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Debt Settlement Companies Put Consumers in a Deep Debt Hole. “They Are a Ponzi Scheme.”

Peter Goodman from the New York Times had a piece published recently, excerpts below. It slayed the debt settlement industry as opportunists and harmful for consumers at large.

Those that feel they offer a legitimate and fair debt settlement service are not going to like the long article much. But then again, the good guys are not the problem with the debt settlement industry, the bad guys are.

Here are my favorite sections of the New York Times story.

For the companies that promise relief to Americans confronting swelling credit card balances, these are days of lucrative opportunity.

So lucrative, that an industry trade association, the United States Organizations for Bankruptcy Alternatives, recently convened here, in the oceanfront confines of the Four Seasons Resort, to forge deals and plot strategy.

At a well-lubricated evening reception, a steel drum band played Bob Marley songs as hostesses in skimpy dresses draped leis around the necks of arriving entrepreneurs, some with deep tans.

The debt settlement industry can afford some extravagance. The long recession has delivered an abundance of customers — debt-saturated Americans, suffering lost jobs and income, sliding toward bankruptcy. The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced.

[Did I not mention the Four Seasons was a bad idea for the convention? Why yes I did. See Debt Settlement Trade Association USOBA Holds Conference at Resort.]

State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises.

Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.

The industry counters that a few rogue operators have unfairly tarnished the reputations of well-intentioned debt settlement companies that provide a crucial service: liberating Americans from impossible credit card burdens.

[Few rogue operators? LOL. They might as well claim aliens abducted the bodies of debt settlement company managers and made them do things they didn't want to do. Few rogue operators, my ass. I guess in debt settlement land 'few' means most.]

The industry casts itself as a victim of a smear campaign orchestrated by the giant banks that dominate the credit card trade and aim to hang on to the spoils: interest rates of 20 percent or more and exorbitant late fees.

“We’re the little guys in this,” said John Ansbach, the chief lobbyist for the United States Organizations for Bankruptcy Alternatives, better known as Usoba (pronounced you-SO-buh). “We exist to advocate for consumers. Two and a half billion dollars of unsecured debt has been settled by this industry, so how can you take the position that it has no value?”

[Ansbach is playing the victim card here? Seriously? How can they industry be the victim when they fail to deliver, refuse to refund consumer money paid for services not received, and have no control over stopping collection or lawsuits. They also claim their services are so needed to represent consumers but now claim creditors don't like them. So why would consumers need them?]

In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. A Colorado investigation came to a similar conclusion.

The industry’s own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements.

[Again, what value do most debt settlement companies bring to the table when they can't prove value? In an article I published here one debt settlement company told the FTC that 25% of customers bailed without settling a single debt. In my research on debt relief options, the apparent success rate of debt settlement appears to be less than 10% of all consumers enrolled.]

“The industry is designed almost as a Ponzi scheme,” said Scott Johnson, chief executive of US Debt Resolve, a debt settlement company based in Dallas, which he portrays as a rare island of integrity in a sea of shady competitors. “Consumers come into these programs and pay thousands of dollars and then nothing happens. What they constantly have to have is more consumers coming into the program to come up with the money for more marketing.”

[Why yes it is. Yea Scott for speaking out on the record. The debt settlement guys are going to hate you for that, they prefer to live behind falsehoods, misdirections and obfuscation.]

“I trusted them,” she said. “They sounded like they were going to help me out. It’s a rip-off.”

Financial Freedom’s chief executive, Corey Butcher, rejected that characterization.

“We talked to her multiple times and verified the full details,” he said, adding that his company puts every client through a verification process to validate that they understand the risks — from lawsuits to garnished wages.

Intense and brooding, Mr. Butcher speaks of a personal mission to extricate consumers from credit card debt. But roughly half his customers fail to complete the program, he complained, with most of the cancellations coming within the first six months. He pinned the low completion rate on the same lack of discipline that has fostered many American ailments, from obesity to the foreclosure crisis.

[So if Butcher is concerned about extricating people from debt then why would FFA not refund all the money because she agreed to pay you for a service that was not delivered? And if FFA knows their completion rate is so low then why do the collect fees upfront knowing most won't actually get the service they are signing up for?]

“The vast majority of companies provided fraudulent and deceptive information,” said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.

At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr. Ansbach, the USOBA lobbyist, to explain why his organization refused to disclose its membership.

“The leadership in our trade group candidly was concerned that publishing a list of members ended up being a subpoena list,” Mr. Ansbach said.

“Probably a genuine concern,” Senator McCaskill replied.

“The current debt settlement business model is going to die,” declared Jeffrey S. Tenenbaum, a lawyer in the Washington firm Venable, addressing a packed ballroom. “The only question is who the executioner is going to be.”

[I'd bet money on that.]

Cody Krebs, a senior account executive from Southern California, manned a booth for LowerMyBills.com, whose Internet ads link customers to debt settlement companies. Like many who have entered the industry, he previously sold subprime mortgages. When that business collapsed, he found refuge selling new products to the same set of customers — people with poor credit.

“It’s been tremendous,” he said. “Business has tripled in the last year and a half.”

The threat of regulations makes securing new customers imperative now, before new rules can take effect, said Matthew G. Hearn, whose firm, Mstars of Minneapolis, trains debt settlement sales staffs. “Do what you have to do to get the deals on the board,” he said, pacing excitedly in front of a podium.

[I think this industry is incapable of handling itself properly when the glory is in selling deals and not providing value for money to consumers.]

And if some debt settlement companies have gained an unsavory reputation, he added, make that a marketing opportunity.

“We aren’t like them,” Mr. Hearn said. “You need to constantly pitch that. ‘We aren’t bad actors. It’s the ones out there that are.’ ”

[See what I mean?]

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You can read the full New York Times article here.

Debt Settlement Companies Put Consumers in a Deep Debt Hole. They Are a Ponzi Scheme.
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Debt Settlement Companies Put Consumers in a Deep Debt Hole. "They Are a Ponzi Scheme." by

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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.
  • Phil

    @fatman – That is the lamest analogy I have ever heard. Gyms don’t claim to do the work of getting you in shape…just to provide a forum where you can work out yourself. Whereas debt settlement companies claim THEY will solve your problems for you. Keep working on it and eventually, perhaps, you will come up with a better analogy that may actually help you disguise this scam-industry.

  • Fat Man…

    I signed up for a membership at a gym that promised me if I followed their program I would get in shape.

    I dropped out three months later (lost all the money I invested in getting in shape) and was fatter going at the end of the three months than I was when I originally signed up…

    So from a pay per success rate standpoint (I would bet, based on the US obesity problems, that gym’s have the same ‘success’ rate as debt settlement) your logic would follow that gyms should not be paid until the fat person gets healthy…

    What other industry is subject to this type of pricing control from the government?

  • Angelo

    Steve, when addressing the industry and it’s problems you really should distinguish between front end loaded companies and success based companies and so should anyone reporting on the industry. You have a platform where you can clarify this and shed light on what works and doesn’t work but you don’t. Debt settlement works and does not harm consumers, FRONT END loaded debt settlement COMPANIES harm consumers ! It’s great that these reporters are exposing the industry but have them talk to me about success based results and they will see the difference and not bash the industry itself, but the up-front model.

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