Based Debt Settlement Networks Should Prepare for Lawyers to Be Sanctioned or Disbarred.

      The regulations that are coming will prevent debt settlement companies from charging before settlement. My concern for you is if your company has been living off front loaded fees, will they be able to survive the switch to back loaded fees without layoffs or going out of business? Most companies with this front loaded model have essentially been operating as Ponzi schemes in that they need current sales to pay for current expenses instead of having escrowed the funds and taking them when services are provided.

      Just something for you to think about and contemplate. Your company can still be a good company but have a bad business model.

      Steve

    • http://www.consumerrecoverynetwork.com/creditors.html Michael@CRN

      Hi David,

      What you outlined is pretty typical of industry practice and does not really set you apart.

      If I may make a few suggestions in your effort toward: “The customers success should always be the first priority!!!!”

      Charge a fair fee based on savings you deliver the customer after the settlement is complete and after the creditor has been paid.

      Encourage settlements within the first 6 months prior to charge off (with the original creditor) rather than 12 months.

      Tell consumers that they risk being sued and that longer program lengths, such as 36 months, certainly increase those risks.

      It would also prove very successful were you to include as part of your education the fact that the consumer can get as good and sometimes better results by talking directly with their creditor themselves.

      Just some ideas.

      Michael

  • David

    I 100% agree that there are companies out there for the quick profits. Would you agree that there are companies out there that are on the opposite side of that spectrum? I also think a good percentage of these horrible companies popping up are individuals that were leftover from the mortgage collapse. Those were some greedy, unethical individuals now running wild in this industry. I truly would welcome some regulation in this industry to clean out this element.

    I would rather not state the name of my company as I am not the owner and not sure if it is appropriate.

    On a side note, I absolutely love your site and the information you’re providing to people is top notch!! Keep fighting the good fight!

    Thanks,
    David

    • http://GetOutOfDebt.org Steve Rhode

      David,

      I completely agree there are some good companies but out of those companies, those that are charging up-front fees need to change, quickly.

      The companies that will survive will be those that limit up-front fees and charge on actual settlements.

      This shakeup in debt settlement is not new. It’s the exact same thing that happened in the credit counseling world. After that shakeup the bad guys went away and the industry still lives. The same will happen with debt settlement as well.

      I understand not wanting to identify the company, but can you at least share if you charge front loaded fees or fees on settlement success?

      Thanks for your support, feedback and comments.

      Steve

  • David

    I think the majority of people drop out of Debt Settlement services this quick is because of fear. Fear of the creditors who intimidate them in the most brutal ways and fear of the unknow.

    I work for a small debt settlement company and we have our own processing and negotiation team and they work very hard to make the customers successful. As a matter of fact, they even get a bonus on maintaining customer retention in the plan. Motivating the customer service team and negotiators this way makes them work extremely hard for the customer. It shows in or retention rate which is roughly 75%.

    Yes, this is a tough program and we explain this up front and probably lose a lot of business this way operating ethically. This program should only be attempted in the right circumstances. The customers that do sign up are successful for two reasons in my opinion. They are extremely motivated to eliminate this debt aggressively and they can tolerate the risks of the programs. It also helps that we completely educate them before a first payment is even made. Educate them verbally AND in writing in our information packets that include everything from how the plan works A to Z and the current state and collection laws. The plan does work if it is done right by the company AND the customer.

    Let’s face it, the banks certainly are NOT on the customer’s side but hopefully there are some good companies out there like ours that are!!!

    Cheers!

    • http://GetOutOfDebt.org Steve Rhode

      David,

      You have to know that there are debt settlement companies out there right now that intentionally provide bad customer service and want the client to drop off within the first year so they don’t have to settle debts.

      Which debt settlement company do you work for that has a 75% retention rate?

      Steve

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