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AFCC Releases Report Praising Debt Settlement But There Are Big Holes

The American Fair credit Council (AFCC) recently released a couple of documents they hoped would persuade people about the value of debt settlement.

I was asked to review the findings in the documents and offer my opinion.

The first presentation is one that was supposedly given to the Federal Trade Commission and Consumer Financial Protection Bureau, at least judging from the name of the file.

This presentation focuses on data commissioned by the AFCC by “Greg Regan, one of the nation’s leading forensic accountants, to analyze consumer outcomes over a statistically significant portfolio of debt settlement accounts.” – Source

The report and presentation divide consumers up into two groups. The first is the group before the Telemarketing Sales Rules went into force in October, 2012 and the second group, Version 2, are the post-TSR consumers.

Ironically, what the report omits is that the parent organization of the AFCC, The Association of Settlement Companies (TASC) is the group that tried almost everything to lobby against the new legislation and wanted to continue the old ways.

I’m struck by how little transparency there is in the underlying data used in the report. The presentation says “The analysis presented below addresses the outcomes of more than 1 million individual Accounts that were enrolled in debt settlement programs from January 1, 2006 through December 31, 2012. These Accounts were associated with approximately 170,000 individual Clients.” – Source

But we really have no indication from the data of the completeness of the client data nor an apparent certification by the author that the underlying data is accurate and includes all accounts.

In the past some debt settlement companies were known to omit consumers that failed to settle debt in their calculations.

There is No Doubt That Debt Settlement, Settles Some Debt

Let me be clear that there is no doubt that for the right consumer that is poised to settle their debt and is appropriate for settlement, debt can be settled. The issue has been and continues to be the inappropriateness of settlement as sold to mass consumers.

Let’s Dive In

The FTC and CFPB presentation claims:

AFCC members deliver significant value to their clients. Across the entire pool (Active, Terminated and Completed, for both 1.0 and 2.0), AFCC members delivered $3.15 in debt reduction for every $1.00 in fees charged.

  • Client across all vintages are achieving substantial reductions to their account balances.
  • The TSR amendments cleared out many (but not all) companies that were not delivering value to consumers.
  • Post-TSR, we have seen a significant shift to faster settlements for clients.
  • Post-TSR, clients receive substantial savings (debt reduction minus fees) regardless of tenure.
  • Pre-TSR, clients achieved savings (i.e., debt reduction minus fees) after ~7 months of program tenure.
  • AFCC members deliver substantial value to clients (even before the TSR amendments).

What the bullet points fail to say is there is little evidence presented regarding how many consumers settle all their debt or what the outcomes are after enrollment. Or what percentage wound up filing bankruptcy, getting sued, getting judgment, etc.

Poor Results

Understanding the presentation is a sales job, it claims the completion rate for AFCC debt settlement clients is only 50 percent. This means that either half of all accounts or half of all clients do not “complete.”

Completion rates (account level) for 2.0 programs are expected to stabilize above 50%, based on 26 months of data. – Source

In the post-TSR world of companies that do not charge an advance fee, there is still significant risk to the consumer for not fully dealing with their debt, even after 26 months. A delay in eliminating the underlying debt sets the consumer up for lawsuits from creditors and more concerning is the future cost to the consumer in extended repayment plans. See The Hidden Real Cost of Credit Counseling and Debt Settlement

AFCC Releases Report Praising Debt Settlement But There Are Big Holes

The AFCC presentation continues on with a number of pretty charts but unless we know the underlying data is accurate then the charts are essentially meaningless.

Most telling for me in the report and presentation is this one slide.

AFCC Releases Report Praising Debt Settlement But There Are Big Holes
AFCC Releases Report Praising Debt Settlement But There Are Big Holes

The report and the presentation both appear to compare debt settlement to an incomplete list of other options consumers can use to deal with their debt.

You will notice that both chapter 7 bankruptcy and unsecured debt consolidation loans are missing from the list.

If we added one more column to the list to include chapter 7 bankruptcy, which 70 percent of consumers file, the results would look like this:

Months to Pay Off – 1.5
Monthly Payment – $0
Interest Rate On Outstanding Balance – 0%
Total Program Interest – $0
Program Fees – ~$1,800
Total Program Cost Paid By Consumer- ~$1,800

There is also no statement in the presentation about the tax liability costs incurred by those that settled. While those that are insolvent may complete IRS Form 982 to waive their tax liability, certainly not all debt settlement clients are exempt or file to waive their liability.

Consumer Bankruptcy

A search of the entire 31 page report could not locate any statement about chapter 7 bankruptcy. There is one section on chapter 13 bankruptcy but in my opinion it does not do a fair job of presenting the facts.

The report says, “This type of bankruptcy is similar to debt settlement programs in that it enables individuals to establish a plan to repay part or all of their debts, and similar to credit counseling, in that it requires participants to pay a monthly amount to the bankruptcy court for distribution, after fees, to approved creditors.”

But what the author fails to take into account is that a chapter 13 bankruptcy has the power of law behind it to stop all collection calls, prevent lawsuits, stop wage garnishments and has no tax liability for discharged debt.

The report also appears to try and make the claim that the completion rate for chapter 13 bankruptcy cases is worse than that for debt settlement. “Nevertheless, the completion rates appear unlikely to match the equivalent for debt settlement clients.” – Source

But what the data does not disclose is why the chapter 13 case terminated. A large number of these cases convert to chapter 7 bankruptcy discharges and the consumers debt is discharged. It would be a stretch to label that as a failure when in the end the consumer debt was eliminated.

Additionally, the report does not also include any qualification about the reason why the chapter 13 bankruptcy was filed in the first place. During the recent years of housing problems, many chapter 13 bankruptcies were filed to stop foreclosures, a power that debt settlement does not have.

Based on feedback from bankruptcy attorneys, and looking at the total number of bankruptcy cases filed by chapter, it appears that nearly 90% of bankruptcy filers are able to repay what they can afford or discharge their debt through bankruptcy. – Source

In the end those foreclosure stopping chapter 13 bankruptcies may have failed but comparing them to debt settlement is like comparing the power of an entry level car to a race car. While they are both cars, they are not equal.

The report also cites the completion rates of credit counseling programs using an article I wrote, nice touch. But the conclusion of my article, The Truth About The Success Rates, Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy was that the most effective program to address problem debt as far as debt eliminated was bankruptcy.

The article also said that the debt settlement success rates were all over the board and as low as 8 percent.

I’d Love to Say I Was Wowed

I’d love to say the report and presentation shared something miraculous and new but sadly it has not.

The missing information and incomplete facts presented also make me very concerned that the message is a positive sales message rather than a balanced look at all consumer debt relief options.

If they are hiding presenting all the facts, what else does the report hide.

AFCC Releases Report Praising Debt Settlement But There Are Big Holes
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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.
  • Errick

    I agree with the above, that if you go in the weeds of this stuff you find nothing but goose poop. I don’t think you need to do that though. If debt settlement has helped even one tenth of those 170,000 people, and if only one percent of those grateful people made some sort of testimonial to their success, that would be 170 testimonials. But there aren’t any! Where are they?

    • http://www.zipdebt.com/ Charles Phelan

      Here you go: http://www.zipdebt.com/blog/client-comments

      Sorry, I couldn’t resist. :-)

      • Errick

        Yes that is awesome, but I was referring to companies who claim to do it for you and charge 15-25 percent of enrolled debt, not $400 to $800. Do they actually let you in the AFCC? Did you give them your data?

      • http://www.zipdebt.com/ Charles Phelan

        No, I didn’t try to join AFCC; they don’t have my data.

  • jamie

    Can you please explain the difference in the monthly payment required for each program for those of us that don’t understand…thank you

    • http://GetOutOfDebt.org Steve Rhode

      The debt settlement payment is completely arbitrary. It is not based on any agreement with creditors.

      The credit counseling payment is based on what the agreements in place with the creditors demand.

      I’ll go back and add the footer to the chart that will show the basis of the different values.

      • jaime

        OK thanks, I’m still not sure why that is so important to those whose main concern is the amount of monthly payment we can afford??

      • http://GetOutOfDebt.org Steve Rhode

        You don’t understand why the amount of the payment is important? Can you please clarify?

      • jamie

        Sorry I didn’t mean that I don’t think the “amount” of the payment is not important I meant I don’t understand “how” the amount is calculated is so important “if” all I’m concerned about is what amount I can afford every month. I get what you’re saying about some sales guy at a debt company just making up a payment amount but when I researched this myself the payment amount I was quoted from companies I contacted was based on what I needed to save up total to be able to pay my settlements when they are reached. Trusting if I am getting good information or am being scammed by some sales guy is a different issue.

      • http://GetOutOfDebt.org Steve Rhode

        Ah, OK.

        Let’s put this into context.

        With debt settlement there is no agreement in place with the debt owner until a settlement agreement is reached. Those are typically not reached until they can be funded.

        If you are making a low monthly payment it will take a longer time to save up enough money to even begin to think about even offering a settlement payment.

        That delay exposes the consumer to continued collection, lawsuits, wage garnishments, etc.

        So the lower the payment, the higher the risk of bad things happening.

        This is different than say a credit counseling group that has proactive arrangements in place with the vast majority of major creditors who will be more appeased and not take action once monthly payments start rolling in.

        Does that help?

      • jamie

        Yes it does, thank you, I do understand this better now and that a person will be at “more risk” of unpleasant collection actions and law suits etc. if they choose a program based on the lowest monthly payment only but what if I can’t afford the payment the CCC company wants for a 60 month plan? Can I minimize these risks by changing phone numbers and hiring an attorney service to help me if I’m sued? I just want out of my debts as soon as possible and a 36 month plan with a lower monthly payment vs a 60 month plan with higher payments is very appealing to me. I know I can file for bankruptcy but I want to really understand all the other ways to get rid of my debts first, then I will decide what’s best for me. I have used your website get out of debt calculator and it also shows lower monthly payments for the debt settlement option.

      • http://GetOutOfDebt.org Steve Rhode

        If you want out of debt in the shortest period of time (90 days) and for the lowest cost, then bankruptcy is the logical solution.

        I’d suggest you first read How to Get Out of Debt. The Honest and Unvarnished Truth, How Do I Get Out of Debt Quickly? Change Your Mindset, and The Truth About The Success Rates, Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy. They will give you a great overview of what we need to deal with to get you moving in the right direction.

        Then use the free How to Get Out of Debt Calculator to review your options.

        Once you’ve identified a company you want to work with, then follow my step-by-step guide on what you should look for and expect from a good debt relief company.

      • http://www.avoidbk.com/ Jared Strauss

        Jamie,

        For a detailed explanation on how debt settlement works see – http://www.avoidbk.com/debt-settlement-pros-and-cons/

      • http://GetOutOfDebt.org Steve Rhode

        This reader question I just answered seems to be a good example of what the issue is. See http://getoutofdebt.org/51895/i-want-to-sue-world-law-group-for-doing-nothing-but-getting-me-sued-by-discover-sherrie

      • http://DamonDay.com/ Damon Day

        Jamie,
        Take a look at my website http://DamonDay.com
        You will get a lot of value out of a telephone consultation with me.

        Talking to debt relief sales people trying to figure out your options is pointless.

        I can review your situation, let you know what is financially possible, and then put together a custom plan that allows you to achieve your goals, with the least possible risk.

      • http://DamonDay.com/ Damon Day

        Jamie,
        You nailed the issue right on the head. You are trusting the sales guy to give you good information instead of doing his job which is to convince you to buy whatever he is selling.

        There is no such thing as a monthly payment. It is a made up number that does not go to the creditor. So if your main concern is the lowest monthly payment, that just opens the floodgates for some sales guy to quote you a number out of their butt based on some made up calculation about some possible event that may or may not happen.

        It is a ruse, and people fall for it every single day thinking they are making a smart financial decision.

        Some guy will quote you 350, then the next guy wants to steal your business so he throws out 325, then the next guy says he can do it for 300 and so on.

        The payment does not exist. Debt settlement is not about how low you can get the monthly payment. It is about how fast you can save up the money before you are sued.

        If you can’t raise the money withing 12 to 24 months, you should be looking at other options before you do anything. Sales people are not there to help you figure out if what they sell is your best option. They are there to convince you that what they sell is your best option. There is a big difference.

    • http://DamonDay.com/ Damon Day

      Debt Settlement Sales people simply make up a payment and a repayment period that sounds good. The creditor is not involved in that decision, so the settlement company simply makes the payment up.

      They are just holding the money, not sending it to the creditors. So the monthly payment is simply an illusion to give the consumer a false sense of security that something is getting done, when in fact nothing is getting done, but saving up some money that may or may not get used to potentially settle a debt at some undetermined point in the future.

      A monthly payment in a credit counseling program is actually agreed to by each creditor and the money is passed on to the creditor each month.

      This is a little detail that settlement sales people routinely gloss over. They want to dazzle you with the low monthly payment number. The lower they make the number, the longer you not settling with your creditors and the more likely you are to be sued.

      • http://GetOutOfDebt.org Steve Rhode

        Damon is correct. Unfortunately there have been a number of incidents I’ve been familiar with where the consumer will complain the debt settlement payment is too high and the salesperson will then say, “Well then how about $X?”

        The other with the debt settlement payment is that creditor policies change. An estimate about what a creditor might do today is not as accurate if it takes years to save money for a future settlement.

        The most accurate payment estimated would be by a debt settlement professional that has current experience with X creditor and the consumer has cash on hand to settle now.

  • http://www.avoidbk.com/ Jared Strauss

    Anyone else catch the 20% accretion rate (see appendix [10])? Wouldn’t 20% accretion be achieved in roughly 8 months? But this report claims the same amount over 42 months. How is that possible?

    • http://GetOutOfDebt.org Steve Rhode

      I had missed that. But you are right, the footnote says, balances will increase by 20% by the time of settlement but it also says the assumption is the average settlement will be 48%.

      Interestingly the report does not appear to make mention of the average settlements actually received.

      The other thing it skips is there is no indication of what percentage of AFCC member accounts this includes.

      How selective is the data?

      Check my math on the data provided in Table 6.1

      $30,000 – Enrolled debt
      $6,000 – Accretion
      $6,000 – Settlement Fee

      $17,280 – At 48% settlement percentage
      $6,000 program fee
      $23,280

      Not including monthly fees.

      22% reduction in original debt

      • http://www.avoidbk.com/ Jared Strauss

        Steve, I think you may have missed my point. 20% accretion (fancy name for accumulated interest, over-limit, and late fees) would be roughly achieved after 8 months of delinquency. Where is the representation of the accessed interest for the remaining 34 months?

      • http://GetOutOfDebt.org Steve Rhode

        I read it as an ongoing 20% increase till settlement. Since version 2.0 has only been running for 26 months according to the report, the accretion continues.

        The table also appears to miss an important data point as well when it says all debt will be settled by month 41 but makes not statement about how many people achieve that result. The only statements were about settling some debts in the text.

      • http://www.avoidbk.com/ Jared Strauss

        The report states “assumes average account accretion of 20% from time of enrollment to time of settlement.”

        Based on the math and that statement, the report claims that the TOTAL accretion for the ENTIRE 42 months is 20%.

        Considering that a lot of debt buyers access post charge-off interest, I don’t see how that is mathematically possible.

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