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Debt Relief Options for consumers – Is the delivery system broken?

Most of the debt relief services industry works less than 30% of the time. It could use a tune up.

Imagine if the car you are driving has a six cylinder engine, but four of them did not function. You would do something about it, right? Even if doing something meant replacing the car? Most would. Not the debt relief industry. That’s not how they roll. The industries failures leave 2/3rds or more of its customers stranded, and often far from the destination they were trying to get to, or that they were told they would be delivered to.

Here is some context:

Chapter 13 bankruptcy numbers reflect that less than one third of filers complete the court sponsored repayment plan. Some chapter 13 filers do convert later to a chapter 7, but I cannot locate a resource that estimates how many.

The data available from the credit counseling industry shows that less than one third of consumers enrolled in a debt management plan complete them. Some debt management plan providers have a 1/3rd or higher customer attrition rate in the first 12 months of a 48 to 60 month plan.

Debt settlement companies do not provide much in the way of program completion data, but I have no problem at all with stating less than a third of the people enrolled into a debt settlement services plan over the last decade actually settle all of the accounts they enrolled.

I know of notable service provider exceptions that exceed the poor performance measures above, but as an aggregate the performance is just that poor.

A good portion of why I determine the debt relief pipe line and delivery system for information and services available to consumers to be broken is the result of inflexibilities, industry practices, and the predisposition of people in a financial bind to:

  • Grasp onto solutions based on incorrect perceptions
  • Listen to incomplete representations made by others and take them too literally
  • Fail to assess the facts, needs, and reality of their circumstances in the immediate and near term.
  • Failure to get fully informed
  • Desire to hand over problems to someone else

Debt relief service providers, promoters, lead generators, commentators in media and elsewhere, promote a broken system daily. Why?

Money – Combined, debt relief services generate tens of millions in revenue each month. Advertisers of all flavor, lead generators, marketers (both call center and individual), vendors and companies offering services operate with revenue generating interests first and consumer interests next – if at all.

Media – The media plays to their audience and most people want to avoid bankruptcy. Most of the media reports about debt settlement over the past several years have been harsh to an extreme. Most of the settlement services industry operated, or continue to operate in a way that fuels the harsh treatment it’s been targeted for. Debt management plans offered by credit counseling agencies (CCA’s) are non confrontational. Referring to a credit counselor is a safe thing to do. It is generally accepted that people should pay back what they owe and credit counseling firms provide the ability to do that at a lower monthly rate. Problem is, the vast majority of people referred to debt counselors don’t qualify to enroll in a DMP. Of those that do enroll, 70 or more percent don’t complete the plan.

Control – Banks exercise control over virtually all credit counseling agencies because they can. Nonprofit CCA’s that stray from the herd are threatened to have bank funding cut and even lose the ability to submit repayment proposals. That threat keeps CCA’s in line. The very agencies that are repeatedly referred to as charitable organizations, whose purpose is to deliver education and information to people in a financial bind, are effectively causing harm as they are only permitted to offer an inflexible option that assures they can help less and less people in the current economy. This fact is well established on the get out of debt site.

Debt settlement services have been broken for many years. In my opinion, the vast majority of individuals and companies operating in the debt settlement industry are purely profit and revenue focused and could give a rip whether their customers will succeed in debt relief or not. There have been many changes to the settlement industry recently, but unfortunately my opinion of my own side of the industry has not changed much.

Furthering the jalopy analogy where only one or two cylinders of an engine are operating, 2/3rds or more of the millions of people in need of debt relief are hopping into, or being sold into, a journey that will find them stalled out, pulled over on the shoulder with blue smoke emanating from the vehicle, and waiting for emergency assistance.

Even though the debt settlement services side of the industry is predominantly populated by profiteers, I consider the CCA side to be the most broken and dysfunctional on the debt relief highway. Why?

  • Legitimate debt settlement companies no longer charge advance fees when they are settling debts on behalf of their customers. The vast majority of settlement companies charge too much, which does not change the dynamic of incomplete program percentages down the road, but debt relief passengers will no longer pay the jalopy driver full fair upfront for only delivering them 1/3 or less of the way. This fact at least addresses the loss of financial resources that plagued debt settlement passengers in years past.

CCA’s are in the best position to deliver the most – to more consumers – at an affordable rate. They have categorically failed to embrace the role they are held up to serve. A role that is in fact a directive for them, given most of them enjoy tax exempt status. The control that their financial service industry partners exhibit over them causes them to be the least efficient debt relief vehicle on the highway. Less than 20% of people they speak with can qualify for the plans they offer and less than a third of those that do qualify ever reach their destination. This causes the largest misallocation of time and financial resources for debt strapped consumers in the debt relief industry – given today’s service provider market realities.

The number one reason the debt relief industry is broken: The sales and screening process.

This one issue actually breaks down into several failures and mainly pertains to credit counseling and debt settlement.

  1. Failure to correctly seek to understand the consumer’s financial situation because of revenue goals, lack of training, overhead inefficiencies, systems management.
  2. Failure to adequately inform the consumer of all alternatives.
  3. Failure to fully detail the benefits and drawbacks of each option which may differ from one person’s situation to the next.
  4. Failure to provide clear cost and time benefits of each option.

These failures are known and quantifiable for the harm they inflict on debt relief travelers. The loss of time and financial resources that occur 2/3rds or more of the time also harm other travelers on the economic highway – people not involved in debt relief. The affects to communities, states, and the nation as a whole are compounded when millions of people are strung out on a plan for debt relief that dramatically impacts the individual ability to return to responsible spending in a time frame consistent with the depth of their financial hardship, and where 2/3rds or more were never going to reach their destination. This of course means more debt relief seekers should be directed to speak with an attorney and evaluate their options with chapter 7 bankruptcy, or be provided detailed education and analysis about settling accounts (as long as settlement can be completed in an efficient time frame and at an affordable price when performed by service providers). CCA’s and settlement companies don’t really do that. They don’t assess the situation and encourage the debt relief seeker to learn more about options they don’t provide – when the person they are speaking with is a potential customer. If they did, they would be saying something like: “Jane, you do qualify for our program, but you also may be better served by filing bankruptcy. I know you want to avoid that, but you owe it to yourself and your family to fully evaluate the option as it may provide you the quickest most cost effective relief you need right now”. How many service providers can honestly say that when they have a qualified consumer, they delay “the close” and encourage the person to seek details on remedies they don’t offer and will not get paid for?

Chapter 7 is not mentioned above because it is not broken. There were changes to bankruptcy laws in 2005 that were the result of heavy lobbying by the banking sector because banks said chapter 7 needed to be fixed. It did not need fixing, but the changes took effect anyway. Regardless, chapter 7 still works in the way it was intended. For the majority of chapter 7 filers it provides the least costly, most immediate and effective debt relief. It gives those who seek it a fresh start and is not plagued with poor performance numbers.

Until screening and suitability issues are addressed; until service providers fully embrace educating consumers about ALL options for debt relief available as relate to each person’s unique set of circumstances; until CCA’s break the chains the bind them; until more consumers realize the responsibility they have to become fully informed; the debt relief services industry will continue to create harm and conflict where wholly unnecessary.

I would really like to hear from debt relief industry participants about their ideas for how to create a better debt relief system in the comments section below. How can we as a group create an industry that is successful with 2/3rds or more of the people we come in contact with?

For those seeking information about options and the assistance available when struggling with debts – there are limited options, but no shortage of opinions and people offering to help. If you are unable to make timely payments on all of your monthly obligations while consistently putting at least some money aside for savings and emergencies, you may need some type of debt intervention. You DO have the responsibility of getting completely informed about all of your options, including debt management plans, debt settlement and bankruptcy. Until you are completely informed you have 70% (likely higher) statistical odds of hopping into a jalopy disguised as dependable transportation that ultimately prevents you from getting to where you were going.

I can always use your help. If you have a tip or information you want to share, you can get it to me confidentially if you click here.

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About Michael Bovee

Michael Bovee
  • http://www.consumerrecoverynetwork.com/ Michael

    And here we have another link found in my daily “debt settlement” Google alert:
    http://www.debtsettlementfamily.com/questions/how-do-i-choose-a-debt-settlement-company-that-wont-scam-me
    The linked answer to the question is about as short on detail as can be and fails to point out that the vast majority of companies who have proven to have problematic business practices, closed up shop leaving people high and dry etc., used independent escrow.
    Nothing against using escrow, I support the practice, but it does not differentiate a good company from bad.

  • http://www.consumerrecoverynetwork.com/ Michael

    Here is an example of media promoting a broken system:
    http://www.foxbusiness.com/personal-finance/2012/01/25/how-to-manage-your-debt-anxiety/

    The article has great tips and advice to be sure. The article ends with what is unfortunately still a necessary warning about settlement companies and then highlights consumer credit counseling as the “what to do next”. Statistically, what to do next in the article cannot be done by the majority and the recommendation is only 1/3 of the intervention information people struggling with debt should seek out.

  • Melissa

    Regarding Gregg’s last comment below (reply to Fitz) I would really like to know the true “state of the union” in the current debt relief industry, I wonder how many companies are still practising and the size of these companies. I believe there is something in what Gregg said about there being very large and very small companies left, how can we get a handle what the industry is currently made up of Steve?

    I have heard a wide range of estimates including that there were 3000 companies a couple of years ago and down to 300 companies now, who knows this information?

    Melissa

    • TRUE

      Members
      TASC™ boasts a member population of 50 and counting, and we’ve simplified the search process so that you can find certified debt settlement companies

      • TRUE

        Search over 500 Companies with IAPDA Members !See all IAPDA members with a particular company.

        http://www.iapda.org/search.php

      • Julian

        True,
        IAPDA allows people to search their database of companies that have ever had an IAPDA member registered (historical list), that does not mean the company is still operating with currently certified members. The search results show whether the IAPDA member is current with certification or if his/her certification is lapsed. They also have a page with links to companies that have currently certified members and this page currently lists approx. 80 companies, I’m sure that’s not an accurate guage of the size of the current industry.

    • Julian

      TASC/AFCC website lists only 37 companies, SAFTI lists only 31 members on their website and the AACC website has disappeared?
      This is a long way from a complete list of companies operating in the space.
      It sure would be good to know where we really are in this industry Melissa.

      • Matt Hearn

        I thought I would chime in for a second… The SAFTI System has taken on a life of it’s own and we are no longer adding the members to the present site. We have partnered with several high level 3rd party firms in the consumer protection realm and are taking the system to a new level. The new site, slated for launch March 1st, will put the light on the entire population of current and active firms operating in the space, along with pertinent information about those firms. It will make consumer protection the forefront issue and will create “never before seen” synergies between ALL parties involved in the process. I can’t let too much out right now, but this is such a game changer, we had to partner with organizations with much more robust technologies and influence in creating the type of system we envision. I will tell you this, SAFTI will be the shot heard around the world. Mark my words on that one! It will take the debt relief world into the mainstream financial services realm in an incredible way…

      • Guest

        WOW, I hope this thing lives up to the HYPE from Matt Hearn..I guess we will see.

      • Matt Hearn

         Well, if you actually know me, you’ll know I don’t make hype. I do what I say I am going to do. If it happens to excite you along the way, then great. I am sorry to say, however, only the good companies will be excited about the system when it deploys. It’s….well….designed with a purpose, if you know what I mean. Self regulation isn’t always pretty, but it’s what we need to straighten the road.

      • wondering

        any update on the progress of this, you were promoting a March 1 launch ???

    • http://GetOutOfDebt.org Steve Rhode

      Do we count credit counseling groups as well as part of debt relief?

      • Melissa

        Steve,
        I think the CCC numbers are important too as long as they are not combined with DS. I think from the references made in the comments that most here are interested in learning exactly where the debt settlement side of the industry has ended up so we can measure any progress or further decline etc.

        Thank you Fitz.

        Melissa

      • http://GetOutOfDebt.org Steve Rhode

        My gut is there are about 100 or so companies that are working hard at making a go of it and about 200-300 fly-by-night uneducated mom-and-pop sprout up companies floating about.

        As I pointed out in My Debt Relief Industry Forecast for 2012 the companies that survive are those that get lean and develop a better approach and not those that try to make the old approach work.

      • Melissa

        Thanks Steve I think your gut (if anyone’s) can be relied on but sure wish there was a way to get hard data. I also agree…to make it work going forward companies need everything you recommend.
        Personally I don’t have a problem with small companies (Mom & Pop?) as long as they are not the “fly-by-night uneducated types”, they have every opportunity to educate themselves, set up compliantly, be the best they can, serve their clients well and earn a great professional income as well.

        Melissa

      • http://GetOutOfDebt.org Steve Rhode

        Good clarification on the mom and pop small ones. I agree.

        There has never been any hard data. They CFPB has been working on rules to require registration of all debt relief companies, which I met with them about to provide support.

        Currently the credit counseling groups are fighting back saying they should not have to register.

        Expect some rules in the next 12 months requiring all companies involved in selling debt relief services to have to register with the CFPB. And then we’ll have the best numbers possible.

      • http://www.consumerrecoverynetwork.com/ Michael

        Melissa,
        The 3000 company number in the settlement space did not differentiate between companies marketing/selling settlement and those providing the actual service. I do not think there was ever more than 1000 companies actually providing the service of negotiating and settling debts.
        From my view there are less than 100 established companies providing direct debt settlement services today (excluding attorneys negotiating on behalf of clients).
        I would estimate there are somewhere around 300 CCA’s operating today. If someone from the CCA side could jump in with a reliable number that would be great.

    • Fitz

      That’s a great question Melissa

  • Melissa

    Michael I agree 100% with your article and your observations, thank you for posting this. The Debt Relief industry needs to discuss these points and come together now to start a new future. Consumers deserve and need this and they need it now.

    I agree that providing detailed and accurate advice to a potential client during the screening process is the number one problem but it does not need to be. The days of fighting to keep the client at all costs should end.
    A potential client can be referred to another debt relief option to be better served and often a referal fee can be earned for the company, sending the client to another debt relief option need not be a lost opportunity to make money. Incoming referals from providers of other options can be arranged.

    There is more than ample information and training available for individual debt relief consultants to learn and fully understand all options available to the debtors they are advising. There is training and certification available from a few industry organizations (IAPDA and a couple of others) that train and certify in Debt Settlement, Credit Counseling and provide a Bankruptcy education. Staff can be equipped to provide the proper information on all debt relief options to debt strapped consumers. Companies need to be fully training their people on the front line who are giving important debt relief advice to consumers. It’s is not difficult to find the staff training resources.

    I also agree that time spent in a debt relief program should be as short as possible as it is clear that situations change and frustration builds for consumers stuck in the wrong program causing these massive drop out rates. Choosing the right option for each unique situation is paramount to keeping the focus and success.

    Melissa

    • Gregg

      Bravo Melissa, the sooner more debt relief companies take the unselfish approach and do what is best for the consumer on the other end of the phone the sooner this industry will turn the corner and begin to grow again.

      As you mentioned the training tools are there and easy to access, company managers just need to embrace this position and do what’s best for their consumer client to rid them of debt in the fastest way possible based on the individual situation of each client.

      In my opinion both CC’s and DS companies need to give their front end staff the education to properly explain the various options available instead of hoping the consumer won’t stray to another option before they can be closed on the wrong program for them.

      Company owners educate your staff and give 100% balanced advice to the people who are looking to you for this, good things will happen for you.

      • Fitz

        Before we get carried away here, proper training and education of staff alone does not solve the problem. The manner in which sales or intake staff are paid is perhaps even more important. If they are commission based, they will push what generates income for them. Even if not commission based, performance will generally be based upon the number of enrollments. The staff member who enrolls fewer customers/clients for all the right reasons, will undoubtedly not do as well as the person who seems to consistently enroll consumers who “need” the services the company offers. If anyone has an employee compensation model that addresses this, please share. Naturally if you’re selling education or ALL the possible debt relief services, this may not be a problem.

      • Gregg

        Thanks Fitz, I understand your point but to build a successful long term business companies can no longer just sign up everyone who fogs a mirror, clients dropping out at the recent historical rates that Michael wrote about will not build a viable business for the long term for anyone. Unhappy clients also do not feed a successful business model.

        This industry is at the point where signing up clients in large volumes as the only goal of the company no longer works, there are no up front fees to earn and income only comes with successfully reducing the client’s debt. A company can have a relationship with a consumer client for 2-3 years before earning a nickel. Every succesful business owner also understands that business grows from the referals of happy clients.

        I may be naive but I don’t think that the majority of companies still operating in the debt relief space and positioning to move forward only compensate their front end staff on number of enrollments made (straight commission). As Melissa mentioned there are other sources of revenue to be earned from clients not enrolled in the program of the company. Clients can be better served and be successful with a diferent program, a referal made and a happy client to refer friends and family. Referals can be reciprocal, outbound and inbound with good business relationships.

      • Fitz

        I agree with just about everything you said Gregg. I really do. I don’t mean to be crass, but it seems a bit like ivory tower thinking to me. This morning there is a DS/DMP company manager going to his front line staff who are taking calls from potential customers. Money is tight. Enrollment is down. His staff is properly trained on all aspects of debt relief (and I have doubts about this really as this is very complicated, case specific, consumer centric, and legal advice info- but lets save that for another day) and he’s saying to them: make sure you do WHATEVER is best for the caller, forget about how the company makes money and meets payroll. People go to work to improve thier lot in life. They will naturally do that which moves them up the ladder is all I am saying. How does one realistically motivate them? The only thing I can come up with is some type of reward for telling the caller the “right” thing. Does anyone do this? If anyone does, please tell me how you do cause I’d like to see how its done.

      • http://GetOutOfDebt.org Steve Rhode

        This is such an important topic I just posted “How to Motivate Debt Relief Company Sales Staff and Not Screw Consumers” for everyone to post their feedback and ideas on this subject.

      • Gregg

        Fitz, I do not disagree with what you are saying and am sure this is how it used to be but I believe the industry is now populated by the very large companies and the very small (1-10 total staff) and even individual owner/operators (sole proprietors).

        I don’t think there are that many mid size companies with a bullpen of enrollment/sales agents on straight commission left in today’s debt relief industry. We hope the very large companies are doing what is right for consumers and I feel that successful small companies recognize good business practices as it relates to their consumer clients.

        The bottom line is that in today’s industry it does not make good business sense (no matter what size your company is) to enroll a client in your program that would be better served by a different option, you will end up spending a long time with an unhappy client that will eventually drop out of your program and there are no up front fees to be made to make that worthwhile. I think it is just that simple.

      • Gregg

        Fitz, I do not disagree with what you are saying and am sure this is how it used to be but I believe the industry is now populated by the very large companies and the very small (1-10 total staff) and even individual owner/operators (sole proprietors).

        I don’t think there are that many mid size companies with a bullpen of enrollment/sales agents on straight commission left in today’s debt relief industry. We hope the very large companies are doing what is right for consumers and I feel that successful small companies recognize good business practices as it relates to their consumer clients.

        The bottom line is that in today’s industry it does not make good business sense (no matter what size your company is) to enroll a client in your program that would be better served by a different option, you will end up spending a long time with an unhappy client that will eventually drop out of your program and there are no up front fees to be made to make that worthwhile. I think it is just that simple.

    • http://GetOutOfDebt.org Steve Rhode

      Melissa,

      I totally agree with you. The guy players need to work openly, transparently, collaboratively and for the betterment of the industry and consumers.

      If they do that there will be a new day for debt relief.

      I’d love nothing better than debt relief industry good guys to use this as a platform to have these discussions.

      I’ve never been against debt relief help, just out and out screwing people. Taking advantage of consumers has only always led to regulation and more restriction. it is a pattern that has repeated about every 20 years or so since the 1940s.

      Thank you for sharing your POV. Be sure to subscribe to the debt relief industry feed to get the latest news and share your opinions.

      Steve

    • http://www.consumerrecoverynetwork.com/ Michael

      Thanks Melissa.
      I do think we are poised to be participants in a more effective and efficient industry future.
      Some challenges do exist for referral relations between the different providers when there are revenues exchanged.
      Training the industry goes a good way, but is only part of the distance that needs to be covered. My focus centers on training the consumer to help themselves first.

      • Melissa

        Hello Michael,
        I understand that there are challenges when trading referal revenues but I have heard of some unique solutions to these challenges including sharing advertising and lead costs etc. between companies of different debt relief options. There does need to be trust between companies doing business with each other and I think most companies can find good and trusted partnerships with another debt relief option.

        I also sense that you will see more in the new industry embrace the DIY education option for their clients as it is a very consumer focused position to offer this to a client. Are you willing to share how many clients will learn DIY debt settlement from you and then decide to have your company take over the negotiations because they find it is just not for them ?

        Learning in detail about how all the options work and then finding a way to make them work for your clients and your company is really the future here and I think the industry is going in that direction. Great discussion Michael, thanks again for posting.

        Melissa

      • http://www.consumerrecoverynetwork.com/ Michael

        Melissa,

        The majority of people we work with utilize the education and ongoing supplemental information to settle their accounts without 3rd party intervention. I am completely open to sharing the data. I often do as it is.

        I am preparing a couple more articles for the get out of debt site this week. Because one of them is going to directly answer your question, and then some, I will reserve further comment for later.

        I am in complete agreement with you that the future of the debt relief industry will involve better informed service providers who can/should/will be more diverse with product and services delivered. This will result in a better outcome for consumers.

      • Melissa

        Thanks Michael, I look forward to your next article.

        Melissa

  • Melissa

    Michael I agree 100% with your article and your observations, thank you for posting this. The Debt Relief industry needs to discuss these points and come together now to start a new future. Consumers deserve and need this and they need it now.

    I agree that providing detailed and accurate advice to a potential client during the screening process is the number one problem but it does not need to be. The days of fighting to keep the client at all costs should end.
    A potential client can be referred to another debt relief option to be better served and often a referal fee can be earned for the company, sending the client to another debt relief option need not be a lost opportunity to make money. Incoming referals from providers of other options can be arranged.

    There is more than ample information and training available for individual debt relief consultants to learn and fully understand all options available to the debtors they are advising. There is training and certification available from a few industry organizations (IAPDA and a couple of others) that train and certify in Debt Settlement, Credit Counseling and provide a Bankruptcy education. Staff can be equipped to provide the proper information on all debt relief options to debt strapped consumers. Companies need to be fully training their people on the front line who are giving important debt relief advice to consumers. It’s is not difficult to find the staff training resources.

    I also agree that time spent in a debt relief program should be as short as possible as it is clear that situations change and frustration builds for consumers stuck in the wrong program causing these massive drop out rates. Choosing the right option for each unique situation is paramount to keeping the focus and success.

    Melissa

  • Fitz

    Great article Michael. I hope to provide some detailed thoughts when time permits. For now, I couldn’t agree more with the statement that the number one reason the debt relief industry is broken is the sales and screening process. Don’t know that I agree with the belief that debt settlement time frames must be limited to be successful. That jalopy running on two cylinders can be nursed all the way across the nation. It can be done. It may take a while and it is not preferred, but sometimes that’s all one can do. More on that later. Again, great piece. Hopefully we will see a good response and healthy debate among knowledgable folks in the industry.

    • http://www.consumerrecoverynetwork.com/ Michael

      Thanks Fitz.
      Narrow time frames in debt settlement has been a focus of mine. I have softened to longer term settlements quite a bit recently. The reasoning is more a reflection of market realities where assignees are more frequently given the green light by creditors to structure settlements over 6 and 12 months. Purchasers are also willing to structure settlements over timelines unheard of in years past. This creates an environment where more consumers can look at settling as a viable option for avoiding bankruptcy, especially chapter 13. I agree that more and more consumers can cross the finish line at moderate cruising speed. This is still more situational and individualized for us at CRN.

      I do look forward to more of your thoughts and those of others throughout the space.

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