When a person is struggling with debt and looking for outside help from a company or person, they should certainly have risks and rewards disclosed to them. Ideally, the disclosures would help a person to best evaluate which direction to take for help, and who to trust. A recent article by Elisabeth Rosenthal in the NYT: I Disclose… Nothing helps to underscore what I find to be the biggest shortcoming of disclosures in debt relief – No context.
From NYT article linked above:
“… disclosure laws — meant to elucidate — do not necessarily lead to greater transparency or prevent the things they were meant to deter.”
One or two sentence disclosures rarely do. Disclosures about the affects of a debt relief option to ones credit score are a good example.
Credit counselors and settlement providers offering legitimate services will disclose that there will be an impact to credit scores and those things will appear on the consumer’s credit report as a result of enrolling in their respective programs. If a consumer is hyper concerned about her credit score and credit report, but unable to pay the minimum monthly amount due on her Citi card, she may be more prone to try and avoid bankruptcy with a DMP than by opting for debt settlement. In this way, one would think disclosures about the impact to credit that this consumer read or heard – performed exactly as meant to. Nope.
The problem debt she has is a $17,000.00 balance with an interest rate of over 20%. A credit counselor offering a monthly payment of 357.00 sounds better than the 500.00 plus she cannot afford now, but the 357.00 monthly payments are going to be a stretch too. She enrolls in the DMP and scrambles up the 357.00 each month only to miss a payment in month 8. She finds herself unable to get back on track the following month. The account was closed by the creditor when she enrolled in the debt management plan, she now has a 30 and 60 day late pay reporting, and she blew through 2500.00 in payments toward a solution she was not going to succeed with. That 2500.00 would have more than covered the cost of a chapter 7 bankruptcy that she was qualified to file. And, as it turns out, that 2500.00 was enough to settle the account with card services in month 7 after she fell off the DMP.
More from the NYT piece linked above:
“One fundamental problem is that disclosure requirements merely get information onto the table, but themselves demand no further action. According to political theory, disclosure is both a citizen’s right and a tool to ensure good government and consumer protection, because it provides information that leads to informed decisions. Instead, disclosure has often become an endpoint in the chain of responsibility, an act of compliance with the letter of the law rather than the spirit of transparency.”
A good example of this would be companies offering debt settlement disclosing the fact that nonpayment to creditors could result in being sued by a creditor in their attempt to collect. That lawsuit may result in judgment which could result in bank levy or garnishment. A consumer given this disclosure is now informed of a known risk. The company making this disclosure can feel that they covered their own butt because the risk was plainly stated to the customer in advance. However, if any real context were provided to the consumer about this known risk, it would involve much more detail – detail that cannot fit into a tidy paragraph or three, let alone one sentence. Being sued by a creditor IS a real risk. Do settlement companies and those who promote them state plainly that the risk of being sued increases the longer debts remain unpaid? Most don’t go into that type of detail as it would scare off a consumer from beginning the savings and settlement plan.
More from the NYT article:
“Many disclosure programs today cloud rather than clarify a particular situation. As disclosure statements have become more numerous and more complicated, “consumers just ignore them or don’t understand what they say,” said Jeff Sovern, an expert in consumer law at St. John’s University.”
The type of disclosure context needed that provides an individual seeking debt relief a meaningful grasp of the issues they face; that educates and informs to the degree that would maximize awareness of the wrong and right steps to take; how to evaluate the immediate need for relief alongside concerns for ones future success and goals; that applies disclosures to the unique circumstances of the relief seeker – is simply not provided in the main by those offering alternatives to bankruptcy.
“While regulators and consumers see disclosure as a way to improve transparency, companies often regard it as a risk-management strategy. “Often the goal of disclosure is to reduce or eliminate the legal risk,” Dr. Weinfurt said. “It is so they can say, ‘Hey we told you so.’ ”
When it comes to the debt relief industry, companies and people provide disclosures in order to meet a minimum standard and to limit their own liability. Any substantive and informative discussion around disclosures to debt relief seeking customers that allows them to truly weigh and measure how the facts disclosed apply to them at the moment and on a forward looking basis, typically never happens. If meaningful discussion about key disclosures does occur, it would most likely be down the line when a disclosure item is triggered and after irreversible action steps in debt relief have been taken. This is where most of the headaches for debt relief customers and companies occur. Unhappy customers who were not fully aware of the implications of the decisions they were making at the time they enrolled in a debt relief plan. Customers of debt management & debt settlement plans may want to place blame on a service provider when things don’t go as planned. The service provider will want to point to a disclosure and say, “we told you this at the beginning”.
The consumer seeking debt relief is not shopping for a toaster oven. Companies and individuals representing they can help someone in need are selling something. That something is not as benign as describing the convection cooking features of a counter top oven. The responsibility debt relief service providers have to inform and educate the consumers they come in contact with cannot be underscored enough.
Regular readers of GetOutofDebt.org are probably familiar with Damon Day. He provides paid consultations with consumers in order to help them understand the debt relief options available to them. He does not provide settlement, debt management or bankruptcy services. What does he really do? He provides detailed debt relief disclosures as they relate to the individuals set of circumstances that are not readily provided to consumers in any meaningful way by the companies who DO provide the services. He fills a niche that should not even exist, but it does, and will remain until disclosure gaps are filled with useful information, consumer education, and side by side comparisons.
There are tools and solutions available to legitimate service providers that can fill the disclosure gap. I will be writing about them in a couple of follow up articles.
Consumer Disclosures in Debt Relief by Michael Bovee
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