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Does Credit Counseling Have a Fiduciary Duty to Mention Ethical Debt Settlement to Consumers?

Does Credit Counseling Have a Fiduciary Duty to Mention Ethical Debt Settlement to Consumers?

Yesterday a commenter on my article Dear Credit Counselors, You Are Your Own Worst Enemy made a very interesting comment that raises a number of questions.

The comments had been flowing between what appeared to be people from credit counseling and debt settlement when the issue was raised that credit counseling groups should have a fiduciary duty to the people they advise to mention debt settlement.

The commenter is absolutely correct.

Credit counseling has long vilified and discounted debt settlement as the “other guys” or the “bad guys” and absolutely for a while many marketers of advanced fee debt settlement were horrible. But it was the marketers and lies that were horrible and that I fought against, not the fundamental facts of debt settlement.

Even back in my credit counseling days my nonprofit credit counseling group managed to settle debt for consumers that needed it and had the capacity to utilize that solution. The hard part is getting credit counselors to alter their perception that all debt reduction solutions are about monthly payment plans. Debt settlement does not need to be and is in fact best offered with assets in hand.

The credit counseling supporter in those comments I mentioned actually said that the problem with debt settlement is that it is fundamentally flawed when the reality is the debt management plan is fundamentally flawed.

In the 1990s a debt management plan would actually cut the monthly payment in half and reduce most interest rates to 0%. Today that’s not the case and the debt management plan does not provide enough meaningful assistance to a broad number of consumers that are looking for sufficient breathing room to make ends meet.

There is nothing fundamentally wrong with settling a debt for less than is owed when both the creditor and debtor agree to that deal and the consumer is aware of possible consequences. In that case debt settlement is a tool, like any other, like a debt management plan.

So what is the difference between a proposed debt management plan that a creditor accepts and a proposed settlement offer the creditor accepts? Are they not both mutually acceptable offers used to remedy a bad debt situation?

Granted, not everyone is suitable for a debt settlement solution. But reciprocally not everyone is universally excluded as well. Consider the people who are told by credit counseling that the debt management plan won’t work because they can’t afford the payment. Could they settle some of the debt and make room for a debt management plan in their lives?

So what about that hybrid approach? How about settling a couple of the debts and then putting the rest on a debt management plan? Why not create an affordable plan with the tools at hand?

The skill of a great surgeon isn’t what is in her hands at the surgical table. It’s what’s between her ears that makes her great.

The skill of an exceptional nonprofit credit counseling group should not be they offer one payment intervention solution it should be they can intellectually create a way to use all tools at hand to create a comprehensive solution for the consumer without discounting one out of nothing but bias.

The Tricky Bits

Credit counselors can be taught how to do this but they first have to overcome and deal with the elephant in the room.

It won’t be till nonprofit credit counselors can break free from the golden handcuffs placed on them by creditors long ago that they will be able to act independently and in the best fiduciary capacity for the consumer that is coming to them for charitable advice and help.

Creditors have driven down fairshare funding so low they have boxed credit counselors into a corner and many may not be able to even survive. So outside of having a fiduciary duty to present the consumer with all their options to deal with their debt, how can they turn their back on a solution that can provide them with some additional ethical revenue in these growing dire times? Is that a smart thing to do in a fiduciary capacity for their own organization.

It’s been almost like a soap opera to watch nonprofit credit counseling try to develop their Less Than Full Balance (LTFB) solution in cooperation with their creditor contacts. They’ve struggled for years to get that rolling. And yet every single day they have floundered yo get that operational, good debt settlement companies have been reaching agreement with creditors and collectors and actually settling debt. And why has this happened? Could it be that credit counseling has been trying to please the creditors rather than best serving the consumers?

So what about the liability of not settling? I can see a time in the not too distant future when lawyers will go after nonprofit credit counseling groups for not having mentioned debt settlement and considered it as a solution for the consumer they assisted. By not learning and implementing that useful tool in certain situations it will expose the credit counselors to large liability for NOT acting in a fiduciary capacity to serve the charitable class of people they are supposed to serve.

Does Credit Counseling Have a Fiduciary Duty to Mention Ethical Debt Settlement to Consumers?
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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.
  • Jennifer

    as the debt industry evolves from a couple of different factions into one (debt relief) this is even more important in avoiding a lawsuit. This is a great definition of fiduciary and makes it pretty clear that anyone guiding a consumer through their debt relief options better include all options and discuss these options in detail to avoid being sued down the road.

  • Steve Rhode

    What is the underlying situation? Are you able to afford the payments now? What’s changed that makes you seek help at this time?

  • Gary

    Steve
    Please, please give me your top 3 recomendations for the TOP  Debt Reduction Firms(people) that you would turn to to solve your problems if you had them like I do.
    I need to get about 50,000 of unsecured credit card debt reduced and also an unsecured loan of 55,000 reduced.
    HELP.

  • Gary

    Steve
    Please, please give me your top 3 recomendations for the TOP  Debt Reduction Firms(people) that you would turn to to solve your problems if you had them like I do.
    I need to get about 50,000 of unsecured credit card debt reduced and also an unsecured loan of 55,000 reduced.
    HELP.

    • http://GetOutOfDebt.org Steve Rhode

      What is the underlying situation? Are you able to afford the payments now? What’s changed that makes you seek help at this time?

  • Carl

    they absolutely have a fiduciary responsibility to examine all debt relief options with their clients and so do any others in the debt industry including debt settlement people.
    Definition of fiduciary: fiduciary n. from the Latin fiducia, meaning “trust,” a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty. The most common is a trustee of a trust, but fiduciaries can include business advisers, attorneys, guardians, administrators of estates, real estate agents, bankers, stock brokers, title companies, or anyone who undertakes to assist someone who places complete confidence and trust in that person or company. Characteristically, the fiduciary has greater knowledge and expertise about the matters being handled. A fiduciary is held to a standard of conduct and trust above that of a stranger or of a casual business person. He/she/it must avoid “self-dealing” or “conflicts of interests” in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it. For example, a stockbroker must consider the best investment for the client, and not buy or sell on the basis of what brings him/her the highest commission. While a fiduciary and the beneficiary may join together in a business venture or a purchase of property, the best interest of the beneficiary must be primary, and absolute candor is required of the fiduciary.

  • Carl

    they absolutely have a fiduciary responsibility to examine all debt relief options with their clients and so do any others in the debt industry including debt settlement people.
    Definition of fiduciary: fiduciary n. from the Latin fiducia, meaning “trust,” a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty. The most common is a trustee of a trust, but fiduciaries can include business advisers, attorneys, guardians, administrators of estates, real estate agents, bankers, stock brokers, title companies, or anyone who undertakes to assist someone who places complete confidence and trust in that person or company. Characteristically, the fiduciary has greater knowledge and expertise about the matters being handled. A fiduciary is held to a standard of conduct and trust above that of a stranger or of a casual business person. He/she/it must avoid “self-dealing” or “conflicts of interests” in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it. For example, a stockbroker must consider the best investment for the client, and not buy or sell on the basis of what brings him/her the highest commission. While a fiduciary and the beneficiary may join together in a business venture or a purchase of property, the best interest of the beneficiary must be primary, and absolute candor is required of the fiduciary.  

    • Jennifer

      as the debt industry evolves from a couple of different factions into one (debt relief) this is even more important in avoiding a lawsuit. This is a great definition of fiduciary and makes it pretty clear that anyone guiding a consumer through their debt relief options better include all options and discuss these options in detail to avoid being sued down the road.

  • Jason

    boy do you ever paint all DSC’s with the same brush…I have never been with a company that ripped off their clients and I have many colleagues in debt settlement with good companies…these are honest hard working professionals helping consumers for the right reasons, they have every right to be here and to be successful.

  • Steve Rhode

    I’m not beating you up over this. I realize you are on the front lines. The take away is that the space that helps people is evolving quickly from a credit counseling – debt settlement division to one of debt relief that covers all debt relief solutions.

    There are nonprofit credit counseling agencies out there that are actively exploring debt settlement but they are doing it very quietly. But trust me, it’s coming.

    You don’t have to run to accept debt settlement but there are a lot of good people here that can answer any question you may have about in order to bury any misconception and gut reaction you may have over it.

    On the credit counseling side there are about five nonprofit credit counseling groups that are accepting consumers from debt settlement companies and building their client base that way.

  • When will it end?

    That is unreal sounds like McCallan strikes again. LOL..I never contact the creditors that is a different department but you are correct they are calling the DMP contact and area. This agency is a HUD approved housing counseling and credit counseling agency and keep in mind I’m just a counselor not the Executive Director.

  • Steve Rhode

    They are settling debt every single day. What do your contacts say when you present them with a settlement offer? If you are running into obstacles it’s most likely because you are calling your DMP contacts at the creditor and not the debt settlement contacts.

  • When will it end?

    I didnt miss her point at all, but I take offense to this I’m now a holistic DSC (FTC enforced) and forget about the millions of people I ripped off and so what that the client is past its ok, let move forward now I’m rehabiliated.  Not hostility, just disgust.

  • When will it end?

    The hybrid approach sounds great in theory but how is it going to be implemented? the creditors make the rules of the game always have I dont believe they will ever change. Its seems to complex for them to grasp. Its black and white with them counseling does this and DS does that.  No intergrating the two services.

  • Steve Rhode

    On a slightly different note I thought you might enjoy looking at this article about a company that is charging $1,495 for people to enter a nonprofit credit counseling program.

  • Janmcmillan987

    I think you totally missed Klara’s point, she said many clients are already in arrears before beginning a DS program or are told of the consequences of stopping payments before starting a DS program (along with everything else). Duh…of course a creditor is not willing to settle with someone who is current, a good counselor will explain this and  ”everything else” about all options as you say that you do. Your hostility towards DS is so obvious in your comments and I think Klara was trying to tell you to just let that go.

  • Steve Rhode

    Debt settlement is not a mass market solution but neither is credit counseling today.

    However, if applied wisely, a combination approach may make logical sense. Why not settle one debt and leave a smaller DMP that allows someone to save while on the DMP? Wouldn’t that be more beneficial for people that want to deal with their debt with a DMP?

  • When will it end?

    Steve, I understand and these points are well taken but this statement you made is my point.

    “When debt settlement is done right it does not result in a wage garnishment and it can even be accomplished prior to charge off.”

    How many clients are settling a $10k balance is less than 6 months?

    And “it can be” is a small but bold statement. This goes back to what we’ve discussed in the past, have client liquidate assets and even in the quote here:

    “Pool of prospective clients who have incomes above the median and usually have assets that would be force liquidated in a BK”

    These are the exceptions not the norm, and you ask me not to paint every DSC with the same brush but examples of clients are probably 1 in 10 that fit the criteria.

  • When will it end?

    Klara, Really? Please…the truth of the matter is there is no settlement without deliquency! Period! So how many of your clients are current or just about to fall behind?

    Just because you tell someone you going to punch them in face before you do it doesn’t make right.

  • Steve Rhode

    I don’t think you can paint all of debt settlement with a broad brush. The objections that you seem to be raising are about the incorrect application of a solution, and not the solution itself.

    Similar criticism could be leveled at credit counseling as well. For example, enrolling people and not allowing room for at least a $100 per month savings account or emergency fund. Not everyone does that.

    The more you learn about actual debt settlement the more you will discover there are providers that are technically more astute than you may believe. For example, read this article by Charles Phelan, like How Settlement Companies Can Maximize Income and Have Happier Clients by Teaching People How to Settle Their Own Debts.

    It would be a mistake to believe that simply telling someone to stop paying their debts is how you teach someone to do debt settlement. You need to be aware of current trends, debt buyer trends, the state they live in, statute of limitation issues, cash on hand, etc.

    When debt settlement is done right it does not result in a wage garnishment and it can even be accomplished prior to charge off.

    I agree that telling someone to stop paying their bills without education is not wise, but what do you say to the consumer that has always been current, is current now, and they call their creditor for help and they can’t offer anything.

    That’s simply a policy issue by the creditors. Better deals are available in different stages of collections. You don’t have to tell a consumer to stop paying their bills but you can tell them what the current creditor policy is based on the bucket they are in.

    So if a consumer could cut their credit counseling payment in half if they were delinquent when they entered the DMP, would you not tell them? And if you did not tell them that are you serving the creditor or consumer first?

    But as Phelan says, “Debt settlement is only a suitable alternative to Chapter 13 bankruptcy, not for Chapter 7. 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!”

    These are great issues for debate and I’m glad we are all having this conversation.

  • Klara

    maybe it is time to forget about the last 5 years and your hostility against DS and move forward, this debate is about what is happening now and moving forward into the future. Also a large number of DS clients had stopped making payments long befor entering a program and those who have not a thoroughly advised of the consequences of stopping payments before starting a program. Again forget the past…do what’s right for your clients and move forward.

  • When will it end?

    Steve, did I start all of this? LOL… It actually is a great debate, but I still think everyone is missing the point. Its not debt settlement itself, the act of actually settling the debt is fine. The problem is telling current clients to stop paying, and all the other ramifications that you cannot compare to counseling’s flaws.

     So answer me this saving only $200 on DMP is compared to wage garnishment for non payment with DSC?

    Talk about not even in the same ball park. As far as the responsiblity end I educate my clients on every possible option available DMP,DS, BK,non-payment. That is really the only comment that insulted me was now the DSC reps are holier than thou after they schredded everyone for the past 5 years.  They all should be the last ones talking about fiduciary responsibilty.

  • When will it end?

    Steve, did I start all of this? LOL… It actually is a great debate, but I still think everyone is missing the point. Its not debt settlement itself, the act of actually settling the debt is fine. The problem is telling current clients to stop paying, and all the other ramifications that you cannot compare to counseling’s flaws.

     So answer me this saving only $200 on DMP is compared to wage garnishment for non payment with DSC?

    Talk about not even in the same ball park. As far as the responsiblity end I educate my clients on every possible option available DMP,DS, BK,non-payment. That is really the only comment that insulted me was now the DSC reps are holier than thou after they schredded everyone for the past 5 years.  They all should be the last ones talking about fiduciary responsibilty.

    • Klara

      maybe it is time to forget about the last 5 years and your hostility against DS and move forward, this debate is about what is happening now and moving forward into the future. Also a large number of DS clients had stopped making payments long befor entering a program and those who have not a thoroughly advised of the consequences of stopping payments before starting a program. Again forget the past…do what’s right for your clients and move forward.

      • When will it end?

        Klara, Really? Please…the truth of the matter is there is no settlement without deliquency! Period! So how many of your clients are current or just about to fall behind?

        Just because you tell someone you going to punch them in face before you do it doesn’t make right.

      • Janmcmillan987

        I think you totally missed Klara’s point, she said many clients are already in arrears before beginning a DS program or are told of the consequences of stopping payments before starting a DS program (along with everything else). Duh…of course a creditor is not willing to settle with someone who is current, a good counselor will explain this and  ”everything else” about all options as you say that you do. Your hostility towards DS is so obvious in your comments and I think Klara was trying to tell you to just let that go.

      • When will it end?

        I didnt miss her point at all, but I take offense to this I’m now a holistic DSC (FTC enforced) and forget about the millions of people I ripped off and so what that the client is past its ok, let move forward now I’m rehabiliated.  Not hostility, just disgust.

      • Jason

        boy do you ever paint all DSC’s with the same brush…I have never been with a company that ripped off their clients and I have many colleagues in debt settlement with good companies…these are honest hard working professionals helping consumers for the right reasons, they have every right to be here and to be successful.

    • http://GetOutOfDebt.org Steve Rhode

      I don’t think you can paint all of debt settlement with a broad brush. The objections that you seem to be raising are about the incorrect application of a solution, and not the solution itself.

      Similar criticism could be leveled at credit counseling as well. For example, enrolling people and not allowing room for at least a $100 per month savings account or emergency fund. Not everyone does that.

      The more you learn about actual debt settlement the more you will discover there are providers that are technically more astute than you may believe. For example, read this article by Charles Phelan, like How Settlement Companies Can Maximize Income and Have Happier Clients by Teaching People How to Settle Their Own Debts.

      It would be a mistake to believe that simply telling someone to stop paying their debts is how you teach someone to do debt settlement. You need to be aware of current trends, debt buyer trends, the state they live in, statute of limitation issues, cash on hand, etc.

      When debt settlement is done right it does not result in a wage garnishment and it can even be accomplished prior to charge off.

      I agree that telling someone to stop paying their bills without education is not wise, but what do you say to the consumer that has always been current, is current now, and they call their creditor for help and they can’t offer anything.

      That’s simply a policy issue by the creditors. Better deals are available in different stages of collections. You don’t have to tell a consumer to stop paying their bills but you can tell them what the current creditor policy is based on the bucket they are in.

      So if a consumer could cut their credit counseling payment in half if they were delinquent when they entered the DMP, would you not tell them? And if you did not tell them that are you serving the creditor or consumer first?

      But as Phelan says, “Debt settlement is only a suitable alternative to Chapter 13 bankruptcy, not for Chapter 7. 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!”

      These are great issues for debate and I’m glad we are all having this conversation.

      • When will it end?

        Steve, I understand and these points are well taken but this statement you made is my point.

        “When debt settlement is done right it does not result in a wage garnishment and it can even be accomplished prior to charge off.”

        How many clients are settling a $10k balance is less than 6 months?

        And “it can be” is a small but bold statement. This goes back to what we’ve discussed in the past, have client liquidate assets and even in the quote here:

        “Pool of prospective clients who have incomes above the median and usually have assets that would be force liquidated in a BK”

        These are the exceptions not the norm, and you ask me not to paint every DSC with the same brush but examples of clients are probably 1 in 10 that fit the criteria.

      • http://GetOutOfDebt.org Steve Rhode

        Debt settlement is not a mass market solution but neither is credit counseling today.

        However, if applied wisely, a combination approach may make logical sense. Why not settle one debt and leave a smaller DMP that allows someone to save while on the DMP? Wouldn’t that be more beneficial for people that want to deal with their debt with a DMP?

      • When will it end?

        The hybrid approach sounds great in theory but how is it going to be implemented? the creditors make the rules of the game always have I dont believe they will ever change. Its seems to complex for them to grasp. Its black and white with them counseling does this and DS does that.  No intergrating the two services.  

      • http://GetOutOfDebt.org Steve Rhode

        They are settling debt every single day. What do your contacts say when you present them with a settlement offer? If you are running into obstacles it’s most likely because you are calling your DMP contacts at the creditor and not the debt settlement contacts.

      • http://GetOutOfDebt.org Steve Rhode

        On a slightly different note I thought you might enjoy looking at this article about a company that is charging $1,495 for people to enter a nonprofit credit counseling program.

      • When will it end?

        That is unreal sounds like McCallan strikes again. LOL..I never contact the creditors that is a different department but you are correct they are calling the DMP contact and area. This agency is a HUD approved housing counseling and credit counseling agency and keep in mind I’m just a counselor not the Executive Director.

      • http://GetOutOfDebt.org Steve Rhode

        I’m not beating you up over this. I realize you are on the front lines. The take away is that the space that helps people is evolving quickly from a credit counseling – debt settlement division to one of debt relief that covers all debt relief solutions.

        There are nonprofit credit counseling agencies out there that are actively exploring debt settlement but they are doing it very quietly. But trust me, it’s coming.

        You don’t have to run to accept debt settlement but there are a lot of good people here that can answer any question you may have about in order to bury any misconception and gut reaction you may have over it.

        On the credit counseling side there are about five nonprofit credit counseling groups that are accepting consumers from debt settlement companies and building their client base that way.

  • Julian

    This is a very timely post Steve. With the changes and re-structuring of the entire debt relief industry in the past several months we have ended up with a whole new approach by many progressive service providers. I think this is the first time the industry has had a core group of debt relief companies moving forward who are discussing all debt relief options with their clients and potential clients, a hybrid approach. With this development in the debt relief space where consumers are receiving more information on more debt relief options from companies who have chosen to provide hybrid debt relief solutions and advice companies who continue to advise consumers only on what they have traditionally provided (CC & DMPs or DS) need to be concerned with their fiduciary responsibility to the consumer not being met. The industry has changed and those still here better change with it.

  • Julian

    This is a very timely post Steve. With the changes and re-structuring of the entire debt relief industry in the past several months we have ended up with a whole new approach by many progressive service providers. I think this is the first time the industry has had a core group of debt relief companies moving forward who are discussing all debt relief options with their clients and potential clients, a hybrid approach. With this development in the debt relief space where consumers are receiving more information on more debt relief options from companies who have chosen to provide hybrid debt relief solutions and advice companies who continue to advise consumers only on what they have traditionally provided (CC & DMPs or DS) need to be concerned with their fiduciary responsibility to the consumer not being met. The industry has changed and those still here better change with it.

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