Apparently the way this works is the debt settlement company has a relationship with a related hedge fund or pool of money that they can access to payoff an enrolled clients debt. The issue is if the debt settlement company reaches an agreement with the debtor’s creditor to settle the debt for X but the debt settlement company makes the debtor pay X+a premium.
I would imagine that the hedge fund would not payoff the client’s debt unless the client had already saved that amount in their trust account.
One company that seems to have a hedge fund relationship is the debt settlement company DebtXS. DebtXS is affiliated with Dextral Capital and their managing partner, Jason Spencer, is quoted as saying “We have an arbitrage distressed debt strategy that utilizes our competitive advantage to generate obscene returns.” – Source.
Jason also says, “I manage one of the best performing hedge funds in the industry.” According to Jason’s LinkedIn profile he is simultaneously also a senior financial consultant at Capital One Bank.
Another company that has a similar relationship is Phillips Financial and Expert Settlement Professional. A company called National Asset Exchange is part of the debt settlement process for consumers enrolled with those companies.
At first, the relationship between debt settlement hedge fund and consumer debtor was not apparent to me. It’s hidden behind foggy language. But a sales person from Phillips Financial said to me “National Asset Exchange is the hedge fund company that will pay off your accounts in full once we reach an agreement which is something that we do that most debt settlement companies wont.”
It wasn’t till today that I read the “obscene profit” quote from Dextral Capital that I think I’ve put it together. By the way, Ken Talbert, the head of the debt settlement company DebtXS is also listed as a Partner of Dextral Capital Management and CEO at EFA Processing. – Source
I then went back and read the National Asset Exchange agreement that the debt settlement client agrees to when working with affiliated debt settlement groups.
Here is what the agreement says:
NAE works as the intermediary between the institutional buyers and the creditors. NAE’s job is to put the best case together for the institutional buyers in the debt purchase process. I hereby understand and agree to Opt-In to the participation of the right to market to a third party funding program as described above. – Source
So it is not the role of the National Asset Exchange to represent the consumer debt settlement client, but put the best case together for the institutional buyer. Hum, interesting.
Now let’s add to that the statement made by National Asset Exchange on their web site. “The technology utilized by National Asset Exchange increases the aggregate value of debt pools to be purchased.” – Source
Another debt settlement company is also sending out material that they also work with a hedge fund. They say:
If a creditor offers an extremely favorable settlement offer prior to the client having enough funds available we have willing hedge fund investors that will purchase the debts and guarantee to settle those account from 30-40% for our clients when they do have the funds.
It is estimated that accounts that would be purchased by these hedge fund buyers are purchased in the 1 to 10 cents on the dollar range and then resold to the client at 30 to 40 cents on the dollar.
Herein Lies the Problem
The issue as I see it is if the debt settlement company related hedge fund is coming to an agreement to pay the debt off at a lower price than they are allowing the consumer client to resolve their debt they break the fiduciary relationship with the consumer. It seems the debt settlement company can’t make statements like “we work for you the consumer” when in fact there motivation becomes to maximize profits, maybe even “obscene profits”, on paying off debt low and making the consumer pay it off at a far higher rate.
If this is the way these affiliated debt settlement hedge funds operate then the consumer is placed at a disadvantage and in fact charged a hidden tax to eliminate their debt. The consumer would be paying a high debt settlement company fee and a premium between the payoff amount paid by the hedge fund and the amount charged by the hedge fund to the consumer.
The hedge fund component of a debt settlement agreement would create, what I believe to be, a hidden and complicated relationship between the company the consumer believes is representing their best interests, the debt settlement company, and a semi-secret profit making enterprise, the hedge fund. I doubt the average consumer signing a debt settlement agreement would be aware they are actually entering into an agreement that makes it potentially more expensive to them to settle their debt in the end.
On top of all that, if the hedge fund has paid off the consumer’s debt, the original debt the consumer enrolled is paid off. The consumer no longer has a contract with the bank but it appears a new loan or credit obligation may be created between the consumer and the hedge fund with the debt settlement company acting as a silent partner in the deal.
And there is an interesting backstory on National Asset Exchange which may involve a possible felon. Read this article.
I’m sure there will be more to come on this.Do Debt Settlement Company Relationships With Hedge Funds Create a Fiduciary Problem for the Consumer? by Steve Rhode