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How Settlement Companies Can Maximize Income and Have Happier Clients by Teaching People How to Settle Their Own Debts

Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation’s largest debt settlement firms, he is the author of the Debt Settlement Success Seminar™, an 8-hour audio-CD course that teaches consumers how to choose between debt program options based on their financial situation. The course focuses on comprehensive instruction in do-it-yourself debt negotiation & settlement designed to save $1,000s. Personal coaching and follow-up support is included. For a free 32-page download on DIY debt settlement, please visit www.zipdebt.com.

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This article is offered primarily for the benefit of people inside the debt settlement industry, but I believe consumers will find this information helpful as well. My intent is to describe a unique process I call Fast-Track Debt Settlement™. In theory, “fast-track” is defined as the client having settled all accounts within 12 months or less, measured from the date of initial default. In practice, however, we aim to settle a majority of accounts prior to the 6-month charge-off deadline. My method is based on the do-it-yourself approach, or more accurately, DIY-with-a-Coach. Clients first receive a core education via training CDs (8 hours of audio instruction), supplemented by live coaching via email or telephone. It is important to note that 100% of negotiations are handled by the clients themselves.

I realize these statements must come as a shock to most industry professionals, who have been taught to think in terms of 36-48 month programs (or perhaps 24-36 months), and who also believe consumers should not attempt to settle their own debts. When I recently published the results achieved by my clients using this method, I was quickly accused of having fabricated my numbers. Once I made it clear the data was indeed accurate, the criticism changed to my results being “too good to be true,” and that I was just helping consumers “game the system,” rather than assisting people who legitimately needed debt relief.

In this article I will set the record straight, describe my methods, then explain how my findings might be of value to third-party debt settlement firms struggling to survive in the post-2010 era. This is not just about promoting my DIY-with-coaching method, or defending my own published results. If you are a debt settlement company CEO and you are serious about helping consumers solve their financial challenges, then please set aside your skepticism and hear me out.

Who Is This Guy, and Why Should I Care What He Says About Debt Settlement?

This won’t become a biographical piece, but since my background in debt settlement is what led me to develop the fast-track approach, a brief discussion of my resume will provide some necessary context. I started providing debt settlement services in 1997, one-on-one with local clients in San Diego. This was a solo practice, so I did sales, customer service, AND negotiating, (plus janitorial and IT services as well). I remain convinced to this day that most of the folks in the industry don’t understand their business as thoroughly as they should, simply because they have only worn one (or perhaps two) of the three key hats necessary to a full understanding of what it takes for clients to be successful at debt settlement. If you have to do the actual work of negotiating for a client, trust me, you become much less inclined to just “sign people up.” Remember, this was in the day where we only charged a percentage of savings. In 1997, I was already operating under the model you guys are struggling to figure out in 2011.

In 1999-2000, debt settlement went national, and I joined a startup firm as VP Sales. We went from 40 clients (the actual number on the day I walked in the door) to 4,000 clients in less than two years, not a huge company by today’s standards, but one of the first of its kind back then. I wrote the original “Four Doors” presentation that was later copied throughout the industry. (You know the pitch – there are only four options – do nothing, credit counseling, bankruptcy, or debt settlement. Talk down the first three and then explain why settlement is best, etc.) Most of the FAQ answers provided on debt settlement websites today are modeled (in many cases plagiarized verbatim) from copy I wrote more than a decade ago. My original 32-page info guide to debt settlement (first published in 1999) has been ripped off and copied more times than I care to count. Contract language, marketing graphics, lead generation, sales training, underwriting standards, the first industry trade conferences – you name it, I was involved in all aspects of the early development of debt settlement as a large scale enterprise.

More to the theme of this piece, I am the person who originally promoted the 36-month approach to quoting debt settlement programs. As far as I know, no one else was presenting settlement with a standard program duration before I taught my sales staff to use this approach. This was in the year 2000, as we were kicking into serious volume for the first time. I implemented the 36-month approach strictly as a template for the sales reps to apply, since otherwise we had a “Wild West” situation on our hands in terms of client suitability. I had no idea it would later become a “meme” that would spread throughout the industry. Most of the people quoting 36-month programs today have no clue where it originated, or the rationale behind it. The point just about everyone seems to have forgotten is that the original idea was to use 36 months as a LIMIT, not the automatic standard for program duration!

By 2003, it became clear to me the writing was on the wall, and Federal and/or State regulations severely restricting debt settlement practices were inevitable. (I still remain surprised it took as long as it did!) I wanted no part of what I saw coming, and the movement to the front-loaded fee structure disgusted me. I had to make a change, so in 2004 I went back into solo practice, but not as a third party debt settlement service provider. Instead, I created an audio training course teaching consumers how to negotiate and settle using the DIY approach. (In 2008, I updated the audio course and expanded it based on what I’d learned working with consumers over the previous four years.) Initially, I intended to sell only the kit itself, but it quickly became clear that coaching provided an essential layer of support most clients required for a successful outcome.

From 2004 to the current day, I’ve been working directly with consumers, coaching them through settlement of their debts. I have *personally* communicated with THOUSANDS of people about their debt problems and developed a clear understanding of who is and who is not a good fit for debt settlement.

Over time, my approach evolved from thinking in terms of 36-month programs to much shorter durations, and the reason for this change is simple. When you coach consumers day-to-day (and don’t just delegate the job to a subordinate), you naturally tend to focus on rapid client success. You learn to develop screens to filter out clients who simply don’t have sufficient resources for the program. It’s emotionally draining to work with a client month after month when they have no money for settlements and little prospect for success. Fortunately I already learned this lesson back in the ’90s. I already knew how to nudge clients to “go find the money” to make a settlement happen. Over the past seven years, I have refined this approach into what I now call Fast-Track Debt Settlement™.

Time for a Paradigm Shift in Debt Settlement—Faster is Definitely Better

For the year 2010 alone, my clients settled more than $16 million of debt balances at an average of just over 33% (balances at time of settlement). There were 1,193 settlements reported, and more than 90% of those were negotiated before the charge-off deadline. Virtually all were DIY settlements, with no third party involvement to support the client directly during the negotiation. Over the 5-year period of 2006-2010, 74% of my coached clients successfully completed the process of settling their accounts, and 80% reported being more than half finished with settlements at time of coaching subscription expiration. Refund requests tracked at less than 3% for the same period, and known bankruptcy filings were less than 6% of coached clients. A more detailed breakdown of success rates and methodology is available on my blog.

Settlement data is located here.

I realize many of you will be skeptical of these results. So I’ll share with you how we accomplished it. To start with, it comes down to the enormous difference between Chapter 7 and Chapter 13 bankruptcy. In the old days when I was gunning for high volume enrollments (yes, I admit it) and trying to grow the country’s largest debt settlement firm from the ground up, I took the position that personal bankruptcy should be avoided if at all possible, and I made no distinction between BK7 and BK13. People were motivated to avoid bankruptcy – period – for a variety of reasons, and it was my job to help them accomplish that aim. But with all the attention surrounding the 2005 bankruptcy law change, coupled with my own additional experience, I started to change my thinking on the whole subject of bankruptcy avoidance and suitability for debt settlement programs.

Let me state my conclusion boldly: Debt settlement is only a suitable alternative to Chapter 13 bankruptcy, not for Chapter 7. This holds true for the vast majority of debtors. There can be exceptions, such as the person who might lose a job security clearance if they file a public record BK, etc., but what I learned in working more closely with consumers is that the folks who qualified for Chapter 7 were mathematically better off using that approach. Further, most who were eligible for Chapter 7 would never have sufficient financial resources for settlement to be successful.

When you only recommend debt settlement to individuals facing Chapter 13, the game changes completely. Now you are dealing with a pool of prospective clients who have incomes above the median and usually have assets that would be force liquidated in a BK. You are working with people who have a *mathematical* reason for avoiding BK, not just an *emotional* reason. Big difference!

Yes, I realize this greatly restricts the pool of potential clients, but that is precisely the point! Debt settlement has been grossly oversold to anyone with at least a $10,000 debt balance. The true demographic for this strategy is a much narrower segment of the public than just “people in debt $10k or more.” I am quite certain most of the BBB or AG complaints filed against debt settlement companies were by clients who should never have been enrolled in such programs in the first place!

After applying the initial filter to separate the Chapter 13 cases from the clear-cut Chapter 7 cases, the next suitability filter to be applied is RESOURCE ANALYSIS. I no longer recommend debt settlement – even to people facing Chapter 13 – if the ONLY resource available for settlement funding is limited to their monthly household income (i.e., savings into their set-aside fund). I tell clients they MUST have something else to work with as they enter the process, and this is where the rubber meets the road. Normally, we are talking in terms of a 401(k), IRA, or other retirement account, cash value life insurance policy, sale of vehicles or other household items, funds borrowed privately from family, and so on. We take the starting debt load and multiply by 40% to arrive at an approximate settlement funding level, needed within 12 months (ideally within 6 months). Next, we take the clients’ conservative estimate of their monthly savings target and determine how much of that 40% can be relied on from savings. The difference is the amount the client needs to plug the gap, and that is where additional sources must come into play.

Understand – THIS IS A PARADIGM SHIFT. The old approach in selling debt settlement is suitability analysis on the basis of the client’s INCOME situation, with the ASSET picture almost entirely ignored during the enrollment process. It’s all about the monthly payment, and of course, it’s far easier to enroll people that way, right? Just tell them they can back off from $750 a month to $500 a month and still be out of debt in three years. It’s not easy to push hard on clients to cash in a retirement account or sell that 4-wheeler sitting in the garage. But the moment you change your thinking and start looking for assets, it becomes possible to greatly accelerate the pace of settlements.

I’ll anticipate a criticism that’s already been leveled at me – that clients who have sufficient resources to settle within 6-12 months really don’t have a legitimate hardship in the first place and should therefore simply pay their debts in full. I was astonished when I heard this accusation, because it demonstrates a complete lack of understanding on the basics of financial planning. Income is only one part of the story. Yes, income is usually the key factor that forces the day of reckoning on the debt load, whether it be job loss, reduction of overtime hours, loss of benefits, or similar squeeze to the paycheck. We’re talking about people with embedded debt of $50,000 to $100,000, higher in many cases. A loss of income (medical problem, divorce, etc.) has put them over the edge, and they are no longer able to sustain the minimum payments. Before the CARD Act blocked universal default, consumers were getting hammered mercilessly with interest rate spikes across the board. Total minimum payment loads of $1,250/month on $50,000 of debt would suddenly jack up to $1,750/month and leave people with an unsustainable situation in terms of cashflow.

Had I taken the old approach with these clients, I would have advised them to bank $1,000 per month and plan for a 24-30 month process. Instead, now I ask about their retirement accounts and perform a net worth analysis. The vast majority of my clients are insolvent based upon a standard net worth review. Add up the assets at face value, subtract the debts, and I get a negative number almost every time. And the folks who do have positive net worth are typically those with some equity in real estate – equity that is no longer accessible to them since the credit crunch of 2008.

When a person is insolvent, it does not mean they have zero lump-sum resources. In many cases, they have IRA accounts in modest ranges like $20,000 to $30,000, and owe $50,000 or more in unsecured debt. A hardship loan of 50% of the IRA balance yields $10-15k for settlement funding, and can thereby greatly compress the amount of time needed for settlement. Besides retirement accounts, there are numerous other options for freeing up settlement funding with this caliber of client, but none of this has anything to do with people dodging their obligations or making use of these techniques without an appropriate need to do so. The basic point here is that YOU HAVE TO ASK ABOUT ASSETS in order to find out this information. Focus on your prospective client’s total financial picture, not just their income situation, and you will be amazed at what you find.

To summarize my current approach, I recommend debt settlement only to consumers who would otherwise be facing Chapter 13 bankruptcy, and who can raise adequate settlement funds within a 6-12-month timeframe, through a combination of asset liquidation and monthly savings. I believe my clients’ results speak quite clearly to the effectiveness of this approach.

My Advice to Traditional Debt Settlement Company Executives

This is all terrific, you’re probably thinking, but how does it help you if you run a traditional debt settlement company? Let me clarify some points that are totally obvious to me after 14 years in this industry, which might not be so obvious to the owner of a struggling firm in 2011.

  1. In the era of no front-loaded fees, you have a new incentive to accelerate the process of settlements so you can get paid. By focusing squarely on your clients’ asset situation, you can free up settlement dollars for immediate use. Voila, faster turnaround on files, lower servicing costs, higher profit.
  2. Stop selling debt settlement to people who qualify for Chapter 7 BK, and/or people who will require 3-4 years to complete the process. This is exactly the type of client most likely to (a) get served with multiple lawsuits because they took too long, (b) burn out your negotiators and customer service staff, and (c) generate complaints.
  3. Start by restricting your program to people who have sufficient resources (between assets and savings potential) to finish within 12-18 months, and who would otherwise be forced into Chapter 13 BK. You’ll see retention increase, complaints decrease, and a lot more testimonials from happy clients. Then try filtering back to 12 months max and you’ll see additional improvements.
  4. You have to face up to an important fact of life. DIY settlements are routine and normal. More than $150 billion of credit card debt got charged off in the past 3 years, and a lot of it was due to settlements taking place. We don’t have accurate figures for this, but even if it’s only 10% due to settlements, we’re still talking about $15 billion of negotiated balance reductions overall. The settlement industry handled probably around $1 billion of that, but so what? What this number tells us is that most settlements were negotiated directly between the consumer and the creditor or collection agency. It’s time for debt settlement industry executives to understand the role and place of DIY settlement, and to move past the knee-jerk reaction that “consumers can’t negotiate SIFs on their own.” If nothing else, my own results prove otherwise. But nobody need take my word for it. Just ponder the $150 billion number, and realize that consumers settled one hell of a lot of debt themselves – without your help.
  5. Settlements will be offered by mail to your clients. Virtually all major credit grantors do this on a cyclical basis. In the era of front-loaded fees, you could shrug your shoulders if the client accepted a deal on their own without consulting you. You had already collected your fee anyway, right? Not the case today! If you have not encountered this yet, trust me – you will! Your clients will soon begin accepting offers on their own. When that happens, guess what? You don’t get paid. Why should they pay your negotiation fee when the offer came in the mail and they just called and took the deal on their own? Go ahead, try systematically collecting from clients who have negotiated their own deals based on automated offers, then watch your BBB complaints soar. I’ve been there, done that. In fact, this problem is what led me to the idea of creating a DIY program in the first place.
  6. The smart debt settlement exec will develop a method of assisting clients to settle with original creditors prior to charge-off, without the use of the power-of-attorney or actual third-party intervention. In other words, the wise CEO will acknowledge right up front that offers may come automatically and should be discussed for improvement, but if a client wishes to accept and offer as-is they will only be charged a nominal flat fee. You can still protect your client by reviewing the settlement letter and ensuring they conduct their transaction safely, and it is fair and appropriate to charge suitable fees for this type of service. Isn’t it better to acknowledge reality and develop a way to monetize what would otherwise be a basis for dispute between client and settlement company?
  7. Faster settlements means far fewer lawsuits, which results in lower average settlement percentages, and translates to higher negotiation fees.
  8. On October 27, 2010, when the FTC rule-change went into effect, debt settlement changed overnight from a business in which a company could sit back and collect fees month after month, with no true financial incentive to get the debts settled, to a business in which “settlement velocity” is the name of the game. I’m referring to the ratio of debt settled to debt enrolled per month, plotted on a rolling basis. Pay-for-performance firms will live or die based on whether their velocity trend line is below 100% (potential rising income) or above 100% (potential falling income). Whatever name you give it, I suspect it will become an important metric to you before long though. My gift to you chaps.

The above should be sufficient to get the creative debt settlement CEO thinking along different lines than the traditional model. We’re in a new period now for the industry. From my perspective, it’s just another phase shift. I’ve been around long enough to see debt settlement morph from a small cottage industry to a business sector with hundreds of new firms. Now that the boom times are over for the aggressive marketers who came to exploit the front-loaded fee structure, my forecast is that the industry will shrink to a reasonable number of quality firms. The twin pressures of competition and regulatory scrutiny will force inferior companies out of the market. There will always be bad actors, but the majority of surviving companies will provide a valuable service at a fair price. However, to survive the in-progress shakeout of the industry, executives will have to become creative and consider new business models and new approaches.

How Settlement Companies Can Maximize Income and Have Happier Clients by Teaching People How to Settle Their Own Debts by

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About Charles Phelan

Charles Phelan
  • Steve Rhode

    Don’t forget that lead costs and marketing will not decrease as long as the overall pool of consumers searching for repayment solutions continues to shrink. Lower demand = higher competition = higher marketing.

  • Jerry Nordstrom

    Robert, I don’t think we’re all that far apart on our beliefs. I was speaking perhaps in too broad of terms. From a marketing perspective I have a pretty solid understanding of the landscape. Internet advertising costs have not decreased, they have if anything increased and I could bore you to tears with the reasons, certainly consumer’s perception of debt relief is about equal with congress, but more importantly is the CTR based model ad platforms are built upon. Click Through Rate performance is susceptible to inflated pricing due to shall we say, “less than realistic claims” The Christian ad on this page upon my viewing is advertising a 70% reduction….
    This ad is rewarded by Google with more clicks, a higher CTR, Lower cost per click and very likely a lower cost per lead CPL. The counter is true as well. An honest ad that either does not make a reduction claim, or states This is a hardship program only will have a low CTR, higher costs and lower profit margin.

    Yes, the market will consolidate, the weak by any definition will fall – poor model, systems, under capitalization etc. A few should survive.

    My concern is that the changes made cut so deep that even good companies offering a respectable service have also gone under. The proverbial throwing the baby out with the bath water. My more philosophical point is that we should have a free market, nail the scoundrels, but allow pricing to be determined by the free market. Consumers know how to price shop and the Internet makes that easy.

    And don’t get me wrong as a provider of qualified referrals (who are not lied to) I certainly would love to see the industry come back strong, efficient and doing the best by the consumer. Lead Discovery has always conducted honest marketing, delivered an informed and honest prospect and has continued to utilize new marketing techniques to get the honest message out.

  • Steve Rhode

    You raise an excellent and obvious point, just because the DS world is different does not mean it is worse. Well that is unless you are simply looking at easy money without much in the way in results.

    Good settlement companies existed before DS went crazy and will exist afterwards. There are some really bright guys in the DS space that know how to run a very profitable business, even at 15% of saving rates, by leveraging technology, local markets, and smart front end suitability.

    If anything, I think there are new opportunities opening up for complaint companies that play by the rules.

    Steve

  • Robert Stevenson

    Jerry,

    While I completely agree with you on the fairness issue of prohibiting any reasonable/small monthly fee on accounts… However, I must disagree with you on the “settlement is dead”

    “Performance based settlement hardly exists. Those who have tried to make this transition have failed.

    –> There’s a lot to comment on in the short time that I have. However, let me try to be quick:

    1) Performance based settlement hardly exists. Those who have tried to make this transition have failed.
    –> Those who have failed were probably way under capitalized, poorly managed and have very high turn over from previous clients who paid fees prior to settlement. To say that those who have made the transition have failed? You need to merely look at the AD links on top of this website as well as popular Google KW. There are some Attorney model people, but the vast majority of the large Google Link buyers are Performanced Based Companies.

    I’m sure Mike (Emerge) can tell you that Yes, this approach is much more riskier, but using the metrics from before a well managed debt settlement plan with no upfront fees can be profitable and beneficial to the client. It really will weed out weak links in all aspects of the business.

    2) The margins are too low to sustain an honest, effective service, the risk to capital too high to satisfy the return of business owners and board members.

    –> There are some things right in here. The margins are much lower and it is harder to sustain an honest effort.. especially when you try the right approach with settling the priority accounts (making less money on Discover & Cap One’s) & then the client settles their Bofa, etc accounts outside the program and you lose the meat and potatoes of the profit.

    The risk to capital is high.. The return is there is the business can be lean, efficient, effective and focus on settling accounts and saving people money. This will whittle away companies that don’t know the customers, the creditors and their tendencies, the finances, the “change”… It will force the market place to be strong (or use the attorney models which I hope is “killed” shortly)

    3) The few that remain in this space offering performance based settlement will soon be gone.”

    –> We could sit here all day and night and argue this point. The fact is, yes, companies will be gone. However, the markets will adjust. There is room for strong businesses. As companies get out, the marketing and acquisition costs should drop allowing companies within the space to remain profitable. The market will not over pay for acquisition in the long run if it is unsustainable. It was only sustainable in the previous model because the up front fees would propel the cost.

    There may be less need for the service than the peak in 09-10, which will cause marketing to remain expensive. However, it will sooner or later remove companies from the space (which you mention) allowing the marketing and acquisition cost to align with profitable numbers.. it really is simple economics. The housing market is correcting itself in a similar fashion as far as afford ability and reach. Those values were inflated for different reasons which based on your writing you understand how/why it happened.

    –> And what charles said earlier is right. You got the DSC people in here.. You got the Debt Coach’s, the DYI software. Everyone has an opinion and mine is there is a good market and good opportunity for all these avenues to provide a valuable service. Those who are better at providing there service will remain viable. Based on our early numbers (Mike from Emerge chime in if you have any thoughts) this can be very successfully, but yes it is higher risk and less reward.

  • Mike Reilly

    All term settlements and we do bring the debtors on three way calls; it’s the only way it happens with the big boys. Full financial analysis and hardship in place! Sometimes use of counsel when necessary.

  • Charles Phelan

    Seriously, Mike? You have 80% of your sifs negotiated with the OC before the 180-day deadline? OK, feel free to publish all that data. :-)

    But you’re right. No point in arguing about it. We just disagree on the relative merits of the approach, that’s all. I’ll put my track record up against anybody’s, but I still think it’s good that consumers have multiple options.

  • Mike Reilly

    Charles, this topic could grow wings real easy so it’s probably best I leave well enough alone. You say tomato I say tomoto, the net..net is, both systems have been proven to help consumers. You have clients that graduated your program as do I and many others.

    Term settlements (a pre-defined amount (the settlement), a pre-defined payment over a pre defined time period (the term) has been in existence for a very long time, ask any CCC agency or creditor. I believe that conducting a detailed financial analysis is the first step to insure a client can make the payments. Barring an additional problems the consumer should be well prepared to walk through the term of any agreement. Clearly additional funds from the sale of or liquidation of an asset is a plus, but just because something like that is not available, to me, is no reason to potentially eliminate a candidate from DS.

    Sell this or any form of debt relief on payment alone without a detailed analysis and yes, you’re doomed from the start. Your concern about creditors going legal is a good one but I will tell you there hasn’t been one we have not been able to stop or work through, money talks and thats a fact!

    Answer to your question

    8 out of 10

  • Charles Phelan

    Mike, I believe there was an OCC advisory issued to the banks in 2009 that addressed the 93-day thing, but I’d have to hunt it up. As I said, it’s just a technical point anyway. The real issue here is legal risk to the client. I believe that aiming for term settlements brings much greater risk to the client than a fast-track strategy. Out of every 100 settlements that your firm negotiates, how many would you say are negotiated before the normal 180-day charge-off timeframe, vs. after charge-off? Also, the risk of default on long-term settlements is a real concern. Applied on a broad basis as a general strategy, I don’t see this approach working any more effectively than Ch. 13, which has a dismal success rate.

  • Mike Reilly

    Charles, if you can point me in another direction i would appriciate it.

    Office of the Comptroller of the Currency
    Board of Governors of the Federal Reserve System
    Federal Deposit Insurance Corporation
    Office of Thrift Supervision Subject: Credit Card Lending Description: Account Management and Loss Allowance Guidance

    Settlements – Institutions sometimes negotiate settlement agreements with borrowers who are unable to service their unsecured open-end credit. In a settlement arrangement, the institution forgives a portion of the amount owed. In exchange, the borrower agrees to pay the remaining balance either in a lump-sum payment or by amortizing the balance over a several month period. Institutions’ charge-off practices vary widely with regard to settlements.
    Institutions should ensure that they establish and maintain adequate loss allowances for credit card accounts subject to settlement arrangements. In addition, the FFIEC Uniform Retail Credit Classification and Account Management Policy states that “actual credit losses on individual retail loans should be recorded when the institution becomes aware of the loss.” In general, the amount of debt forgiven in a settlement arrangement should be classified loss and charged off
    2 For purposes of this guidance, a workout is a former open-end credit card account upon which credit availability is closed, and the balance owed is placed on a fixed (dollar or percentage) repayment schedule in accordance with modified, concessionary terms and conditions. Generally, the repayment terms require amortization/liquidation of the balance owed over a defined payment period. Such arrangements are typically used when a customer is either unwilling or unable to repay the open-end credit card account in accordance with its original terms, but shows the willingness and ability to repay the loan in accordance with its modified terms and conditions.
    4
    immediately. However, a number of issues may make immediate charge-off impractical. In such cases, institutions may treat amounts forgiven in settlement arrangements as specific allowances.3 Upon receipt of the final settlement payment, deficiency balances should be charged off within 30 days.

  • Charles Phelan

    Mike, my understanding is that term settlements, by definition, can only take place on charged-off accounts. OCC guidelines preclude anything longer than three months on pre-c/o sifs, so unless the creditor was ignoring that guideline, they must have recorded the charge-off early (and then assigned to the agency). Not a big deal, obviously, but an important technical point, since any account past charge-off is automatically at higher risk of litigation to the client. I’ve certainly coached clients to negotiate long-term settlements like these, and negotiated many of them myself in the old days, but again, most of our settlements are negotiated pre-c/o, so it usually only comes up in the context of stipulations. To me, the inherent flaw in the term-settlement approach is the risk of future default all over again, particularly for a client limited to income-only resources. As you know, a voided settlement is a real heartbreak for a client who can no longer sustain payments. Was this particular client facing Ch. 13? Or did she have income below the median? Did this client have a path to Ch. 7?

  • Mike Reilly

    Charles, clairifying my comment “just went legal” the agency I was dealing with (I have a very good relationship with) stated the file was leaving their facility and going legal…

  • Mike Reilly

    No, we cause term settlements at all stages, the 22 I did yesterday was done through a collection agency employed by the original creditor. We went back and forth 3 times, I wanted a better percentage with a shorter term, and they wanted more money. The trade off for more funds, a longer term, this is what we find as typical and this particular client has only income to rely on, no assets to liquidate. If the term settlements are staggered you can provide increased dollars to others as the initial settlements are completed, the creditors love that.

    Term settlements provide several features to the client; so long as the payments are being made there will be no collection calls, no legal action, a payout of less than 100% and a term typically less than 60 months. It’s clearly better than a DMP for 60 months and a pay back of 100%. It also works well for those without assets to liquidate.

  • Charles Phelan

    Thanks, Mike. Let me ask you for some clarification first. When you talk about term settlements, I assume that you are only referring to accounts settled after charge-off, correct? Also, was the 22-month term settlement you’re referring to a stipulation for judgment negotiated with a law firm? Or did you negotiate that through a regular collection agency?

  • Mike Reilly

    Charlie,

    First off, very well done, a quality article! The only thing I would like to address is the fact that you left out the traditional “term settlement” which most firms in the space (especially now) secure on a regular basis. Just yesterday we secured several (longest term of the day 22 months) and that is a regular occurrence.

    We have many of the clients you as a DIY guy would not accept and have great success with them for this very reason. I am that guy you refer to who does it all, in fact the 22 month term was my negotiation, the file just went legal, settled at 51% based on the escalated balance over 22 months. This particular client is in several term settlements and will be completely settled out inside your recommended timeline but just making term payments for 36 months. At the end of the day it looks like her average settlement will come in around the mid forties based on escalated balances.

    Do you really see an issue with this strategy or a flaw in this model?
    Also, and this is just my opinion, I think the industry handled a lot more than 1 billion in settlements over the last three years. I guess if you had a real good connection into NoteWorld and Global we could get a better idea.

    Michael Reilly, CDS/CCCS
    Emerge America

  • Mike Reilly

    Charlie,

    First off, very well done, a quality article! The only thing I would like to address is the fact that you left out the traditional “term settlement” which most firms in the space (especially now) secure on a regular basis. Just yesterday we secured several (longest term of the day 22 months) and that is a regular occurrence.

    We have many of the clients you as a DIY guy would not accept and have great success with them for this very reason. I am that guy you refer to who does it all, in fact the 22 month term was my negotiation, the file just went legal, settled at 51% based on the escalated balance over 22 months. This particular client is in several term settlements and will be completely settled out inside your recommended timeline but just making term payments for 36 months. At the end of the day it looks like her average settlement will come in around the mid forties based on escalated balances.

    Do you really see an issue with this strategy or a flaw in this model?
    Also, and this is just my opinion, I think the industry handled a lot more than 1 billion in settlements over the last three years. I guess if you had a real good connection into NoteWorld and Global we could get a better idea.

    Michael Reilly, CDS/CCCS
    Emerge America

    • Charles Phelan

      Thanks, Mike. Let me ask you for some clarification first. When you talk about term settlements, I assume that you are only referring to accounts settled after charge-off, correct? Also, was the 22-month term settlement you’re referring to a stipulation for judgment negotiated with a law firm? Or did you negotiate that through a regular collection agency?

      • Mike Reilly

        No, we cause term settlements at all stages, the 22 I did yesterday was done through a collection agency employed by the original creditor. We went back and forth 3 times, I wanted a better percentage with a shorter term, and they wanted more money. The trade off for more funds, a longer term, this is what we find as typical and this particular client has only income to rely on, no assets to liquidate. If the term settlements are staggered you can provide increased dollars to others as the initial settlements are completed, the creditors love that.

        Term settlements provide several features to the client; so long as the payments are being made there will be no collection calls, no legal action, a payout of less than 100% and a term typically less than 60 months. It’s clearly better than a DMP for 60 months and a pay back of 100%. It also works well for those without assets to liquidate.

      • Charles Phelan

        Mike, my understanding is that term settlements, by definition, can only take place on charged-off accounts. OCC guidelines preclude anything longer than three months on pre-c/o sifs, so unless the creditor was ignoring that guideline, they must have recorded the charge-off early (and then assigned to the agency). Not a big deal, obviously, but an important technical point, since any account past charge-off is automatically at higher risk of litigation to the client. I’ve certainly coached clients to negotiate long-term settlements like these, and negotiated many of them myself in the old days, but again, most of our settlements are negotiated pre-c/o, so it usually only comes up in the context of stipulations. To me, the inherent flaw in the term-settlement approach is the risk of future default all over again, particularly for a client limited to income-only resources. As you know, a voided settlement is a real heartbreak for a client who can no longer sustain payments. Was this particular client facing Ch. 13? Or did she have income below the median? Did this client have a path to Ch. 7?

      • Mike Reilly

        Charles, if you can point me in another direction i would appriciate it.

        Office of the Comptroller of the Currency
        Board of Governors of the Federal Reserve System
        Federal Deposit Insurance Corporation
        Office of Thrift Supervision Subject: Credit Card Lending Description: Account Management and Loss Allowance Guidance

        Settlements – Institutions sometimes negotiate settlement agreements with borrowers who are unable to service their unsecured open-end credit. In a settlement arrangement, the institution forgives a portion of the amount owed. In exchange, the borrower agrees to pay the remaining balance either in a lump-sum payment or by amortizing the balance over a several month period. Institutions’ charge-off practices vary widely with regard to settlements.
        Institutions should ensure that they establish and maintain adequate loss allowances for credit card accounts subject to settlement arrangements. In addition, the FFIEC Uniform Retail Credit Classification and Account Management Policy states that “actual credit losses on individual retail loans should be recorded when the institution becomes aware of the loss.” In general, the amount of debt forgiven in a settlement arrangement should be classified loss and charged off
        2 For purposes of this guidance, a workout is a former open-end credit card account upon which credit availability is closed, and the balance owed is placed on a fixed (dollar or percentage) repayment schedule in accordance with modified, concessionary terms and conditions. Generally, the repayment terms require amortization/liquidation of the balance owed over a defined payment period. Such arrangements are typically used when a customer is either unwilling or unable to repay the open-end credit card account in accordance with its original terms, but shows the willingness and ability to repay the loan in accordance with its modified terms and conditions.
        4
        immediately. However, a number of issues may make immediate charge-off impractical. In such cases, institutions may treat amounts forgiven in settlement arrangements as specific allowances.3 Upon receipt of the final settlement payment, deficiency balances should be charged off within 30 days.

      • Charles Phelan

        Mike, I believe there was an OCC advisory issued to the banks in 2009 that addressed the 93-day thing, but I’d have to hunt it up. As I said, it’s just a technical point anyway. The real issue here is legal risk to the client. I believe that aiming for term settlements brings much greater risk to the client than a fast-track strategy. Out of every 100 settlements that your firm negotiates, how many would you say are negotiated before the normal 180-day charge-off timeframe, vs. after charge-off? Also, the risk of default on long-term settlements is a real concern. Applied on a broad basis as a general strategy, I don’t see this approach working any more effectively than Ch. 13, which has a dismal success rate.

      • Mike Reilly

        Charles, this topic could grow wings real easy so it’s probably best I leave well enough alone. You say tomato I say tomoto, the net..net is, both systems have been proven to help consumers. You have clients that graduated your program as do I and many others.

        Term settlements (a pre-defined amount (the settlement), a pre-defined payment over a pre defined time period (the term) has been in existence for a very long time, ask any CCC agency or creditor. I believe that conducting a detailed financial analysis is the first step to insure a client can make the payments. Barring an additional problems the consumer should be well prepared to walk through the term of any agreement. Clearly additional funds from the sale of or liquidation of an asset is a plus, but just because something like that is not available, to me, is no reason to potentially eliminate a candidate from DS.

        Sell this or any form of debt relief on payment alone without a detailed analysis and yes, you’re doomed from the start. Your concern about creditors going legal is a good one but I will tell you there hasn’t been one we have not been able to stop or work through, money talks and thats a fact!

        Answer to your question

        8 out of 10

      • Charles Phelan

        Seriously, Mike? You have 80% of your sifs negotiated with the OC before the 180-day deadline? OK, feel free to publish all that data. :-)

        But you’re right. No point in arguing about it. We just disagree on the relative merits of the approach, that’s all. I’ll put my track record up against anybody’s, but I still think it’s good that consumers have multiple options.

      • Mike Reilly

        All term settlements and we do bring the debtors on three way calls; it’s the only way it happens with the big boys. Full financial analysis and hardship in place! Sometimes use of counsel when necessary.

      • Mike Reilly

        Charles, clairifying my comment “just went legal” the agency I was dealing with (I have a very good relationship with) stated the file was leaving their facility and going legal…

  • Charles Phelan

    Dave, thanks for your comment. I understand that your approach relies heavily on software. However, I have to tell you candidly that my experience is that consumers are looking for a *coach*, a person they can look to for guidance, much more so than a “system” or website, etc. Also, you mention tools to “create their letters.” What types of letters are you talking about?

  • Charles Phelan

    I think you’re a little too focused on politics today, Jerry. :-) If the customer of a pay-for-performance firm “consumes services” for 12 months, most of the debts should be settled by then and the negotiation fees paid already. That was the entire point of the article!

  • Dave

    Charles I agree with you completely and appreciate this article, it is pretty much dead on. What we are doing at http://www.mydebtportal.com is simply making it easier for the client to do do it yourself settlement by giving them online tools to create their letters, keep track of all communication, set goals, open escrow accounts if needed and give them an overall strategy, however we do not make them do a power of attorney and we do not charge anything up front for our services, they only pay us if we are able to save them money in the transaction, I also see a day (probably very soon) where we will not charge the consumer anything – up-front or after settlement – to access our system.

  • http://www.mydebtportal.com Dave

    Charles I agree with you completely and appreciate this article, it is pretty much dead on. What we are doing at http://www.mydebtportal.com is simply making it easier for the client to do do it yourself settlement by giving them online tools to create their letters, keep track of all communication, set goals, open escrow accounts if needed and give them an overall strategy, however we do not make them do a power of attorney and we do not charge anything up front for our services, they only pay us if we are able to save them money in the transaction, I also see a day (probably very soon) where we will not charge the consumer anything – up-front or after settlement – to access our system.

    • Charles Phelan

      Dave, thanks for your comment. I understand that your approach relies heavily on software. However, I have to tell you candidly that my experience is that consumers are looking for a *coach*, a person they can look to for guidance, much more so than a “system” or website, etc. Also, you mention tools to “create their letters.” What types of letters are you talking about?

  • Jerry Nordstrom

    Time will tell my friend. Running a business where the customer can consume services for 12 months or more and then not pay you for any reason they wish is not a model many businessmen are looking to jump into. I think the Gov should stand behind their law and provide me with healthcare, advanced degree education, and a secured job ALL upfront for free for 3 years, BUT if I don’t like what I’m receiving at anytime, I won’t pay any taxes due to them. “‘Cause Its the Right Thing To Do” ya?

    I’m moving to another country – Texas may be nice.

  • Charles Phelan

    Jerry, I suspect there are a few folks here who will dispute your assertion that “performance based settlement will soon be gone.” It’s true that scalability is far more difficult on that model, but there is definitely a niche there for those savvy enough to work within it.

    You make a good point about consumers’ lack of motivation to repay in the bailout era. However, in my experience, the fear of creditor lawsuits is also a powerfully motivating factor.
    Virtually every single prospective client I speak with has that fear, and it’s what drives a lot of consumers to seek solutions when they might otherwise not be so inclined toward repayment.

  • Jerry Nordstrom

    Charles, I agree with many of your observations as you know. However I think you missed stating an important point about the current state of Debt Settlement companies.

    Performance based settlement hardly exists. Those who have tried to make this transition have failed. The margins are too low to sustain an honest, effective service, the risk to capital too high to satisfy the return of business owners and board members. The few that remain in this space offering performance based settlement will soon be gone.

    As a marketer who speaks with many hundreds of CEOs each year I can tell you first hand. Success based Settlement is dead, and for now the Up-front fee Attorney model is alive.

    Fortunately, there are good guys like yourself who can offer an honest and effective DIY service.
    Other all online DIY service models also may fill the void left by the thousands of companies who are now out of business. DIY is likely the model that will survive the longest. Interestingly, it is exactly the model that started the industry out… we have come full circle.

    I also believe there is a strong belief on the part of consumers that it is a dumb move to pay back ANYTHING, regardless of the program offered. Why pay unsecured debts back when soon enough a significant number of people will have it paid for them by Bailout Barack? We do have an election coming and with it promises and payments for the “needy”. Home owners were bailed out, new programs are being introduced every week, banks, car loans, student loans, farmers and more… the Gravy train is chugging full steam ahead… why pay your credit cards when it may be coming to your station sometime soon?

  • http://www.leaddiscovery.com Jerry Nordstrom

    Charles, I agree with many of your observations as you know. However I think you missed stating an important point about the current state of Debt Settlement companies.

    Performance based settlement hardly exists. Those who have tried to make this transition have failed. The margins are too low to sustain an honest, effective service, the risk to capital too high to satisfy the return of business owners and board members. The few that remain in this space offering performance based settlement will soon be gone.

    As a marketer who speaks with many hundreds of CEOs each year I can tell you first hand. Success based Settlement is dead, and for now the Up-front fee Attorney model is alive.

    Fortunately, there are good guys like yourself who can offer an honest and effective DIY service.
    Other all online DIY service models also may fill the void left by the thousands of companies who are now out of business. DIY is likely the model that will survive the longest. Interestingly, it is exactly the model that started the industry out… we have come full circle.

    I also believe there is a strong belief on the part of consumers that it is a dumb move to pay back ANYTHING, regardless of the program offered. Why pay unsecured debts back when soon enough a significant number of people will have it paid for them by Bailout Barack? We do have an election coming and with it promises and payments for the “needy”. Home owners were bailed out, new programs are being introduced every week, banks, car loans, student loans, farmers and more… the Gravy train is chugging full steam ahead… why pay your credit cards when it may be coming to your station sometime soon?

    • Charles Phelan

      Jerry, I suspect there are a few folks here who will dispute your assertion that “performance based settlement will soon be gone.” It’s true that scalability is far more difficult on that model, but there is definitely a niche there for those savvy enough to work within it.

      You make a good point about consumers’ lack of motivation to repay in the bailout era. However, in my experience, the fear of creditor lawsuits is also a powerfully motivating factor.
      Virtually every single prospective client I speak with has that fear, and it’s what drives a lot of consumers to seek solutions when they might otherwise not be so inclined toward repayment.

      • http://www.leaddiscovery.com Jerry Nordstrom

        Time will tell my friend. Running a business where the customer can consume services for 12 months or more and then not pay you for any reason they wish is not a model many businessmen are looking to jump into. I think the Gov should stand behind their law and provide me with healthcare, advanced degree education, and a secured job ALL upfront for free for 3 years, BUT if I don’t like what I’m receiving at anytime, I won’t pay any taxes due to them. “‘Cause Its the Right Thing To Do” ya?

        I’m moving to another country – Texas may be nice.

      • Charles Phelan

        I think you’re a little too focused on politics today, Jerry. :-) If the customer of a pay-for-performance firm “consumes services” for 12 months, most of the debts should be settled by then and the negotiation fees paid already. That was the entire point of the article!

      • Robert Stevenson

        Jerry,

        While I completely agree with you on the fairness issue of prohibiting any reasonable/small monthly fee on accounts… However, I must disagree with you on the “settlement is dead”

        “Performance based settlement hardly exists. Those who have tried to make this transition have failed.

        –> There’s a lot to comment on in the short time that I have. However, let me try to be quick:

        1) Performance based settlement hardly exists. Those who have tried to make this transition have failed.
        –> Those who have failed were probably way under capitalized, poorly managed and have very high turn over from previous clients who paid fees prior to settlement. To say that those who have made the transition have failed? You need to merely look at the AD links on top of this website as well as popular Google KW. There are some Attorney model people, but the vast majority of the large Google Link buyers are Performanced Based Companies.

        I’m sure Mike (Emerge) can tell you that Yes, this approach is much more riskier, but using the metrics from before a well managed debt settlement plan with no upfront fees can be profitable and beneficial to the client. It really will weed out weak links in all aspects of the business.

        2) The margins are too low to sustain an honest, effective service, the risk to capital too high to satisfy the return of business owners and board members.

        –> There are some things right in here. The margins are much lower and it is harder to sustain an honest effort.. especially when you try the right approach with settling the priority accounts (making less money on Discover & Cap One’s) & then the client settles their Bofa, etc accounts outside the program and you lose the meat and potatoes of the profit.

        The risk to capital is high.. The return is there is the business can be lean, efficient, effective and focus on settling accounts and saving people money. This will whittle away companies that don’t know the customers, the creditors and their tendencies, the finances, the “change”… It will force the market place to be strong (or use the attorney models which I hope is “killed” shortly)

        3) The few that remain in this space offering performance based settlement will soon be gone.”

        –> We could sit here all day and night and argue this point. The fact is, yes, companies will be gone. However, the markets will adjust. There is room for strong businesses. As companies get out, the marketing and acquisition costs should drop allowing companies within the space to remain profitable. The market will not over pay for acquisition in the long run if it is unsustainable. It was only sustainable in the previous model because the up front fees would propel the cost.

        There may be less need for the service than the peak in 09-10, which will cause marketing to remain expensive. However, it will sooner or later remove companies from the space (which you mention) allowing the marketing and acquisition cost to align with profitable numbers.. it really is simple economics. The housing market is correcting itself in a similar fashion as far as afford ability and reach. Those values were inflated for different reasons which based on your writing you understand how/why it happened.

        –> And what charles said earlier is right. You got the DSC people in here.. You got the Debt Coach’s, the DYI software. Everyone has an opinion and mine is there is a good market and good opportunity for all these avenues to provide a valuable service. Those who are better at providing there service will remain viable. Based on our early numbers (Mike from Emerge chime in if you have any thoughts) this can be very successfully, but yes it is higher risk and less reward.

      • http://GetOutOfDebt.org Steve Rhode

        You raise an excellent and obvious point, just because the DS world is different does not mean it is worse. Well that is unless you are simply looking at easy money without much in the way in results.

        Good settlement companies existed before DS went crazy and will exist afterwards. There are some really bright guys in the DS space that know how to run a very profitable business, even at 15% of saving rates, by leveraging technology, local markets, and smart front end suitability.

        If anything, I think there are new opportunities opening up for complaint companies that play by the rules.

        Steve

      • http://www.leaddiscovery.com Jerry Nordstrom

        Robert, I don’t think we’re all that far apart on our beliefs. I was speaking perhaps in too broad of terms. From a marketing perspective I have a pretty solid understanding of the landscape. Internet advertising costs have not decreased, they have if anything increased and I could bore you to tears with the reasons, certainly consumer’s perception of debt relief is about equal with congress, but more importantly is the CTR based model ad platforms are built upon. Click Through Rate performance is susceptible to inflated pricing due to shall we say, “less than realistic claims” The Christian ad on this page upon my viewing is advertising a 70% reduction….
        This ad is rewarded by Google with more clicks, a higher CTR, Lower cost per click and very likely a lower cost per lead CPL. The counter is true as well. An honest ad that either does not make a reduction claim, or states This is a hardship program only will have a low CTR, higher costs and lower profit margin.

        Yes, the market will consolidate, the weak by any definition will fall – poor model, systems, under capitalization etc. A few should survive.

        My concern is that the changes made cut so deep that even good companies offering a respectable service have also gone under. The proverbial throwing the baby out with the bath water. My more philosophical point is that we should have a free market, nail the scoundrels, but allow pricing to be determined by the free market. Consumers know how to price shop and the Internet makes that easy.

        And don’t get me wrong as a provider of qualified referrals (who are not lied to) I certainly would love to see the industry come back strong, efficient and doing the best by the consumer. Lead Discovery has always conducted honest marketing, delivered an informed and honest prospect and has continued to utilize new marketing techniques to get the honest message out.

      • http://GetOutOfDebt.org Steve Rhode

        Don’t forget that lead costs and marketing will not decrease as long as the overall pool of consumers searching for repayment solutions continues to shrink. Lower demand = higher competition = higher marketing.

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