The Truth About The Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy.
 | By Steve Rhode Ask me your question. | Click on the star rating below to rate this article.
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This is a story that I’ve been working on for a few weeks. I’ve been asking people and groups for feedback and information to write this but what I’ve run into, is a wall.
I have received some feedback from groups and people that don’t wish to be publicly identified to protect themselves but what I have learned has been extremely disappointing or just downright shocking.
The debt solution industry, which consists of debt settlement groups and credit counseling organizations does an absolutely horrible job when it comes to transparency about success rates. And my definition of a successful resolution is a consumer that fully resolves their debt situation through the hands on intervention of the entity providing the services.
For example, a successful DMP is one in which a consumer contacts a credit counseling group and enrolls in the Debt Management Program (DMP). The consumer then fully pays off their debt through the DMP.
In a debt settlement solution a successful outcome is one in which the consumer was able to fully resolve their debt situation and resolve all of the debt they enrolled through settlement, thus eliminating their original debt problem.
With bankruptcy a successful outcome is one in which the consumer was able to obtain legal relief from their debts with either a fully completed chapter 13 repayment plan or a chapter 7 discharge.
I am disappointed that groups that the public trusts, like National Foundation for Credit Counseling (NFCC) and Consumer Credit Counseling Services (CCCS) were not more forthcoming in providing DMP success rate data.
In communications with NFCC I was left with a distinct feeling that they simply did not want to disclose what the success rate or completion rate is of their member agencies even though they collect massive amounts of data from those agencies.
“Not to be cynical but it sounds like you either don’t want to release it or it is not a figure that is calculated and monitored on a regular basis to check agency performance.” Me to NFCC.
Their response. None.
It would seem that in the interest of the consumer clients that the success rate of the DMP from individual member agencies would be a metric that NFCC paid some attention to in order to protect consumers from poor performing CCCS offices. Apparently it it not.
The only debt management or credit counseling group that provided me with a completion rate or success rate of their DMP plan was Cambridge Credit Counseling. In the past Cambridge has lived through some difficult days but I really have to tip my hat to them on this issue. They were willing to be quoted immediately and very forthcoming in data, something that NFCC was not able or willing to do. But yet NFCC is held out as being the white knight and protector of consumers in the credit counseling world. I would urge any journalist that wants to examine this subject to press NFCC hard for an honest and transparent answer on completion rates for a DMP.
Bankruptcy data was available but the hard statistic to obtain was the disposition of chapter 13 cases. Some bankruptcy attorneys were willing to provide me with their experiences on chapter 13 cases but I was not able to get an official number from the American Bankruptcy Institute (ABI) and unable to get a timely official response from the Executive Office of the United States Trustee (EOUST).
I admit that this post may generate some contention and dissension from members of the various camps I discuss but I fully welcome open disclosure and public comments on this post to help set the record straight.
Let’s look at what I learned.
Credit Counseling and Debt Management Plans
The success rate for a debt management plan is in the 20% completion rate range. Cambridge Credit Counseling was willing to be quoted at a 27% completion rate / success rate for thir DMPs. NFCC was not willing to provide a completion rate. As I said to them, the cynic in me says why not provide the facts, unless you don’t want people to know.
In my research I found a report from the the National Consumer Law Center, “The Life and Debt Cycle” that said.
Because of inconsistent and reduced concessions, it appears that only consumers with considerable disposable income left over each month are able to get out of debt through DMPs. It is difficult to find conclusive data on the effectiveness of DMPs. Most agencies do not release information on their retention rates, although a 1999 NFCC memo cited by Consumer Reports found that just 21% of their clients completed DMPs while about the same percentage left to self-administer debt payments. In 2001, the National Foundation for Credit Counseling reported completion rates of about 26% with about 20% leaving for self-administration. The high failure rate in DMPs is undoubtedly influenced by the limited concessions that creditors offer to consumers who enter credit counseling. If consumers cannot significantly lower the amount that they owe, they are more likely to fail in completing a three to five-year DMP.
I suspect that in these difficult economic times that the true completion rate for DMPs across all credit counseling agencies is going to be below 20% with ever tightening family budgets and less extra money for repayment.
One of the primary reasons for such a low completion rate is that DMPs are not calculated on what the consumer can afford, such as in a chapter 13 bankruptcy plan, but on what the creditor wants. The same National Consumer Law Center report summed the issue up better than I could.
The problem is that DMPs, as currently constituted, are only useful for some consumers. Creditors call the shots when it comes to concessions offered through DMPs. They rarely reduce the amount of principal that consumers owe them, never as part of a DMP. Agencies really have only three concessions to offer that creditors will allow. First, creditors can “re-age” a credit card account of a consumer who enters a DMP. Most creditors will re-age an account once a year or twice in five years, the maximum allowed by federal financial service regulators.
Debt Settlement Plans
The Association of Settlement Companies (TASC) published a report on the debt settlement industry and provided it to the Federal Trade Commission.
The report cites a 45% to 50% completion rate of debt settlement plans which I find doubtful. This does not take into account the total number of people that begin to pay debt settlement companies in monthly payment plans and then either fail to accumulate enough money to settle or who bail on the debt settlement program before all or some of their debts are settled.
An interesting fact in the statement issued by TASC is that 6% to 10% of debt settlement clients are sued by their creditors while in a debt settlement program. I’d count that as a failure as well.
My verdict is that the elimination of all debts through debt settlement, without getting sued is probably in the 20% range as well. It may be lower than that as consumers with daily economic pressures find it difficult to save up enough money to settle their debts, or persist through ongoing collection calls and creditors while they attempt to save that money.
Debt settlement programs are also expensive. Consumers are paying 15% of their total debt and/or fees up to $5,000 or more for debt settlement services.
Having gone bankrupt myself in 1990 and lived with that all these years, I have been under the impression that bankruptcy is not a pleasant solution. But what surprised me the most from my research is that while bankruptcy does cost money, it is generally much less expensive that debt settlement services, and that the majority of people resolve their debt when turning to bankruptcy as a solution.
Chapter 13 bankruptcies, the payment plan approach, are reported as having a high failure rate like debt management plans or debt settlement, but what is not frequently mentioned is that many of those failed chapter 13 plans are converted to chapter 7 bankruptcy cases and the debts are fully discharged that way.
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.
Bankruptcy is also a legal solution which forces creditors to play by a set of defined rules. It also terminates collection calls and collection activity and stops pending lawsuits. Neither credit counseling or debt settlement solutions can make this claim.
Conclusion
It is very disappointing that the perceived “good guys” of consumer solutions, the credit counseling industry are not open and transparent about the sad and poorly effective results of debt management programs. This is also troubling since almost every journalist and creditor are steering people towards credit counseling as a solution to problem debt, believing it is a magic solution.
Based on current data, it would appear that rather than help consumers in trouble, they are directing them towards an ineffective solution. And I have not even covered the fact that the credit counseling industry reports that only 7% to 8% of the people who contact a credit counseling group could even afford a DMP. Yes, the rest get budgeting help, advice, or referred for guess what, bankruptcy.
David Jones, the president of Association of Independent Consumer Credit Counseling Agencies said, “The agencies affiliated with the AICCCA used to be able to help 20-25% of the people who came to them to avoid bankruptcy. Now they find they can only help about 7-8%, Jones explained.”
As a solution in resolving problem debt, a DMP it appears among the most charitably promoted but least successful of approaches.
And what troubled me most about this was the fact that I founded and ran a non-profit credit counseling group for a number of years. I’d never seen a comparison of the different approaches while I was running the debt counseling group but at the end, i was significantly disillusioned with the credit counseling industry and would up closing the non-profit I started.
if I had been specifically aware of the effectiveness of each solution it would have changed my outlook on the services delivered to consumers. But that’s easy to say now. When you are drinking the Kool-Aid it is hard to believe that the solution you are delivering may be among the least effective.
There is simply no open forum or discussion on all debt resolution services and completion or success rates for consumers to make fully informed and educated decisions. The data is fragmented, secret, and hard to put together, especially if you are living through the stress and pain of problem debt. If I was running a credit counseling group now I would certainly make sure that each client signed an informed consent statement indicating they knew the chances for successfully eliminating their debt. I realize that would lower the number of people enrolled in credit counseling but at the end of the day, people have to come first.
Debt settlement is another problematic approach. Debt settlement companies do a horrible job of disclosing the tax consequences of settling debt and the chance of being sued while in a settlement program. They also are not forthcoming about the completion rate of people that enroll versus those that fully settle all their debt through the debt settlement approach.
But from experience in assisting debtors with lump-sum debt settlements when they have the cash on hand right now to settle all their debts, the success rate is in the 70% range.
Bankruptcy clearly came out as the quickest and most effective solution to resolving problem debt. I’ve lived through it. I know it is painful. But with the power of law behind it and the total number of discharges to filings behind it, bankruptcy would seem to be the most cost effective way for debtors to deal with their debt in the shortest amount of time and receive the most comprehensive outcome.
And let me say, right here, that I invite comments I know there will be disbelievers to what I have said here. Not believing it does not make it so.
I desperately urge any company that wants to dispute these findings to provide on-the-record, public, open and fully transparent data regarding completion rates for people to review regarding their company performance.
Follow-Up
Be sure to read Fewer Than Ten Percent Get Out of Debt With Credit Counseling or Debt Settlement Companies to learn more about success rates of credit counseling and debt settlement.
Other Related Articles to Read
Comments
Comment by Cindy Morus, The Money Mender I’ve had several clients talk to National Foundation for Credit Counseling (NFCC) and Consumer Credit Counseling Services (CCCS) agencies and came back with higher payment plans than they were currently required to pay by the creditors. Maybe the interest rates were lowered, but the fact was the client could not make the minimum payments so how could they be successful at discharging their debt with higher payments.
My rule of thumb for bankruptcy is “if you can’t get out from under your debt in about 5 years, your chances aren’t very good” because the deprivation factor is too high and life may intervene in the way of a layoff or job loss, medical issue, major repair, etc.
I also hate to see people avoid bankruptcy for years and then have to do it anyway.
I would be interested in seeing more stats on the failure of Chapter 13 and why.
Thanks, Steve.
Cindy Morus
Cindy Morus, The Money Mender´s last blog ..Unemployed? Top 5 Tax Traps! 
Steve Rhode Reply:
June 17th, 2009 at 1:21 pm
Cindy,
There are actually studies out that show if the payoff is more than three to five years out, people will not stay motivated. Do a search for “Hyperbolic Discounting” and see what you find.
We think alike on these issues.
I can tell you on chapter 13 failures, part of the problem is the forced deprivation through payment plans that don’t allow for saving or a bit of fun. There is little carrot, almost all stick. The plans are so tight that most are not sustainable.
Steve
Comment by Cindy Morus, The Money Mender Right, Steve, that’s why I suggest BK when my estimates show it taking longer than 3-5 years on their own.
I’ve been thinking that the current Chapter 13 BK law is too stringent for many people, especially if they don’t work on the emotional and beliefs side of things.
People can learn all the technical money management skills in the world, but if they don’t work on the emotions, they don’t stand much chance of success.
Cindy Morus, The Money Mender´s last blog ..Unemployed? Top 5 Tax Traps!
Comment by Carl H. Starrett II I can only speak for myself and my bankruptcy practices. I’ve been any attorney since December 1993. Prior to opening my own practice 5 years ago, my of practice was representing creditors to collect debts. Now I focus on representing debtors.
The vast majority of my cases are Chapter 7 matters. In that time period, one of my clients was partially denied a discharge for a $4400 cash advance taken at a Las Vegas casino. They couldn’t afford my fees for the additional work to defend against the adversary proceeding. They still received a full discharge of their debts as have every other Chapter 7 client that has retained me. Rarely do I charge for than $2000 in legal fees for a Chapter 7 case.
I have never seen a DMP succeed and I’ve only seen 2 people in the last 5 years that were better in negotiations than bankruptcy. And if someone “qualifies” for a DMP, they are almost always better off in a Chapter 13 bankruptcy instead of a DMP.
Chapter 13 cases do have a high failure rate for the same reasons that DMP might fail. It can be a long commitment and circumstances can change. Expenses can increase and jobs can disappear.
I take a global approach to a client’s case. I look at their goals and where they might be in 6 months to a year. Unless there is a specific reason to place this in a Chapter 13, I try to place them in a Chapter 7. Most Chapter 7 cases last no more than 4 months and allow the debtor to get their fresh start. In 6 to 12 months, most of my clients see their credit score higher than the day that I filed their case.
Bankruptcy isn’t right for everybody, but my experience has shown me that it is almost always superior to a debt management plan.
Carl H. Starrett II´s last blog ..California’s 90-Day Foreclosure Moratorium Really Isn’t
Comment by Gerri Excellent post Steve. You’re right, the failure rate for most debt solutions is pretty high – and they should be clearly disclosed.
I think Elizabeth Warren’s book, The Two Income Trap, sheds a lot of light on the problem. Stagnant wages combined with increasing health care, housing, education and child care costs have left many middle class families with little wiggle room. Those are the biggies. Add to that the smaller expenses that were once luxuries, but now considered “necessities” – cable TV, high speed internet, a cell phone, meals out – and it’s pretty clear how so many of us accumulated credit card debt.
When I talk with consumers who are considering their options, I always insist they talk to a counseling agency (they have to get mandatory pre-bankruptcy counseling anyway), talk with a bankruptcy attorney, and then talk to a debt settlement company – then make an informed decision with all the facts. Sometimes they choose to go ahead and file, and sometimes they decide to try to settle. And sometimes they realize a DMP will work for them. But it’s important to know all your options.
Finally, there are so many other factors at work here – emotional, psychological, financial — that if one of those issues goes unaddressed, it’s hard to achieve long lasting success.
Bankruptcy offers relief for the time being, but it may not result in any long-lasting improvement in one’s financial health. That doesn’t mean I discourage it, but if you decide to go that route keep in mind you’ve just started your work. It’s like having a triple bypass and not learning how to change your diet or start exercising.
Come to think of it, debt and diets are a lot alike. And we Americans are pretty bad when it comes to both.
Gerri´s last blog ..Credit.com’s Freebie Summer Giveaway
Comment by Dan Ray Great post, Steve.
As a personal finance journalist I always favor transparency: How the heck am I supposed to give consumers good debt advice if I don’t what program is likely to work, and for whom?
I do applaud the NFCC for helping goad the top 10 credit card issuers to OK a somewhat easier-to-complete DMP by adding a longer payout period for the most distressed consumers. The irony is, it comes at a time when fewer consumers can afford it.
Dan Ray´s last blog ..Obama proposes new consumer protection agency for credit cards, other financial services
Steve Rhode Reply:
June 18th, 2009 at 9:56 am
Dan,
I hear your prop for NFCC but I am concerned that when NFCC issues statements like “We applaud these creditors for recognizing the need to do more for consumers who are trying to avoid bankruptcy, and need some additional help with interest rate and fee waiver concessions so they can repay their debt”, that it indicates that NFCC isn’t suggesting bankruptcy to those that should consider it as a solution of choice.
By the way, the quote is taken from the NFCC press release on asking creditors to modify repayment terms to allow for things like emergency savings accounts. So that means that until now that NFCC has not been helping consumers with emergency savings accounts as part of a get out of debt strategy since they are conforming to creditor stipulations rather than design debt repayment plans that are best for the consumer.
The extended term DMPs, even if the Office of Comptroller of the Currency had allowed them, are more prone to failure anyway. The longer the plan, the less likely it will succeed. An ideal plan should be for three years with remaining debt forgiven not longer.
As far as I am aware, the new “Call to Action” DMPs have not been implemented. I’ll email NFCC and ask.
It is also interesting to note that the minimum payments in a DMP used to be as low as 1.5% in the late 1990s and when creditors increased them since to as high as 3%, I don’t remember NFCC being vocal about that at all. Why not? Why now?
Just some observations that make me wonder what the real story is.
Steve
Comment by Brad Thanks for the incredible research on the failure rates of debt counseling and consolidation. It’s not surprising to me that they are so high.
Comment by Ben Callicoat Very interesting post. It confirms what I’ve been seeing from my bankruptcy practice for a long, long time.
In fact, I go so far as to tell my clients: credit counseling programs (debt management programs) are a scam. They don’t work for you; they work for the credit card companies who fund them.
Interesting stuff about why Ch. 13 failure rates are as high as they are (but also good to point out that the result is simply the debtors convert to Ch. 7, get a discharge and go about their lives.)
Brave post; well done.
Ben Callicoat´s last blog ..The Secret History of the Credit Card
Comment by Been Had I currently am in a debt settlement program and it’s been nothing but a negative experience for me. People have to realize before any money is deposited into your account, 4 to 6 of your first payments go to the attorney and your maintenance fees. I signed up in February and I already have a creditor taking me to court! NOW, the attorney that The Credit Exchange assigned me to has “been assigned a Trustee”. The customer service number that told me this couldn’t explain what that means as I have been calling them trying to get help regarding the court case…..hmmm. By the way, I stopped at that particular creditor to discuss and she said once it goes to court, there’s no backing out. She stated she told the attorney’s customer service that they DON’T settle as soon as they found out I was in this program. If the customer service would have told me that, I would have gone to the creditor prior to the court action to discuss arrangements. Oh, by the way, now I have court costs on top of my debt to them.
Anyone reading this: Does this sound like a great way to get out of debt to you? My opinion: NO
The attorney assigned to me is in another state. I specifically asked the Credit Exchange person before I signed up if they were licensed in my state and she said yes…..but the creditor said on the original document that was sent to them stating I was in their program only showed they are licensed in another state and they don’t deal with attorneys licensed in another state.
Lies, lies, lies.
Thanks for listening/reading.
Steve Rhode Reply:
July 9th, 2009 at 9:02 am
Ben,
Thank you for sharing your experience. Which creditor was it that said they won’t settle as soon as they found out you were in a debt settlement program?
Steve
Comment by Been Had Sorry for the delay. American General. They are taking me to court tomorrow/Monday.
Comment by Jennifer Wallis Well, Steve, if you wanted to know our success rates, all you had to do was ask me ;) While we are an NFCC agency, I can’t speak for the whole NFCC-only my agency.
First, it depends on how you define success. While graduating from a DMP with no debt is one measure, we also consider it a success for a client to get to a point where they can handle their debts again on their own.
As for my agency, so far in 2009, 44% of the accounts that we closed were because a client graduated debt-free (we call it successful completion). 18% closed because they took over their accounts to pay on their own (self administration). So, together that’s 62% of our clients that either became debt-free or could handle their finances on their own after being on a DMP. 28% of our clients dropped off a DMP with no explanantion or they could not afford to continue. 10% of them filed bankruptcy.
Although we have not yet rolled out the Call to Action DMP, the reaserch we have done shows that it really should help clients with lower payments and lower interest. I have a spreadsheet comparison if you’d like to see it.
Oh, and to the commenter above: I don’t work for credit card companies. Yes, we do receive some funding from them. But, we also receive funding from numerous community grants, the United Way, HUD, the federal government and many other sources, including client fees. Our heart has alywas been and will always be with our clients.
Best wishes,
Jennifer Wallis
Steve Rhode Reply:
July 30th, 2009 at 10:47 am
Jennifer,
Thanks for the comment and your willingness to share. Maybe you could help me out on these other questions I had.
1. What percentage of people that contact you by phone or web have a one-on-one counseling appointment with a credit counselor?
2. What percentage of people that contact you enroll in a DMP as the preferred solution?
3. What is the breakdown by percentage of what people do if not enroll in the DMP?
4. What are the current DMP interest rates and payment calculations for Chase, Bank of America, Amex, and Citibank? If they have multiple programs, can you at least give me the most common rates that someone should expect and fairshare for each creditor?
5. What happens to someone when they can’t afford the minimum payment of the DMP? Will creditors take less and still give them the same terms over the five years of repayment?
I really appreciate the help on this.
Steve
Comment by Jerry Nordstrom Many valid points in this thread, with the exception of “all CCCS and Settlement solutions are a scam”. Let me put another spin on these statistics that I believe many Debt Relief company owners would agree with.
Consumers in deep debt are in debt for a reason. Outside of severe personal injury they have neglected their financial responsibilities. It’s only natural that a large % of them will also fail out of any debt relief program for the same reasons, regardless of the quality or type of service being provided.
Consumers in debt often love to blame the service and not look at their own failings. When they don’t abide by the terms of the progam and the debt situation is not resolved they drop the program and blame the debt relief service.
Consumers hear what they want to hear.
Ask any debt relief consultant. You can consult a person all day long telling them of the risks, explaining the specific things they MUST do to be successful. But all they hear is, you’ll be debt free, you don’t have to do a thing.
They do not read the contracts, yet sign off on the terms. 3 months later they drop and blame the company for being a scam.
With that said, the # of Debt Relief services have grown exponentially over the past 5 years. Negotiation services have increased from 20 national companies in 2004, to well over 400 today. Many of these companies are new entries who came from the mortgage marketplace. With increased competition, sales pressure and the potential of lucrative returns some sales floors start to tell consumers what they want to hear.
Greedy marketers are distorting the truth.
Online; Claims of 80% reductions are common, claims to stop all collections calls, lower interest rates to 0 and more. Consumers can get and do get confused. Unfortunately, the marketing produces a lot of revenue and the practice continues. Worse still is that their onine competition loses revenue for telling the truth.. I mean who is going to respond to an ad with a 40% reduction when the ad next to them states 80% with a guarantee? Google, Yahoo and MSN will not get involved with false advertising claims.
Credit counseling fees and thus profits are being tightly regulated so they must operate on a volume model, this puts pressure on them to soften the pitch and make more sales.
So there you have it, what is the largest factor in a low success percentage for debt relief services in general? Lack of clear regulation on marketing and licensing. Too strict of regulation on fees for credit counseling/management making the profit model financially impossible. A society of debtors all too willing to accept a feel good pitch from new unscrupulous companies and decline the services from companies who tell them the hard cold truth.
Steve Rhode Reply:
July 30th, 2009 at 12:53 pm
Jerry,
For the record, I did not say “all CCCS and Settlement solutions are a scam”. In fact I could not find that quote on the page. Just wanted to clarify.
If we are talking about debt management solutions problems. I think many of these issues could be addressed with transparency, public reporting, regulation and to make the client the one that pays for the service, instead of the creditors with fairshare. We need to end this dual agency relationship to make sure the consumer comes first.
Steve
Comment by Miss C in FL Thank you for the great info! We’ve been struggling and consulted the NFCC agency professionals as well as an attorney.
First, we take full responsiblity for the CC debts we’ve amassed and owe, appx $45k. Living beyond our means, disposing of disposable income willy nilly, etc. My husband was a mortgage industry lay off and unable to find work during 2008; he did, however finish his Economics degree and find employment; which is a 20% lower wage. We went to a credit counseling company, in person, and they weren’t able to reduce our monthly payments to an affordable amount. It seems as tho they were more focused on the time period to pay the creditors than what the debtors could reasonably afford. I’m sure we wouldn’t be counted as a failure on their books, or counted at all as we signed nothing, nor did they follow-up with us as our counselor said she would. We have begun the bankruptcy process. We won’t argue with your “it’s a cop-out” or “easy way out (not been easy thus far)” finger-pointing, but for us, it’s not worth arguing about anymore; it was not a decision made lightly nor desired. We tried working with the creditors directly and a couple (Citi and Chase) worked out internal hardship payments for 12 months, but the others would not (Bank of America, AmEx, other Chase). We have reduced our “living” expenses to the bare minimum of two working parents – 2 cars in Orlando, insurance, mortgage, internet, phone (we chose cell over home, it was cheaper!, no texting, no messaging, no media, just calling), we’ve sold what we don’t need to live, etc. My last gripe, CC companies have to take a little responsiblity again. Lowering limits, raising interest, and don’t get me started on fees in anticipation of “having to serve their customers” laws going into effect is exaserbating the situation.
Personally, we’ve learned our lesson and have two years to get back on our feet to ensure this never happens to us again. We aren’t moving, and we aren’t buying anything with anything other than cash; which is what we should have been better at doing for the last 10 years. More over, I applaud those of you who have never, and god willing, will never, go thru this.
Comment by fbc Real life: in the past three weeks I’ve seen three new clients who were in a Debt Management Plan, but got sued before much if anything was negotiated or paid.
The first client was a pharmacist who paid $1600 a month for 10 months. Yes, $16000. And he, of course, got sued.
Same general story with the next two clients.
fbc´s last blog ..Real Life, Real Bankruptcy: Can I Keep My Car?
Comment by Lex Instead of recommending that people file bankruptcy, why not recommend that they start a web site giving free advice and fill it full of cloaked affiliate links? ;)
Bankruptcy is a way to blow up the moldy house, sure, but ultimately the finest debt solution is to earn more money and waste less, isn’t it?
Big Hug.
Steve Rhode Reply:
August 31st, 2009 at 7:06 am
Lex,
you are correct that all financial problems are cured by an increase in income, a reduction in expenses, or a combination of both. However many people in troublesome money trouble have already reduced expenses to the bone and are not in a position to increase income. This leaves the only legal debt reduction tool as bankruptcy.
As far as cloaking goes, they really are not. The links ate setup that if the underlying link changes that it can be changed in one place instead of all over the site. It was my lazy way to deal with it. If you have not had a chance to read the site terms where I openly talk about the links, you might want to if that interests you.
Thanks for the hug back. It’s appreciated.
Steve
Comment by Greg Could you please tell me what you would suggest other then bankruptcy. I’m in debt $45,000 in credit cards.
I’ve used all my savings, my tax returns, to try and pay these accounts. Unfortuanately the rates were increased, gas prices increased and now they lowered my credit card amounts to my balances owed. I checked my credit report and I pay my accounts on time, but I know I’m gong to have problems with no extra income.
I have an appointment Sept.30th for Bankrupcy.
I’ve tried calling theses creditors and they offer no help.
Comment by Steve Sussman Two options:
1. Send written offers to the lenders starting at XX% of each debt. Do not mention any lump-sum payment at the moment. Offers should contain: suspended or lower interest rates; elimination of any recent late or other charges.
2. Contact three debt settlement firms, explain the situation and request a quote for their services. Note that most debt settlement folks are now on the Persolvo system and that can present a problem for you.
Without a clearer and more detailed picture of your situation targeted advice is difficult. I would be happy to help.
Comment by mae THANKS JENNIFER … I did call my creditor and explained my situation. They gave me an offer to stop the lawsuit. It does pay to stay calm and focus and talk directly to your creditors.
Comment by Steve,
This is a great article for starting a discussion of something that has plagued the debt relief industry for years. But, I do want to comment on a definition of “success”. You defined Debt Settlement’s success as “the elimination of all debts through debt settlement, without getting sued”; this definition seems valid. Bankruptcy has a similar clear cut definition: fully discharging debts through bankruptcy. I have argued in front of the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafting committee on the Uniform Debt-Management Services Act (UDMSA) that the definition of success for Credit Counseling and Debt Management Plans is not simply paying off all the client’s debts in a Debt Management Plan, because the plan itself is not the program, the program includes credit counseling.
The committee, because of pressure from consumer groups, toyed with the idea of adding a success rate to the disclosures, but because of comments on the success rate, my argument included, they decided that the rates would be difficult to calculate, and may not be easily comparable.
A debt management plans is just a part of credit counseling, it is a tool or a crutch for those clients that are facing financial hardship, and just one of the options that credit counselors offer every day. The object of credit counseling is educate and counsel the client on how to handle their finances, how to create a budget and live within it, and how to meet their financial obligations. A credit counselor’s job first and foremost is to offer education and options. A failure of credit counseling would be for the client not to be able to handle the debt without the need of a hardship program.
Many credit counselors view the debt management program as a crutch and the credit counseling as the rehab. The crutch (a debt management program) is needed to get the client up and mobile, the rehab (the counseling) allows the client to walk on their own. I tell my clients that if they are still paying off their debt through the debt management program in the 4-5 years most debt management programs run, then I have not done my job of educating them to handle their financial obligations on their own.
Is it not a success for a client to leave a debt management program because they have reigned in their debt and have learned through counseling to handle their debt on their own?
Is it not a success for a client to leave a debt management program to refinance their debt at a credit union because they have learned through counseling to pay their debts on time and have improved their credit score so they can be approved for a low cost personal loan?
Is it not a success for a client to leave a debt management program because they have learned through counseling how to better budget their finances and have realigned their spending priorities?
I am just suggesting that “success” in Credit Counseling and Debt Management Plans may not be as clear cut as the failure rate of the Debt Management Plan, because it discounts the primary focus of the Credit Counseling efforts.
Steve Rhode Reply:
November 17th, 2009 at 10:38 am
Russell,
I hear you man. I have made similar arguments in the past to MBNA and Chase when I ran a credit counseling group. They wanted to hold collection ratios in my face and rates of return and I made the point that our services had a deeper impact. My analogy was that if a church is full of people on a Sunday and the preacher gives a great sermon, how do we measure how close to God those attendees were as a result of the lessons taught and learned? There are some things that are just immeasurable.
So what can we measure to compare results? People need a scorecard to use to compare. If we can measure the effectiveness of medical interventions, certainly we can measure the effectiveness of debt interventions. Medical interventions might result in better eating habits, more awareness of nutrition and more minutes spent in exercise. But the end measurement is going to be how many people lived and died as a result of receiving X treatment modality. More people lived, that’s a success.
The typical response to an article like this by each camp is going to be defense. The walls will be raised and the troops rallied to defend the position. It will be the rare member that will actually fall into introspection and take a good look at the realty of the landscape. You sound like you might one of those people.
Today I adopt the position that the majority of people that move towards credit counseling are not there to proactively learn money management or budgeting skills. Instead they are reacting to an immediate issue, the debt problem, or are stimulated by delinquency, looming financial disaster and collection calls.
Can credit counseling by a good a ground for learning new money skills, absolutely. But I think modern credit counseling does not operate in the best interest of the consumer that is struggling to make ends meet, has fallen behind or is facing stressful and uncertain financial times. This is simply because while budgeting skills and money management lessons are important, the immediate goal is how can be be rescued from the financial tsunami they are facing right now. And as long as debt management plans are dictated by creditors with little real reduction in monthly payments or DMPs are not contractually binding on all creditors there will be serious issues that need to be talked about and fixed. I also think credit counseling needs to be released from their golden bonds with the creditors and allowed to exist in an environment where they can be the champions of consumers, speak out loudly about bad creditor behavior and not be silently afraid of offending the very entities that provide them funding. But that’s an issue for another discussion.
There will be some success stories, but there are also some very serious deficiencies that need to be addressed and made better.
Steve
Comment by thewildmind I thought this article was excellent. Two years ago, I went through a divorce where I ended up having to take over ALL (not half) the marital debt, because everything was in my name and the ex had no credit and could not get any to pay half the debt. He was notorious for not paying bills while we were married, and I was not going to risk my financial future on a settlement that made him responsible, allowed him to default (with no means for me to go after him) and subsequently still made me responsible to the creditors for the debts because I was the primary card holder. It sucked, but I had to think longer term than just the immediate fairness of the situation.
As a single mother of four children, now responsible for two people’s debts on my one income which isn’t a lucrative one by any means, I considered a Credit Counseling Service and bankruptcy. I was concerned about the costs of retaining a bankruptcy attorney when I was still making payments to my divorce attorney. I am committed to paying my debts, and feeding my children. I decided to go on a debt management plan through a local non-profit CCCS and this allowed me to reduce the interest payments and the monthly payments to an amount that I could afford. Two years later, I have cut everything to the bone, worked on increasing my income as best I can, paid off and whittled down some debts that weren’t included in the DMP and life is looking a lot better. Everything I spend now is on a cash only basis. I have about three more years to go. In about six months, my car will be paid off and that will provide some added relief.
I always understood that a DMP was the better way to go over Bankruptcy because of the longer term effects to credit scores and ability to get credit (I do hope to sell my home and purchase a different one eventually) down the road. Am I misinformed?
thewildmind´s last blog ..Writer’s Block
Steve Rhode Reply:
December 6th, 2009 at 4:06 pm
The reality is that the current path you are on does have a negative impact on your credit. The closure of your cards and no new credit history does lower what your score could have been.
As far as the cost, a case can easily be made that bankruptcy is overall less expensive than credit counseling, where you pay back all of your debt over a long period of time. With bankruptcy, while there is an upfront cost for the attorney, the interest rate on all cards goes to 0% and while your credit would have taken a hit it could have been easily rebuilt in the same time it will take to complete a credit counseling program. Hopefully you’ve been able to build up a good emergency fund during the time you’ve been making your DMP payments.
Steve
Comment by fbc Wildmind: I congratulate you on your determination to avoid bankruptcy. Although I am in fact a bankruptcy attorney, I usually cheer when clients decide they’d rather fight it out.
That said, I agree with what Steve Rhode said above completely. You can retain a bankruptcy attorney for alot less than you can do a DMP.
Furthermore, the bankruptcy would zero out your unsecured debt immediately, and allow you to begin rebuilding your credit about 4 months after filing (about the average time for a Ch. 7 bankruptcy.)
I’m not a fan of DMPs because they have a terrible failure rate, and in my opinion they kill your credit every bit as dead as a Ch.7. The one bright spot with a DMP is that their lasting effect on your credit report may be slightly shorter than that of a Ch. 7 bankruptcy. (But not nearly as much as you might think.)
All that being said, I highly recommend Dave Ramsey and his Financial Peace University. (http://www.daveramsey.com) I would advise you to look into Dave’s offerings. He hates bankruptcy and is highly successful at helping people recover from financial disasters.
God bless you. If you need assistance, you’re welcome to write back to me. I’m only licensed to practice law in Oklahoma (and I’m guessing you’re not in Oklahoma). But I’m happy to give you the benefit of my experience, if not legal advice.
Ben Callicoat
fbc´s last blog ..How To Go Broke and End Up in Bankruptcy Court (or "If Tomorrow Never Comes")
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Fist off, this is a fantastic post. I’m sure it took a great deal of time.
Outside of Bankruptcy, which I believe 80% – 90% of the people who file do not need to do so, The other so called debt solutions can be accomplished on your own.
Step one in this process is have you or are you willing to change your behavior? If not then you are only dealing with the symptom and not the underlying problem. Assuming you have addressed the problem, It’s time to attack the debt yourself.
One of the best way’s I know of to do this is with first, a pro-rate plan and then a debt snowball. You need to take care of Food, Utilities, A place to live and transportation before worrying about anything else.
What I’ve seen in a lot of situations where people in debt come to me for help is some are not always willing to make scarifies and are looking for a quick fix. Others are willing to do what it takes. Sometimes that even means selling the house. It’s an option.
In summary, stay away from companies that want to charge you money to “clean up or eliminate your debt”
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Steve Rhode Reply:
June 17th, 2009 at 1:00 pm
Todd is right. Money problems are typically the symptom of an underlying issue and without fixing that, the money problems will be harder to resolve.
Steve
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