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The FTC Does Not Want Debt Settlement to Survive

A tipster (send in your tips here) sent in the following comment I wanted to address.

But now that debt settlement is dwindling, it is clear the FTC wants this industry not to survive or rebound. DS needs internet marketing. FTC is shutting down lead gens, who are not companies, and pretty much everyone right now.

The FTC Does Not Want Debt Settlement to Survivephoto © 2008 Hazrulnizam Rosle | more info (via: Wylio)It might certainly feel like that but from a slightly outside the industry position I’m not sure I see the same thing. This isn’t my first time watching this rodeo.

While the FTC may be taking action to cleanup what they perceive as abuses that have or will harm consumers, I certainly don’t think they spend time thinking about how to shut down debt settlement as a whole.

In the debt relief world there have been some memorable actions the FTC has taken against credit repair, upfront loan fees, credit counseling, and now debt settlement. It’s just debt settlement’s turn in the barrel but it’s been brewing for a few years with the high-flying abuses.

All of those previously targeted industries survive, albeit differently. But from the people I know and talk to at the FTC, the FTC has no agenda to shut down debt settlement. In fact in this video you can even hear Allison Brown from the FTC say so. Here is what Evan Zullow from the FTC had to share on this topic.

The Commission adopted the amended TSR with one goal in mind: Protecting consumers of debt relief services from deception and harm. Debt relief providers who comply with the rule and provide services in a fair and honest manner have nothing to fear from the FTC. – Evan Zullow, FTC

When I lived through the credit counseling regulatory actions, it felt personal. I talked about that time in this article.

And while the actions of the FTC and other regulators impacted my debt relief group at that time. In the long run the changes put in place did eliminate most of the abusers in the industry and did serve to better protect consumers.

The Greatest Dangers to Debt Settlement Today

Without a doubt the FTC actions and proposed state regulatory action will significantly impact the debt settlement industry. Fee caps and the loss of advanced fees change the old way of doing business. And that’s just what they change, the old way of doing business. But the industry will remain in a different form.

The key now is not to spend energy fighting against what has changed but to reinvent the individual debt settlement company so they can live within the rules and survive. The best companies poised to survive will be the smaller shops with less legacy overhead.

Those companies that did not become fat, dumb, and happy during the go-go days of debt settlement will be better able to survive. Companies right now that are not restructuring to be able to live on 15% success fees may not make it. If you hesitate and live primarily off your residual servicing income from before the TSR implementation, you will be screwed.

Let’s look at the non-profit credit counseling world. The actual performance numbers of the average agency are not wonderful. If you took someone with say $30,000 of debt and factored in the $50 initial fee, monthly fees and fairshare over 3 years before the person left the program. You are probably looking at around $2,400 in income on that consumer.

So what would a debt settlement company need to do to accomplish the same level of income at a 15% success fee cap? Well they’d need to settle debt so the consumer saved $16,000. Frankly, that’s not impossible to do.

The greatest danger to the debt settlement industry today is not the actions of the past but the inability to embrace change and morph itself into a complaint model. The solutions are obvious:

  • Don’t want to wait three years to get paid? Don’t take on clients that can’t settle sooner.
  • Not making enough per client? Don’t enroll clients with low debt or many low balance debts. Start looking at a hybrid solution where you settle the big debts now then and send the consumer to a credit counselor to manage the smaller ones. The settlements will give the consumer breathing room to succeed.
  • Harder to get new clients with complaint advertising? You’re just going to have to deal with that. Getting clients through deception is not the fall back position.
  • Can’t afford to run your business on reduced income? Cut, cut, cut. It’s basic budgeting. You need to cut expenses to fit within projected income. Need to restructure current debt, think bankruptcy.
  • Don’t want to layoff employees? Too bad. You have a responsibility to your clients; the consumers that trusted you. You’ll just have to make the cuts necessary to deliver on those promises. It totally sucks to layoff 20 employees but it’s even worse to screw over 2,000 consumers by closing without providing the services you sold them.
  • Can’t afford to pay marketers and affiliates? Those guys got paid way to much in the past. Continuing that practice is not good business sense. Instead of paying marketers, look to developing better ties in your local community and reaching out to groups like the credit counseling folks do. Build regional awareness and local bonds. Most importantly deliver exceptional customer service so customers rave about you and bring more clients by word of mouth. Hey, credit counseling has acquisition costs as well.
  • What to be able to survive into the future? Adapt, adjust, embrace change, do the hard things, and make tough choices.

It Sucks

I get it. I really, really do. At one point in my life I had to make the decision to essentially layoff all my staff and regroup. I still had cash in the bank and I faced a crossroads. I could have either run the cash down to zero, fighting the good fight, or I could take the cash, pay out staff severance and make sure I had enough money on hand to cover an orderly solution for the remaining clients. And that’s what I did.

The decision to close was tough, it hurt and I wound up being one of those guys that laid people off and cried with them. That does not mean it was not the right thing to do. It means it was a tough thing to do.

Opportunity

For my debt settlement friends, the future looks obvious and full of opportunity. Many debt settlement companies will not survive this transition because they will not realign themselves and if you can restructure your business where you are focusing on a few states you are compliant in, you target the right clients and you settle debt quickly, you can still make a good income. In fact a year from now new people will be entering the field and they will do well. It’s the transition from the old to the new that is toughest.

The Real Future Risk

The real future risk in the next few years is not regulation, it’s the potential customer pool. It’s shrinking. There will be continued demand for debt relief services but fewer consumers can afford any of the solutions and bankruptcy will be more appropriate. Those that have been maxed out have dealt with it so the short term potential clients are the newly tapped out. With banks restricting credit there are just fewer people loaded up with credit that are hitting the wall.

I’ve written about the discouraging search trends in the debt relief space, here and here. In reality in order for some debt relief providers to survive the supply of affiliates and debt relief companies is going to need to shrink to meet demand.

Want You to Shut Down?

I’m not aware of any regulator that wants the debt settlement industry to “close down” but I am aware of many that want it to be cleaned-up.

The bottom line is if you are complaint with regulations, you operate within your income, you avoid misleading promotion, you enroll the right clients, and you provide exceptional customer service, the future is yours.

The FTC Does Not Want Debt Settlement to Survive
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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.
  • Steve Rhode

    Most agencies are not going to publicly admit they are working with settlement companies. You’ll just have to start making calls and find one that understands.

  • loppy hill

    “Not making enough per client? Don’t enroll clients with low debt or many low balance debts. Start looking at a hybrid solution where you settle the big debts now then and send the consumer to a credit counselor to manage the smaller ones. The settlements will give the consumer breathing room to succeed.”

    –> Steve, this is a great idea. Since you were in the CC industry, how do we get connected to something like this?

  • loppy hill

    “Not making enough per client? Don’t enroll clients with low debt or many low balance debts. Start looking at a hybrid solution where you settle the big debts now then and send the consumer to a credit counselor to manage the smaller ones. The settlements will give the consumer breathing room to succeed.”

    –> Steve, this is a great idea. Since you were in the CC industry, how do we get connected to something like this?

    • http://GetOutOfDebt.org Steve Rhode

      Most agencies are not going to publicly admit they are working with settlement companies. You’ll just have to start making calls and find one that understands.

  • Dave

    Ok Bobby, fair enough. I was just commenting on the story that the FTC does not want Debt Settlement to survive.

    It is my opinion that Full Service Debt Settlement and Attorney based solutions are going away, they may survive for a few more years but they will and are slowly dying, they simply charge too much and are not really a viable option for anyone that has access to the Internet and the wealth of information that is out there on the industry.

    My main point on the changing of the industry with the Internet is that there is so much information out there – Getoutofdebt.org and of course my site http://www.mydebtportal.com – that it does not make sense for anyone to hire a full service debt settlement company, with all the bad apples in the industry, the FTC regulations, the attorney general lawsuits, the class action lawsuits and the number of complaints etc.

    I did not mean to “Aggressively” promote my product, I’m just putting it out there as another resource for people struggling with debt so that they know there are other options besides filing bankruptcy or hiring a debt settlement company or attorney.

    And I agree that they have been doing it before the platform existed and that phones existed too, however we walk people through all the steps and make it easy for them to use their computer in the comfort and privacy of their home.

  • Bobby Zangrilli

    Dave, you’re missing my point — your opinions on the industry do not bother me and in fact I agree with them. What bothers me is you’re on here aggressively promoting your product and making it seem like the concept of self-directed settlement is revolutionary when it’s something people have been doing long before your platform existed.

  • Robert S

    meh, DYI and automated technologies work well and support a huge niche. In the tax world, Turbo Tax is huge. However, H&R Block still remains a profitable Wall Street company. Not everyone is a DIY. Frankly, I am a DYI person and would probably take the software approach. But to say “days of companies like yours are over”….

    and Bobby as said… You’ve got 800 visitors and huge visions… Nothing wrong with that, merely pointing out your perspective.

  • Dave

    http://getoutofdebt.org/17270/… there you are Bobby. In my post I did not say that my company was going to be the end of the industry, I was merely saying that the days of companies like yours are over.

  • Bobby Zangrilli

    Dave, you might want to get more than 800 visitors a month to your website before you start proclaiming the end of eras. Also, the technology to “work with the creditors themselves” existed before the internet…it’s called a telephone.

  • Dave

    I have said for the past three years the INTERNET changes everything! just as every other industry has had to change their model because of the Internet so does Debt Settlement.

    Some in the industry think that DS is differant that it can’t be automated etc. Thats funny! Every industry can be helped by automation and technology, this industry is no differant.

    Our online settlement solution at http://www.MyDebtPortal.com gives Consumers the power to work with their creditors themselves, other sites such as ReadyforZero.com and DebtGoal.com are working with consumers to help them.

    The days of consumers paying big fees up-front and high monthly fees, yet getting nothing of value are OVER, with sites like Getoutofdebt.org doing their very best to inform consumers of the reality of the debt settlement companies out there the days of settlement companies making lots of money and doing basically nothing are over!

    Consumers, do your research, there are many companies out there that do NOT charge up-front fees OR big monthly fees bundled with other offers and other Loopholes to continue to rip off those stuggling the most!.

    Keep up the good work, keep informing consumers they have options!

  • http://www.mydebtportal.com Dave

    I have said for the past three years the INTERNET changes everything! just as every other industry has had to change their model because of the Internet so does Debt Settlement.

    Some in the industry think that DS is differant that it can’t be automated etc. Thats funny! Every industry can be helped by automation and technology, this industry is no differant.

    Our online settlement solution at http://www.MyDebtPortal.com gives Consumers the power to work with their creditors themselves, other sites such as ReadyforZero.com and DebtGoal.com are working with consumers to help them.

    The days of consumers paying big fees up-front and high monthly fees, yet getting nothing of value are OVER, with sites like Getoutofdebt.org doing their very best to inform consumers of the reality of the debt settlement companies out there the days of settlement companies making lots of money and doing basically nothing are over!

    Consumers, do your research, there are many companies out there that do NOT charge up-front fees OR big monthly fees bundled with other offers and other Loopholes to continue to rip off those stuggling the most!.

    Keep up the good work, keep informing consumers they have options!

    • Bobby Zangrilli

      Dave, you might want to get more than 800 visitors a month to your website before you start proclaiming the end of eras. Also, the technology to “work with the creditors themselves” existed before the internet…it’s called a telephone.

      • Dave

        http://getoutofdebt.org/17270/franklin-debt-relief-review there you are Bobby. In my post I did not say that my company was going to be the end of the industry, I was merely saying that the days of companies like yours are over.

      • Robert S

        meh, DYI and automated technologies work well and support a huge niche. In the tax world, Turbo Tax is huge. However, H&R Block still remains a profitable Wall Street company. Not everyone is a DIY. Frankly, I am a DYI person and would probably take the software approach. But to say “days of companies like yours are over”….

        and Bobby as said… You’ve got 800 visitors and huge visions… Nothing wrong with that, merely pointing out your perspective.

      • Bobby Zangrilli

        Dave, you’re missing my point — your opinions on the industry do not bother me and in fact I agree with them. What bothers me is you’re on here aggressively promoting your product and making it seem like the concept of self-directed settlement is revolutionary when it’s something people have been doing long before your platform existed.

      • Dave

        Ok Bobby, fair enough. I was just commenting on the story that the FTC does not want Debt Settlement to survive.

        It is my opinion that Full Service Debt Settlement and Attorney based solutions are going away, they may survive for a few more years but they will and are slowly dying, they simply charge too much and are not really a viable option for anyone that has access to the Internet and the wealth of information that is out there on the industry.

        My main point on the changing of the industry with the Internet is that there is so much information out there – Getoutofdebt.org and of course my site http://www.mydebtportal.com – that it does not make sense for anyone to hire a full service debt settlement company, with all the bad apples in the industry, the FTC regulations, the attorney general lawsuits, the class action lawsuits and the number of complaints etc.

        I did not mean to “Aggressively” promote my product, I’m just putting it out there as another resource for people struggling with debt so that they know there are other options besides filing bankruptcy or hiring a debt settlement company or attorney.

        And I agree that they have been doing it before the platform existed and that phones existed too, however we walk people through all the steps and make it easy for them to use their computer in the comfort and privacy of their home.

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