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Debt Settlement Companies Poised to Eat Credit Counseling for Lunch. What a Difference a Day Makes.

It’s funny how a little thing like the FTC telemarketing sale rules can lead to change and eventually revitalize an industry.

Last year I wrote and talked about how the debt settlement industry needed to expand their horizons with a combined debt management plan (DMP) and settlement approach. They could focus on settling some debts quickly, earning revenue, while parking the remainder of the accounts in a DMP instead of just letting the lawsuits hit consumers.

Well it certainly looks like that trend is happening and in a fast way. In just a couple of weeks TASC is going to be holding a training session on the hybrid approach at their upcoming debt settlement conference in Las Vegas.

The reality is this never would have even been a consideration for the debt settlement world if the TSR had not fundamentally rocked it. But out of change, good things can happen.

The TSR has been painful for many companies but the irony is it will lead to stabilization of the debt settlement space and new entrants will have clear guidelines and boundaries to follow to grow under. Testimony is coming from debt settlement companies supporting the California 15% fee cap and it is quickly becoming a new world of opportunity for debt settlement groups that can operate wisely.

Getting into the hybrid debt settlement / DMP model greatly expands the potential customer pool of debt settlement customers. Debt settlement companies providing this hybrid approach will now offer better and more expanded services than credit counseling can, does or will in the short run.

The credit counseling world has been trying unsuccessfully to tip-toe into debt settlement with their Robert Manning model and Less Than Full Balance (LTFB) approaches. Both attempts and approaches are fundamentally flawed and don’t work but yet debt settlement companies are settling debt every single day.

Credit counseling wants into the debt settlement space but only with the good graces of the creditors. And creditors don’t want credit counseling in the debt settlement space, at least the departments that supervise credit counseling don’t. I am told, one creditor has even instructed credit counseling agencies that if they get into settlement they will lose their fairshare funding. Yet this bank routinely settles debt daily. It just an administrative cluster, you know, that has been holding credit counseling away from better helping consumers. That and the fairshare handcuffs.

If credit counseling wasn’t handcuffed by creditors they would have been into debt settlement a long time ago. If the goal is to help people best break free from debt then the settlement option would have been a great tool to use.

Credit counseling suffers from their own historical point of view on this. They’ve made debt settlement the villain for so long they forget the only reason they are not doing it and better is because the creditors don’t want them to, not because it’s not the right thing to do.

Settlement was only really bad because credit counseling was not offering it. And another reason credit counseling could not wrap their head around it was because credit counseling groups think in terms of monthly payments and disposable income and not assets on hand. They completely miss that part of the equation.

As long as credit counseling only thinks in terms of disposable income they will hurt themselves. And why do they approach consumers this way, well the answer is routed in that age old problem of, because they always have.

Let me give you a real example of how the hybrid model works.

For the Credit Counselor:

Bob calls a credit counseling group and say he has $25,000 in unsecured debt and his monthly payment is $500 and he just can’t get by. At $500 a month he can’t save and he is living paycheck to paycheck.

Consumer Bob has $4,000 on hand. The $4,000 comes from the sale a unused second car, putting his baseball card collection on eBay, money from a family member, etc.

Either with one or a couple of his debts the credit counseling group settles $10,000 of Bob’s debt with the cash on hand and earns additional money from doing that. They just lowered Bob’s payment from $500 a month to $300 a month for the remaining debts and guess what, Bob can now afford a DMP for the remaining debts and have enough leftover to start saving instead of living month to month.

The credit counseling group just took a consumer they could not help and would have turned away and sent to bankruptcy into one they can help and retain.

For the Debt Settlement Company:

The debt settlement companies will approach Bob a little different. They will be able to earn money from the fast settlements and plop Bob into a DMP for the rest where he is happy, not getting collection calls and not getting sued. When Bob is ready to settle his next debt, who do you think he is going to pay to settle it for him?

It is also obviously clear that debt settlement providers are getting into the debt management space and adding that solution to their arsenal. Credit counseling had better do the same thing and by tomorrow. Why? With the move by debt settlement companies adding DMPs through friendly nonprofits they just widened their customer pool and now offer a more comprehensive service than credit counseling.

The question of “if” credit counseling should be doing debt settlement or at least offering it as a solution in those cases when it is appropriate is obvious. That shipped sailed.

Debt settlement companies, with the addition of DMPs will potentially murder market share of credit counseling groups stuck hoping that a LTFB solution will work. Credit counseling should have been doing debt settlement 12 months ago, not 12 months from now.

Credit counseling is suffering under the same diminishing customer pool as debt settlement has been. But right now credit counseling tells callers that if you can’t afford our payment we can’t help you. Debt settlement, with the addition of DMPs as a solution can tell people they can help.

If credit counseling is a nonprofit educational charity then why don’t they focus on educating people how to do their own settlements in cooperation with Michael Bovee at the Consumer Recovery Network or Charles Phelan at ZipDebt.com? Both companies focus on training consumers and could assist credit counseling groups to offer these services by this time next week.

It is mind boggling how much power the creditors have had over credit counseling, to the detriment of credit counseling and the very consumers credit counseling purports to help.

Debt Settlement Companies Poised to Eat Credit Counseling for Lunch. What a Difference a Day Makes.
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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

    That is taken way out of context. The point I was making is that credit counseling was using debt settlement as the villain to sell credit counseling services.

    In my days of running a credit counseling agency I used settlement successfully to help consumer eliminate debt, in the right way, at the right time, and by using the right approach.

    I have been very outspoke about the advanced fee models and the lack of results. But that’s a separate issue from settlement alone and does not represent the fact that every day creditors do settle debt.

    Debt settlement is not a one sized fits all solution but then again neither is credit counseling. Use at the right time and in an effort to best meet the goals and circumstances of the individual they can both have a role either individually or jointly.

  • Steve Rhode

    Thanks.

  • SeanDSLegalPlan

    11th para- 1st sentence…

    “””Settlement was only really bad because credit counseling was not offering it. And another reason credit counseling could not wrap their head around it was because credit counseling groups think in terms of monthly payments and disposable income and not assets on hand. They completely miss that part of the equation.”””

    I THINK IT NEEDS TO BE PUT BACK INTO CONTEXT OF CC VIEW…….

  • Steve Rhode

    Nope. A settlement company only needs to refer the consumer over to an established credit counseling provider. They don’t even need a referral relationship.

  • Steve Rhode

    I could not find that quote. Can you help me find it?

  • Kevin Porter

    “Settlement was only really bad because credit counseling was not offering it.”

    Are you sure about that? Are you saying there was nothing wrong about how it was being done?

  • http://www.facebook.com/people/Kevin-Porter/100001186820398 Kevin Porter

    “Settlement was only really bad because credit counseling was not offering it.”

    Are you sure about that? Are you saying there was nothing wrong about how it was being done?

    • http://GetOutOfDebt.org Steve Rhode

      I could not find that quote. Can you help me find it?

      • Anonymous

        11th para- 1st sentence…

        “””Settlement was only really bad because credit counseling was not offering it. And another reason credit counseling could not wrap their head around it was because credit counseling groups think in terms of monthly payments and disposable income and not assets on hand. They completely miss that part of the equation.”””

        I THINK IT NEEDS TO BE PUT BACK INTO CONTEXT OF CC VIEW…….

      • http://GetOutOfDebt.org Steve Rhode

        Thanks.

    • http://GetOutOfDebt.org Steve Rhode

      That is taken way out of context. The point I was making is that credit counseling was using debt settlement as the villain to sell credit counseling services.

      In my days of running a credit counseling agency I used settlement successfully to help consumer eliminate debt, in the right way, at the right time, and by using the right approach.

      I have been very outspoke about the advanced fee models and the lack of results. But that’s a separate issue from settlement alone and does not represent the fact that every day creditors do settle debt.

      Debt settlement is not a one sized fits all solution but then again neither is credit counseling. Use at the right time and in an effort to best meet the goals and circumstances of the individual they can both have a role either individually or jointly.

  • Kevin Porter

    For this to work, won’t the creditors have to accept DMP proposals from the settlement companies? I think this is less than likely to happen with the majority of large creditors, based on their current positions to stop accepting proposals from credit counseling agencies if they perform debt settlement.

  • http://www.facebook.com/people/Kevin-Porter/100001186820398 Kevin Porter

    For this to work, won’t the creditors have to accept DMP proposals from the settlement companies? I think this is less than likely to happen with the majority of large creditors, based on their current positions to stop accepting proposals from credit counseling agencies if they perform debt settlement.

    • http://GetOutOfDebt.org Steve Rhode

      Nope. A settlement company only needs to refer the consumer over to an established credit counseling provider. They don’t even need a referral relationship.

  • Tom Brown

    If I had to throw out a number and estimate; 3/10 people will be able to increase payments toward a settlement. 1/10 would be able to do a lump sum.

  • Steve Rhode

    Hopefully others here will speak up but what I hear time and time again is that people are able to find some cash on hand to settle some debt. That will give people some breathing room to make the DMP more successful.

  • Jason Taylor

    There are not going to be too many Bob’s that plop down $4000 to begin the program. Most consumers who have cash on hand spend it making minimum payments and when they run out of the cash on hand, then they seek help. Also long term I don’t think creditors are going to go for this, when they see some creditors being paid in full, even using a DMP, they are going to question why THEY should settle when the client can apparently afford to pay the OTHER creditors back in full. In theory, I really would love to see this work, I just don’t believe it will in the long run. I do sincerely hope that I am wrong.

  • Jason Taylor

    There are not going to be too many Bob’s that plop down $4000 to begin the program. Most consumers who have cash on hand spend it making minimum payments and when they run out of the cash on hand, then they seek help. Also long term I don’t think creditors are going to go for this, when they see some creditors being paid in full, even using a DMP, they are going to question why THEY should settle when the client can apparently afford to pay the OTHER creditors back in full. In theory, I really would love to see this work, I just don’t believe it will in the long run. I do sincerely hope that I am wrong.

    • http://GetOutOfDebt.org Steve Rhode

      Hopefully others here will speak up but what I hear time and time again is that people are able to find some cash on hand to settle some debt. That will give people some breathing room to make the DMP more successful.

      • Tom Brown

        If I had to throw out a number and estimate; 3/10 people will be able to increase payments toward a settlement. 1/10 would be able to do a lump sum.

  • Steve Rhode

    The only thing that will change is the debt settlement guys will clean up and since they will be offering the DMP as part of their solution it will significantly neutralize the criticisms of debt settlement.

    Of course the ultimate killer to arguments if the solution is effective is if debt settlement groups would embrace performance transparency.

    The more they show, the more they will be trusted by a wide range of people.

  • Letitride

    As much as I agree with you both, the term “institutionally stupid” is most applicable here ….10:1 says the fair share prevails and the banks will use that as leverage to stop the hybrids.
    I do hope Im wrong, but until the us vs. them mentality goes away nothing will change :(

  • Andy Faria

    A hybrid program done correctly will blow the doors off both ds and cc providers that only focus on one or the other. Both should be concerned enough to begin exploring the option.

    I agree w/ Michael that cc’s are in a far better position to begin offering this, but they would need to get off the fair share, and take back some of the control. It would be bold move, no doubt. Just waiting to see who’s gonna step up and do it.

    I’m not sure how well a partnership between a ds and cc provider would work though. If they remain separate and only get paid to perform a specific function of the program, their interests will conflict eventually, and the consumer could get stuck in a “tug-of-war” situation.

  • http://northeast-properties.com Andy Faria

    A hybrid program done correctly will blow the doors off both ds and cc providers that only focus on one or the other. Both should be concerned enough to begin exploring the option.

    I agree w/ Michael that cc’s are in a far better position to begin offering this, but they would need to get off the fair share, and take back some of the control. It would be bold move, no doubt. Just waiting to see who’s gonna step up and do it.

    I’m not sure how well a partnership between a ds and cc provider would work though. If they remain separate and only get paid to perform a specific function of the program, their interests will conflict eventually, and the consumer could get stuck in a “tug-of-war” situation.

    • Letitride

      As much as I agree with you both, the term “institutionally stupid” is most applicable here ….10:1 says the fair share prevails and the banks will use that as leverage to stop the hybrids.
      I do hope Im wrong, but until the us vs. them mentality goes away nothing will change :(

      • http://GetOutOfDebt.org Steve Rhode

        The only thing that will change is the debt settlement guys will clean up and since they will be offering the DMP as part of their solution it will significantly neutralize the criticisms of debt settlement.

        Of course the ultimate killer to arguments if the solution is effective is if debt settlement groups would embrace performance transparency.

        The more they show, the more they will be trusted by a wide range of people.

  • Michael

    While my opinion on this topic may be in the minority (perhaps not for long), CCA’s are in a far better position to serve consumers needs for debt relief with their existing infrastructure and when contemplating the framework of state and federal legislation either passed or under consideration, than any other.

    Fair share dependence by CCA’s is what has cut them both ways.

    I completely agree with the underlying premise of this article. The operational and market realities existing today have necessitated creative thinking and structural changes. Not just by service providers, but by creditors and the collection assignment pipelines too.

  • Michael

    While my opinion on this topic may be in the minority (perhaps not for long), CCA’s are in a far better position to serve consumers needs for debt relief with their existing infrastructure and when contemplating the framework of state and federal legislation either passed or under consideration, than any other.

    Fair share dependence by CCA’s is what has cut them both ways.

    I completely agree with the underlying premise of this article. The operational and market realities existing today have necessitated creative thinking and structural changes. Not just by service providers, but by creditors and the collection assignment pipelines too.

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