How to Get Out of Debt With the Get Out of Debt Guy » national foundation for credit counseling

Credit Counseling Industry Accused in Potential Historic Turning Point Lawsuit

Steve Rhode — Mon, 07 Nov 2011 14:23:53 +0000

A lawsuit I’ve been following since it became publicly available back in the middle of October has become a major milestone in what could spell the death of credit counseling as we know it

I first learned of this case about six months ago when it was developing but I’d not written anything about it at that time. In fact I was holding off writing anything about it till it developed further but following comments from at least one credit counseling insider last week to my post “Credit Counselors Clueless. I Have a Dream of a Better Debt Relief Industry“, I feel compelled to bring this case to light.

In my post last week I talked about how non-profit credit counselors appear to be out of touch and behind the curve of the debt relief industry of today.

One apparent credit counseling industry insider lashed out at me and said:

Commenter: “A lot of good work goes on in credit counseling despite the problem with creditors. Yes, the industry does need to change. People are angry and it is driving them away from both credit counseling and debt settlement. The creditor is truly the one blocking the system and the regulators have failed to address the viable products made4 availale regardless of who provides them.”

Me: Really, the creditor is the problem?

I’ve said for many years now, the problem with credit counseling is two-fold.

The DMP product is broken and does not serve consumers in trouble. And you want to know why, because the credit counseling industry allowed it to break.
You can’t serve the consumer and get paid by the creditor. It is a fundamentally corrupted system that does not place the best interests of the consumer first by the charities. It’s like saying the diet industry needs to be paid by the snack food manufacturers.

These problems are why in 2006 I personally shut down the credit counseling organization I founded here in the U.S. It was a decision I made that consumers could not be put first in a system where creditors called the shots for credit counseling programs.

Some credit counseling agencies decided to attempt to service consumers within the system created by creditors and they’ve existed since that time. And try as they might the amount of funding creditors provide for their credit counseling activities continues to drop and drop. Obviously creditors see less and less value in the services credit counseling agencies provide as agents of creditors. Why do I say agents of the creditors? Even credit counseling calls themselves credit counseling agencies so they are agents of either the creditor or the consumer by their own label. As you read further the agency relationship will be made clearer and it will shock outsiders.

Any credit counseling group today that thinks their value is increasing to creditors or believes their funding is going to improve is delusional at best.

Creditors are and have learned to live without non-profit credit counseling groups recovering money for them and funneling them back cash through charitable collections. As one person said last week, banks like Chase already have twice as many consumers enrolled in their own internal hardship plans than through credit counseling debt management plans.

In fact, this lawsuit I’m going to share with you may drive creditors further away from credit counseling groups so as not to be labeled enablers or co-conspirators in the activities to be discussed.

As a result of this lawsuit, if CapitalOne and other creditors are not seriously rethinking their participation with credit counseling at this point, I’d be very surprised.

With more automated credit counseling solutions on the way, which will become the norm and not the exception, in a couple of years I would expect to see at least a 100:1 ratio of DMPs through internal and automated programs versus local credit counseling outfits.

In fact today I need to spend a couple of hours looking at the demo on just one such fully automated system that enrolls consumers in a DMP without any human interaction or local agency. That future is just around the corner.

Local credit counselors will become extinct like the small local credit bureaus or your neighborhood typesetter. There is just no need for them anymore.

The Landmark Indictment Against Credit Counseling

The case I alluded to at the beginning of this post is Lori King v. Capital One Bank and InCharge Debt Solutions 3:11-CV-00068.

This is a class action suit filed in Charlottesville, Virginia in Federal Court that lays out the hidden underbelly of non-profit credit counseling in such a damning way that I think it spells big trouble for all non-profit credit counselors moving forward.

Credit counseling was not always as corrupted by creditors as it is today. It wasn’t until the early 2000s that creditors became much more demanding in what they expected to “get” from credit counselors.

No better example of this exists than the 2003 Chase Bank “Pay for Performance” letter in which Chase laid out that funding was going to be tied to collection performance. You can see a copy of this letter in this post.

Frontline and middle level credit counseling employees may very well believe they are doing good work on a social service mission to assist consumers but credit counseling executives know that the entire industry has changed and they are not the ones in control. The creditors are.

What follows in a complex narrative laid out in this landmark case that damns credit counseling and ties together the collusive relationship between current credit counselors and creditors in a disgusting little package that exposes the unfortunate hidden secrets of perceived help that consumers are led to believe they receive today.

From the Lawsuit

“Aiming itself directly at the sub-prime market of Americans drowning in credit card debt, defendant InCharge advertised and promoted itself as a nonprofit tax-exempt credit counseling organization whose main organizational purpose was to act on behalf of consumers and in their interests. As will be shown, however, InCharge was in fact not operating on behalf of the consumers to whom it was advertising, but was operating as a partner, joint venturer and/or agent of the very creditors that the consumers were struggling to get out from umder, including Defendant CapitalOne.”

“The principal service InCharge claimed to offer consumers was the formation and maintenance of a debt management plan (“DMP”) for which it charged a fee for its service. InCharge uniformly claimed in its promotional materials on the Internet and other media that it would “negotiate” on the consumer’s behalf with the consumer’s credit card lenders, including entities such as CapitalOne, to whom consumers owed money. The ostensible benefits to consumers advertised by InCharge included the elimination of late and over-the-limit fees, and the re-aging of credit accounts. These services were offered with the express purpose of improving consumers’ credit records, credit histories and/or credit ratings by retroactively eliminating black marks on the consumers’ credit report. Further, InCharge represented that its services and advice could improve a consumers’ credit rating, credit record, and credit history. InCharges’s provision of such services brings it within the coverage of the Credit Repair Organizations Act (“CROA”).”

“To comply with CapitalOne-dictated policies, (and to attempt to evade regulation by the CROA, FDCPA and other state laws), InCharge organized itself as a purported non-profit tax-exempt organization. InCharge then used its ostensible non-profit, tax-exempt status in its massive advertising and promotional campaigns, telling consumers that it needed consumers’ voluntary contributions (fees) which InCharge expressly (and falsely) claimed would merely cover the cost of setting up and operating the consumers’ DMPs.”

“CapitalOne knew at all pertinent times about these uniformly false representations and others being made to consumers by InCharge; more specifically, CapitalOne knew all along that there were no “negotiations” between it and InCharge and that in fact the “benefits” that InCharge was offering to consumers were pre-set by lenders such as CapitalOne and dictated to InCharge in the form of periodic benefits sheets which could be unilaterally changed – and which were unilaterally changed – by CapitalOne periodically and then imposed upon InCharge. CapitalOne also knew from its reviews and audits of InCharge’s policies that InCharge, and indeed substantially all of the larger lnternet-based credit counseling entities were not operating in a manner consistent with being non-profit organizations. Upon information and belief, its personnel also received calls from its card holders complaining of InCharge and its business practices.”

“In point of fact, InCharge did not have any control over any of the “benefits” it was advertising to consumers. Rather, (1) the reduction of interest rates (2) the reading of accounts, and (3) the waiver of fees, were all exclusively under the control of CapitalOne and other creditors. In addition to entirely controlling the only “product” that InCharge had to sell to consumers, it is alleged on information and belief that CapitalOne further exercised control over InCharge by reserving the right to periodically audit or otherwise review the policies and operations of InCharge. Additionally,CapitalOne exercised control over the policies of InCharge through conditioning its tens of millions of dollars in direct financial support on InCharge’s compliance with CapitalOne’s directives.” ”

Collection Activities of Non-Profit Credit Counseling Laid Bare

“The benefits to CapitalOne from having InCharge act as its agent and intermediary (as opposed to offering and controlling its own DMP program) were several and included (1) improved collection rates from having a friendly “non-profit” (as opposed to a hostile collection agency or bank) induce consumers into continuing to make payments even where it was not in their best interest to do so; (2) lessening CapitalOne’s collection costs by inducing consumers to pay fees to support the supposedly non-profit InCharge (that the consumer wrongfully believed was working on its behalf when it was in fact CapitalOne’s agent); (4) its (wrongful) claims of Community Reinvestment Act credits for its “donations” to InCharge and other credit counseling agencies that are in fact not donations at all, but which, on information and belief, are booked by CapitalOne as ordinary fee for-service business expenses and treated that way by CapitalOne on its tax returns; (5) cloaking CapitalOne from exposure to existing regulations such [as] the FDCPA and CROA by providing CapitalOne a “straw-man” lawyer of protection between it and the consumer it is collecting from (6) having credit counseling agencies handle DMPs for all creditor banks that allowed CapitalOne to avoid bankruptcy discharges or having to compete (in terms of benefits offered to consumers) with its competitor banks for the consumers’ limited pool of funds available for debt repayment by assuring a pro-rata payout by InCharge to all of the consumer’s [creditors] ; and (7) deniability.”

“In fact, InCharge is and was nothing more than a debt collector that partnered with CapitalOne to collect its accounts under the guise of a good Samaritan rescuing consumers drowning in debt. InCharge operated in a manner inconsistent with its non-profit and tax exempt statuses, distributing monthly payments it collected to, and for the private benefit of CapitalOne, while keeping a share for itself – which was effectively a quid pro quo payment by CapitalOne for the debt collection services of InCharge. The nature of this quid pro quo payment was disguised to consumers who were only informed that creditor banks might also make charitable “contributions” to InCharge. Plaintiff further alleges that [CapitalOne] booked its payments to InCharge as ordinary business expenses and not as charitable contributions. In short, if a consumer paid $100 to InCharge to be paid on a CapitalOne account, InCharge would pay CapitalOne an agreed upon percentage and be allowed by CapitalOne to keep the remaining percentage, as a fee from CapitalOne. This back-end payment to the credit counseling agency (“CCA”) by creditors is called “fair share” in industry parlance and its true nature is hidden from consumers. It is alleged on information and belief that CapitalOne paid InCharge tens of millions of dollars in “fair share.” ”

Credit Counselors Don’t Really Negotiate

“Because InCharge was, in reality, a partner with CapitalOne, and only took an interest in selling DMPs to make money for itself and CapitalOne, it did not actually “negotiate” at all with CapitalOne, but instead delivered and administered CapitalOne’s prepackaged debt relief terms. In short, the life-ropes InCharge was throwing to consumers drowning in debt were actually anchors weighted with high costs, and their utility was diminished by lengthy delays and poor service that often plunged consumers into deeper financial distress through creditor-imposed late charges and additional interest.”

“Further, at all relevant times it was administering DMPs, InCharge misrepresented to Ms.King and to all of its other clients, that it “negotiated” with CapitalOne, and that in so doing, had only her interests and that of the members of the classes in mind. CapitalOne and InCharge both knew that such representations were false and endemic throughout the credit counseling industry. Despite this fact, CapitalOne made no attempt to have the CCAs with which it dealt change this practice since the practice benefited CapitalOne.”

“This specific representation (that InCharge “negotiated” with creditors) was false because the CCAs merely applied predetermined discounts established by CapitalOne to consumers’ accounts with CapitalOne. There was no “negotiation.” The members of the classes had no way to know that they were being lied to in this respect.”

“In addition, such representations about how InCharge was going to “negotiate” on the consumer’s behalf against CapitalOne indicated falsely that an arms-length relationship existed between InCharge and CapitalOne.”

Credit Counselors Not Representing Consumers Best Interest in a Fiduciary Capacity

“Ultimately, consumers were deceived and cheated by InCharge, and CapitalOne was a direct or at least an indirect cause of, and one of the biggest beneficiaries of the frau. It received hundreds of millions of dollars from consumers who were unaware of InCharge’s partnerships, joint ventures and/or conflicts of interest with, and dual agencies for, CapitalOne. Consumers were oblivious to the fact that these ostensibly non-protit, tax exempt credit counseling agencies that were purportedly there to help them out of their financial difficulties did not operate as true non-profit tax-exempt entities, but were money making machines targeting the most vulnerable of American consumers for further abuse.”

“There was further a fiduciary relationship that existed between InCharge and the members of the classes so that the members of the class placed their trust in InCharge since it (1) represented that it would provide financial counseling; (2) held Class M embers’ money in trust for payment to creditors; (3) had access to private financial information (4) and represented (albeit falsely) that it would negotiate on behalf of the members of the classes. The existence of this fiduciary relationship also supports equitable tolling and equitable estoppel in the statute of limitations context.”

The Reality of the Debt Management Plan Offered by Non-Profit Credit Counselors

“The chief tool placed at the disposal of the CCAs by banks and credit card companies, including CapitalOne, for avoiding consumer bankruptcy is a vehicle called a “debt management plan” (“DMP”). The basics of DMPs have not really changed since the 1960s.”

“Generally speaking, after a debt-troubled consumer makes contact with a CCA (often, after being directly transferred, or otherwise referred to the CCA by a creditor such as CapitalOne) and is directed toward proceeding with a DMP, the CCA contacts the consumers’ creditors, such as CapitalOne, and submits a DMP proposal based upon criteria previously provided by the creditors.”

“The DMP proposal offers creditors a stream of monthly payments from the consumer based on pre-existing guidelines imposed on the CCA by CapitalOne and other creditors. The creditors’ guidelines establish the conditions under which they will extend standard DMP benefits to consumers. InCharge’s salespersons (“counselors”) strive to qualify consumers,including Plaintiff, under these pre-set criteria.”

“Standard DMP benefits include, among other things, that a consumer’s credit account will be “re-aged.” Defendant InCharge explains this to consumers as follows: “InCharge works with your creditors to reduce interest rates, re-age accounts, and eliminate late-and over-limit fees.” ” – Source

“Upon acceptance of the proposal by all or some of a consumer’s creditors, the consumer then typically makes a single monthly payment directly to their CCA. The CCA then deposits the consumer’s monthly payment into a trust account from which it forwards monthly payments to each of the consumer’s creditors in an amount determined by the terms of the consumer’s DMP (as dictated by the creditors).”

“When this system initially was setup by banks and credit card companies in the 1960s, the consumer was either charged nothing or a nominal fee by CCAS for DMP services.”

“Creditors like CapitalOne were willing to share debt collection proceeds of CCAs like InCharge-referred to as in the industry as “fair share” – because it is much less than the 25% -33% that is the standard payment to their ordinary collection agencies. More to the point, paying a percentage of the consumer’s debt to CCAs was to a creditors’ advantage any time that a consumer was able to avoid (or even delayed) filing bankruptcy, which of course would, until recently, have resulted in the entire discharge of the consumer’s debt to the creditor.”

“Although CapitalOne masquerades its “fairshare” payments to CCAs as “contributions” or “donations,” on information and belief, Plaintiff alleges that Defendant CapitalOne treats “fair share” as an ordinary business expense on its tax returns.”

Credit Counseling Runs Afoul of Credit Repair Laws

“InCharge promised Ms.King and all of its other clients who had DMP accounts with InCharge, that participation in InCharge’s debt management plan would “improve her credit” because many of her creditors would “re-age” her accounts,i.e., that the creditors would retrospectively reach back and eliminate references to late payments or past due accounts. In this way, InCharge touted the ability of its DMPs to improve credit. Attached as Exhibit “B” is an archived copy of InCharge’s website as of December 4,2008 where InCharge stated that “(a) credit counseling service can improve many aspects of your life. It can help you get out of debt faster and “improve your credit.”(Emphasis added). Attached as Exhibitt “C” is a copy of InCharge’s website as of October 12, 2011 where InCharge states that “once you start a DMP and begin making consistent, timely payments, your credit score also improves.” (Emphasis added). In short, InCharge advertised that a material benefit of its service was an improvement in the consumer’s credit history, credit record and credit rating. Indeed, the re-aging of accounts was more than an incidental service to improve consumer credit records and credit history, it was one of the primary benefits being offered to consumers in order to sign them up to a DMP.”

Referrals From Creditors Are Not What Consumers May Believe

“In many instances, consumers who were having trouble paying their credit card debt would call CapitalOne seeking to negotiate their debt on their own behalf.

Although CapitalOne was fully able to provide its card holders with the same interest rate reductions, reversal of late charge sand fees, and re-aging of its accounts that InCharge provided indirectly through its DMPs, CapitalOne did not want to provide these benefits directly to consumers, or even to negotiate with them, but preferred to have an intermediary deal with its consumers for all the reasons previously stated.

It is alleged on information and belief that CapitalOne, thus would routinely refer many of its credit card customers directly to InCharge so that they could enroll in InCharge’s debt management plan.

Direct referrals of consumers who need or want a DMP (otherwise known as “qualified” or “hot” leads) are an extremely valuable commodity in the credit counseling industry. In return for a referral, a bank would typically pay a lower “fair share” rate to a CCA. This sort of arrangement was common in the “credit counseling” industry and if it existed between CapitalOne and InCharge would be a further indicia of the control CapitalOne exercised over InCharge and the closeness of their partnership.

On information and belief, it is further alleged that neither CapitalOne nor InCharge reported this barter system of payment to the IRS.”

CapitalOne also paid a percentage of the money InCharge collected back to InCharge as “fair share” and such percentages were based on how closely InCharge adhered to CapitalOne’s program guidelines. In short, there was a strong incentive to comply. – Source

Now It’s Your Turn to Read The Suit

I invite you to read the entire lawsuit, which you can do here, and come to your own conclusions about the claims made and information exposed. Please post your opinion in the comments below about if you believe this is a game changing suit that can fundamentally alter credit counseling in the future.

At the Heart of the Matter

At the very heart of the allegations seems to be a number of issues we’ve talked about on GetOutOfDebt.org before. The most important is one of the fiduciary duty of the debt relief provider. You can see past stories on this issue, here.

In addition we have the potentially deceptive relationship between the credit counseling agency and the consumer in which the consumer is led to believe the credit counselor is acting in their best interest or even negotiating, not knowing in reality it is the creditors that pull the strings.

When a credit counseling agency tells a consumer the consumer does not fit in the debt management plan with the credit counseling agency it is because the creditors have called the minimum payments using predetermined guidelines, not that the credit counseling agency has actually tried to put together a true pro-rata repayment plan, as is done in other countries, based on what the consumer can afford to pay. The creditors call the shots and the non-profit charities accept it and then tell the consumer they can’t help. The truth is they could help but they choose not to. Not very charitable.

And why don’t non-profit credit counseling agencies or even national trade groups stand up and be vocal about this hidden relationship, because they are afraid of losing their funding from creditors.

I challenge readers to go back and look in Google for any public outcries by credit counseling agencies against poor creditor practices before laws or regulations were passed against those practices. You won’t find them or you won’t find many at all. Credit counseling is historically silent against creditor practices so you must ask, who do they truly represent?

In fact here is a look at the press releases put out by the National Foundation for Credit Counseling, the largest and most respected trade association of credit counseling groups.

The only real outrage I could find was disappointment in losing government funding for HUD Housing Counseling. – Source

Not to pick on NFCC, let’s also look at the press releases of Money Management International, one of, if not the largest non-profit credit counseling agencies out there. A look at current press releases through January 2, 2008 did not show any releases that talked negatively about any creditor. – Source, Source

Note: I think MMI is managed by very smart people and think they do provide a very efficient DMP to consumers inline with what the creditors want.

Consumers believe that when “sold” a debt management plan it is in their best interest, when in fact either a debt settlement approach or bankruptcy may be more advantageous considering their particular situation.

Yet credit counselors are either effectively silenced by creditors from mentioning debt settlement or attempt to persuade consumers to avoid bankruptcy in order to enroll in a debt management plan which financially benefits the credit counseling agency and creditor at the potential detriment of the consumer.

And then there are the credit repair claims made. Under current case law, saying anything about credit, late fees, re-aging, etc., would be a serious mistake.

Back in August of 2010 I talked about what I considered to be a landmark case involving credit counseling and credit repair issues. See Credit Counseling Severely Wounded Under New New Court Ruling. Class Action Suits Expected.

These credit repair exposures are not new, yet credit counseling groups continue to expose themselves to these claims and one of the saving programs some credit counseling agencies want to roll out to generate money is credit repair.

Let’s look at some current examples of what credit counseling groups are saying.

CCCS of San Francisco

The National Foundation of Consumer Credit (NFCC) member agency CCCS of San Francisco apparently sees no issue with attempts to steer consumers away from bankruptcy and improve credit.

Almost staggeringly curious in my opinion is CCCS of San Francisco continuing to say things today like:

Bankruptcy is the worst thing to have on your credit report and can affect your ability to buy or rent a home, buy a car, get a job, or obtain life insurance.
If you have been missing payments or making payments late, you may benefit from our Debt Management Plan. Reduced payments will fit into your budget easier, allowing you to meet credit obligations while covering your housing and other living expenses; lower interest rates and waived late and overlimit fees mean more of your payment goes toward principal; and “reaging” of your account means your credit report starts looking better right away.
If your credit report already reflects any late or missed payments, then the DMP will likely improve your record by facilitating consistent, on-time monthly payments. Also, through the Plan, many creditors “re-age” your account, meaning that even if you were late in the past they will report you as “current” as long as you make all your monthly payments on time through the Plan. And once you “graduate” from the Plan after having paid off all your debt, we will help you reestablish credit.” – Source

ACCC – ConsumerCredit.com

Not to use just one agency as an example, here is American Consumer Credit Counseling saying,

Bankruptcy should nearly always be considered as a last resort. The adverse effects of a bankruptcy on your credit score are long lasting. And the emotional effect of having declared bankruptcy can be devastating. Bankruptcy currently stays on your record for up to 10 years. Generally, a bankruptcy on your credit report will preclude you from consideration for some loans, and when you do qualify for a loan, the interest rate is usually much higher.

Creditors have been known to lower your monthly interest rates, accept a lower monthly payment, or re-age your accounts so they are current, instead of in arrears. The goal of a debt management plan is to get you out of debt in the shortest period of time, without going through bankruptcy or debt settlement, both of which are detrimental to your credit score.

CCCS Okland California

Here is an example of the Suze Orman site being potentially misled by Tina Powis-Dow the Director of Education and Marketing for the CCCS office in Oakland, California.

A debt management program is when we negotiate with the creditors to reduce the interest rate or to eliminate them altogether. A lot of creditors, because they’re going through Consumer Creditor Counseling Service, will go ahead and completely eliminate the interest rates. This is really great. We try and get them caught up so that they’re no longer paying in arrears. In other words if I as Joe Consumer were to call the creditors and say, “let me work out a payment arrangement” – sometimes what they’ll do is say, “okay fine, we can do that and we’ll lower your payment but your account is going to continue to age.” So you’re constantly going to be behind. Most of the time when going through Consumer Credit Counseling Services you don’t have a problem because we negotiate that by saying we don’t want any of this in arrears stuff, we don’t want the person to be continually showing as behind. I want them brought up to date as of today. When we sign the contract I want the interest rates either eliminated or reduced and this is what we do. Sometimes we have to get nasty with creditors. – Source

CCCS of Service of Springfield, Missouri

CCCS of Springfield, Missouri continues to say they negotiate with creditors. “I agree to deposit with Agency my monthly debt payments in the amount of _____________ under the repayment plan negotiated by Agency.” – Source. Interestingly the same DMP agreement does not make any mention of the dual agency the credit counseling agency has with the creditors as discussed in the lawsuit.

CCCS of Orange County

Consumer Credit Counseling Service of Orange County, California says, “We will negotiate late fee and interest rate reductions with your creditors to help you pay off your debt as soon as possible.” – Source

Misleading Statements to Consumers Continues

So you can see from the examples above that some of the statements or practices that are question in this lawsuit do prevail in the credit counseling industry even today. The idea of “negotiations” or claiming a credit benefit are topics that have been previously discussed, yet continue.

For the record, I did not target any particular agency in my examples, I just did what any regulator or lawyer will do, used Google.

It’s Time for a Fundamental Change in the Way Credit Counseling Operates

Non-profit credit counseling as an industry has been less than transparent with consumers when it comes to how it all works. And the facts intentionally or unintentionally omitted by charitable credit counseling groups and their trade associations is shameful. The lack of these facts, in my opinion, prevents consumers from making a fully informed and educated decision about what is best for them when picking a debt relief provider.

Consumers need to know all the facts so they can make a wise choice about what debt relief solution represents their best interests and helps them to achieve their goals.

Even the perceived leading credit counseling body, the National Foundation for Credit Counseling is not transparent about the way credit counseling works. And like other credit counseling agencies they fail to mention the positive benefits of bankruptcy or that a Chapter 7 bankruptcy will discharge the debt in months, rather than years as with a credit counseling program. – Source

Why be against bankruptcy if it is the best solution for the consumer? Could it be that non-profit credit counselors want to talk consumers out of bankruptcy as the suit says?

The NFCC says:

What are the benefits of working with Certified Consumer Credit Counselors?
Certified Consumer Credit Counselors are experts who tailor confidential programs to meet your specific needs. They will help you understand your situation so you can get on the road to financial freedom. [Gives the impression that a program will be tailored but fails to mention the creditors generally tells the credit counseling agencies the terms they will offer. As the suit pointed out, little to no negotiation really exists.]

How are agencies funded?
Agencies are funded through a variety of sources including voluntary contributions from creditors who participate in our Debt Management Plans (DMP), local grants from private sources and foundations, and client fees and contributions. [Fails to mention the quid pro quo arrangement some creditors have of providing funding based on the money returned to them by the credit counseling group or the relationship between money returned and funding.]

Can you fix my credit report or clean it up?
No. If negative comments on your credit report are correct, they can remain in your file for up to seven years-except for bankruptcy, which can remain for up to 10 years. [Fails to mention that a Chapter 13 bankruptcy is only reported for seven years.]

How will a DMP affect my credit?
Your participation in a DMP may change information that is already on your credit report. If your credit report reflects that you have paid creditors as agreed in the past, a DMP could have a negative impact on a creditworthiness decision by a potential creditor, landlord, or employer because it is an indicator that you are or have experienced financial difficulties.

In addition, creditors may report that you are on a DMP and are not paying as originally agreed although they have accepted the reduced payment. Creditors have different credit reporting policies and a certified counselor can answer your questions about the possible effect on your credit rating.

But remember, the goal of the DMP is to develop a plan to ultimately improve your financial and credit standing. [Appears to say the DMP goal is to improve credit.] – Source

Does Anybody Know How to Run an Open and Honest Modern Credit Counseling Agency?

The time has come for non-profit charitable tax-exempt credit counseling groups to come clean with consumers and be open and honest about the way credit counseling really works.

More importantly, the time has long passed for non-profit credit counseling groups to break free of the bondage creditors place on them and truly represent the charitable class of American’s they should be helping.

How long has this situation been deteriorating for credit counseling you might wonder. Well here’s a press release I sent out in 2005 when I was running the non-profit credit counseling group.

Credit Counseling Industry In Crisis
Creditors exert control; legislators shortsighted on reform

For Immediate Release: January 11, 2005

ROCKVILLE, Md. — Modern day credit counseling, often a last resort for consumers desperate to avoid bankruptcy, has reached a point where creditor control and legislative reform threaten the very industry itself. Once thought of as a financial safety net for consumers struggling to pay off debts, credit counseling as we know it is struggling to survive and provide a valuable service.

“In an era when consumer debt is at record levels, the very system designed to assist those in need is a broken system at best,” said Steve Rhode, who has returned as president of Myvesta to represent consumers in this crisis. “Currently consumers are not serviced by an industry who has the needs of the consumer in mind. It is an industry that has been besieged by creditors and government guidelines which force the agencies to worry more about day-to-day survival than focus on helping the consumers with in-depth and meaningful assistance.”

According to Rhode, creditors focused on demanding successful collection activity and the suggested IRS guidelines have trapped credit counseling agencies in a no-win position.

“Credit card companies, the single largest provider of funding for credit counseling agencies, have drastically cut their financial support while forcing agencies to act as collectors rather than counselors,” Rhode said. “Agencies have to do what the creditors want to stay in existence or they will get cut off from funding. Credit counseling agencies are afraid to speak out for fear of more funding cuts as retribution for speaking the truth.”

“On top of that, government agencies, in an effort to stifle deceptive practices in the credit counseling industry, are suggesting guidelines that threaten the ability of agencies to fund their programs at all.” Rhode said. “We are now faced with an industry that is on the brink of destruction and has to either obey the creditors as collectors or operate without any source of income. Either choice is deadly dangerous and bad for consumers.”

Imagine if those words had been listened to in 2005, the credit counseling world today would be much different and InCharge Debt Solutions would never have been in this spot to begin with.

Put the blinders on tighter, say I’m wrong, or stick your head further into the sand; it doesn’t matter. The end result is going to be the same for credit counseling. If it continues on the creditor controlled path they are on it’s going to be destructive and ugly for both the credit counseling agencies and the consumers that believe they will help.

@GetOutOfDebtGuy

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Will the CFPB Outlaw Fairshare to Credit Counseling Organizations?

Steve Rhode — Mon, 24 Oct 2011 15:50:12 +0000

From How to Get Out of Debt

I was approached not long ago by an knowledgeable industry insider with the statement that the CFPB may be already in the process of policy to outlaw credit counseling fairshare payments.

You know the first reaction you might have about that statement is that it would never happen. Fairshare is that commission the creditors pay when nonprofit credit counseling groups collect money from consumers in a debt management plan.

It is quite simply a pay for collection arrangement which helps to support nonprofit credit counseling groups and allows creditors to take those commission payments as a tax deduction.

The issue that makes this a possibility worth considering is that the fairshare payments could be said to create an unreasonable conflict of interest between the credit counseling agency that is supposed to be representing the consumer, but getting paid by the creditor. If the agency is getting paid by the creditor and the creditor controls critical policies, terms and procedures of the debt management plan then maybe the nonprofit credit counseling agency is really simply an agent for the creditor.

There is no doubt that the credit counseling – consumer – creditor relationship is muddied by this funding process and who knows, maybe in the interest of transparency and creating fiduciary relationships that protect consumers the CFPB may take a good hard look at the fairshare conflicts.

The National Foundation for Credit Counseling (NFCC) has been pushing back about being regulated by the CFPB, saying nonprofit credit counselors are watched over and regulated enough by the IRS. Seems like a nightly unfriendly consumer position for nonprofit groups to take, but hey, why not.

That “we are already regulated,” argument might have some merit if it wasn’t for the past cases of nonprofit credit counselors harming consumers. The latest being United Financial Systems in South Florida which set a record of the most number of FTC complaints since 2010. If you are not familiar with the United Financial Systems mess you should click here.

Testimony provided by the National Consumer Law Center, Consumer Federation of America, Consumers Union, U.S. PIRG and the National Association of Consumer Advocates expressed concern over the nonprofit credit counseling world and its lack of supervision.

Nevertheless, the CFPB should reserve the authority to supervise and examine larger nonprofit entities to guard against abuses. The IRS only examines non-profits for compliance with the internal revenue code—not to protect consumers. This difference in mission could allow anticonsumer conduct to survive IRS scrutiny. It would also be inappropriate to automatically assume that non-profits are universally safe when experience shows otherwise.

Non-profit credit counseling agencies, one of the most common forms of non-profit debt relief service, were invented by creditors to promote repayment of debts over bankruptcy. As a result many credit counselors once depended on creditors for a significant portion of their funding though a system known as “Fair Share.” This created a clear conflict of interest that lead the IRS to describe one applicant for tax-exempt status as a “collection agency” for credit card companies.

In 2004 NCLC published a report showing that abuses persisted despite increased attention from states. The IRS noted in a 2006 report that “many credit counseling organizations operating as tax-exempt charities are now primarily sellers of debt-reduction plans, motivated by profit, and offering little or no counseling or education.” While the IRS has been aggressively fighting this problem for several years now, the CFPB should not omit non-profit debt relief providers from CFPB’s supervisory jurisdiction on the assumption that the IRS will carry this burden forever. – Source

So what do you think. Post your comments below. Will the CFPB take a good hard look at the conflict created by the current fairshare system and should it be eliminated?

@GetOutOfDebtGuy

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Why is Credit Counseling Stumped Demand is Down?

Steve Rhode — Fri, 21 Oct 2011 15:07:24 +0000

From How to Get Out of Debt

Over the past couple of weeks I’ve noticed a wave of information appearing on the web about the decrease in demand for credit counseling services. The reason given seems to be “consumer fatigue.”

The peak client numbers that nonprofit consumer credit counselors saw in 2009 appear to be slowly falling. NFCC member agencies in the Ninth District began to see a gradual decrease in client volume in 2010. For example, The Village Family Service Center saw a slight drop-off beginning in June and July. As of September, Sheri Ekdom projected calendar year 2010 would show a 7 to 8 percent decrease in client volume compared to 2009 numbers.
While the decline could be read as a sign that the economy is improving, counselors attribute it to other factors. According to Tom Jacobson of CCCS of Montana, the decline is due in part to competition from dubious debt-settlement companies and in part to recent efforts by credit card companies to circumvent nonprofit counseling agencies. Some credit card issuers have launched in-house credit counseling operations that negotiate directly with selected debtors. The practice has raised concern among some consumer advocates, because credit card companies may have an interest in seeing their own claims paid first, even though that might not be what’s best for their customers’ overall financial situations.

Another factor in the declining client numbers, according to multiple counselors in the Ninth District, is consumer fatigue or economic fatigue.

“I don’t have scientific proof of this, but I think there are people who are getting tired and maybe making a choice of not doing anything,” says Sheri Ekdom. “We’ve worked with some people on their housing situations for five, six, seven months, and they’re not getting anywhere with the lender. There’s a sense of ‘Why should I continue?’ ” – Source

You’ve got to shake your head at the credit counseling attributed statement, “…recent efforts by credit card companies to circumvent nonprofit counseling agencies.” How is it possible for creditors to circumvent their own relationship with their own customers?

Credit card companies offer internal hardship programs and term reductions to their consumers they feel it is appropriate to do so for. That’s not a mystery or inappropriate in my book.

A news interview in Minnesota also presented the “consumer fatigue” talking point.

Jim Kroening, of the Stillwater-based non-profit Family Means says their office has seen a 30 percent drop, and he worries that people are turning to the myriad for-profit, debt-elimination companies that advertise on late night TV.

What continues to strike me as just plain odd or misdirected is the opinion by credit counseling groups and apparently the National Foundation for Credit Counseling (NFCC) that the downturn in demand is due to debt settlement companies or the housing situation.

I’ve covered the trends on this topic for a while now and have covered the underlying issues in depth.

I still struggle to wonder why the credit counseling industry can’t stop focussing on debt settlement as the reason for their ills and deal with the true underlying problem, more and more consumers can’t afford creditor term dictated debt management plans. It’s not a mystery.

And as far as decreased demand, it’s been a few years since consumers loaded up on debt and as more time passes the demand for relief services will continue to fall.

It would be nice to see credit counseling deal with the real underlying issues here then try to point blame at debt settlement today or creditor hardship programs.

The real problem is credit counseling groups only offer creditor dictated terms to consumers in trouble. The terms are not sufficient to meet current consumer needs. Creditors also control the services credit counseling groups can offer by holding the withdraw of fairshare funding over their head. Now that’s an issue to deal with, not “consumer fatigue.”

@GetOutOfDebtGuy

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NFCC Appears to be Talking Out of Both Sides of Their Mouth

Steve Rhode — Thu, 22 Sep 2011 17:31:43 +0000

From How to Get Out of Debt

Recently the National Foundation for Credit Counseling (“NFCC”), the nonprofit franchise operation for credit counseling outfits, filed a public statement in which they were winging about the amount of funding they get from creditors.

Historically, a significant amount of support for those activities came from creditors in the form of “fair share.” In recent times, however, and due in a large part to the economic turmoil in the financial services industry, the amount of creditor support and “fair share” payments to nonprofit agencies has dropped precipitously. Many nonprofit agencies have been forced to merge, or worse, to curtail or cease operations because of the lack of funding. – Source

NFCC also calls out for “the need find sustainable means to support nonprofit agencies.”

I have no issue with the existence of nonprofit credit counseling groups. I founded and ran one myself.

It’s a big world and ethical debt relief providers come in different tax statuses. Some are for-profit, and pay income tax on the profits they make, and some are non-profit and don’t pay income tax on their profits.

Consumers are perpetually ill-informed when it comes to nonprofits. The designation of nonprofit does not mean the companies don’t make a profit, it is in reference to the free pass on taxes the companies get. They are not taxed on their profit, thus considered non-profit. Nonprofits can make a lot of money, tax free and in return for that they make a commitment to additional IRS regulations, then, now, and in the future.

The NFCC makes the argument they should be regulated differently than other debt relief providers, they cite the tough IRS codes they have to follow, but it was the choice of nonprofit credit counseling groups to elect to become nonprofit. Being nonprofit in my eyes should not preclude any nonprofit debt relief agency from having to also comply with the laws of the land that are in place to protect consumers from wrongdoing and deception.

A nonprofit 501(c)(3) credit counseling agency is, at a minimum, subject to Section 501(c)(3) of the Internal Revenue Code; the IRS Core Analysis Tool and the IRS Chief Counsel’s Memoranda; Section 501(q) of the Internal Revenue Code; and other oversight and regulation by the IRS. If the nonprofit agency is approved by the EOUST to provide bankruptcy-related counseling, it is also subject to EOUST oversight and regulation. If the agency is a NFCC Member Agency, it is also subject to the COA standards for obtaining and maintaining accreditation, and the NFCC Member Quality Standards, the most stringent standards in the sector.

But you get a total tax break and don’t pay any tax on your profit

If nonprofit credit counseling groups don’t like the tax status they elected, they can always become for-profit entities.

They Are Charities. Shouldn’t We Count on Them to Do Everything They Can to Protect Disadvantaged Consumers?

You would naturally assume these charitable nonprofit agencies would be fully in support of such legislation. But from the testimony they provided it appears they want to be considered differently.

Consequently, the NFCC strongly encourages the CFPB to include for-profit debt settlement companies as a “larger participant” [and then regulated by the CFPB] in consumer financial products and services, and to promulgate comprehensive regulations to protect consumers from abusive and predatory debt settlement practices.

But what they don’t say in their statement for-profit debt relief companies should be regulated by the CFPB is, but not us because we are non-profit. It is a statement of omission.

While the NFCC is crying and whining over their precipitously falling funding from creditors, it reminds me of proposed legislation a couple of years ago that was to be introduced under the urging of Mark Guimond at AADMO, for mandatory fairshare funding. I am told NFCC would not support such legislation. I can’t think of any NFCC member agency that came forward publicly to protect their funding in this way.

The legislation to be put forward was to be called the Consumer Debt Management Protection Act. Under that proposed legislation nonprofit funding of credit counseling would be about 300% higher than where it stands today.

A creditor that accepts a payment on behalf of a consumer by a debt management organization, pursuant to the terms of a debt management plan, shall make payment to the debt management organization in an amount equal to fifteen percentum of the payment received by the creditor. – Source

So here is what I find disingenuous about the NFCC position to the CFPB. On one hand they appear to make the argument they can’t shoulder any more consumer protection obligations because creditors have cut back on their funding, but at the same time they appear to have done nothing to require creditors to fund them at appropriate levels.

You can’t have it both ways.

If you want to not make an effort to require mandatory funding and creditors continue to reduce the funding they provide, then it is what it is. Creditor devaluation of the credit counseling services is no reason to not protect consumers by regulation from the CFPB.

Not to be cynical but it could be said the reason credit counseling did not want to support mandatory funding in 2009 is because they did not want to irritate the creditors. It doesn’t look like that strategy worked out well. While they didn’t rock the boat, they also did not protect the very funding they now complain they lost and now can’t provide more services to help consumers.

Sad.

@GetOutOfDebtGuy

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National Foundation for Credit Counseling – History and Future

Steve Rhode — Sun, 31 Jul 2011 17:43:43 +0000

From How to Get Out of Debt

National Foundation for Credit Counseling History

The largest and oldest association of nonprofit credit counselors is an association that was originally founded as the National Foundation for Consumer Credit, and later changed their name to the National Foundation for Credit Counseling. Groups that exist as members under the National Foundation for Credit Counseling (NFCC) are knows as Consumer Credit Counseling Services (CCCS) office.

The original slogan, as you can see above, was “The credit of the people intelligently used,” and they were “Dedicated to a Finer Credit Service.”

- – -

Consumer Credit Counseling originally started as Economy Budget Service. It was then the brainchild of the late Leon J. Ingram, president of the Capital Finance Corp., a public-spirited 18 state, small loan company which financed and operate it entirely alone at a $15,000 annual cost for 12 years. On August 1, 1967 it was taken over as a community sponsored project. (Social service outlook, Volumes 3-4, New York (State). Dept. of Social Services, New York (State). Dept. of Social Welfare) – Source

- – -

Even though the organization was founded in 1951 as Consumer Credit Counseling Service at a meeting that was held at the Barbizon-PIaza Hotel in New York on June 7 and 8, the first national conference for the larger association was held in 1966 in Kansas City, where 53 counseling services from the United States and Canada came together to set things more formally in motion.

In the beginning of the NFCC credit counseling group, the focus was stated to be “to educate the debtor.” In those early days some agencies were even funded under the Federal Education Act of 1966.

But credit counseling groups were also founded and funded by groups of merchants and credit reporting bureaus. For example, the Credit Counseling Service in St. Paul, Minnesota was a division of the Credit Bureau of St. Paul.

As early as 1968, at the national meeting of the National Foundation for Credit Counseling in Indiana, a concern was raised that some creditors “go so far as to look upon your organization as credit collection agencies.” “We must do a job of getting across to these people today that CCCS is not just a method of collecting debts,” said Robert Hammer of CCCS of Central indiana at the national conference. Even today many still struggle with that opinion.

The credit counseling repayment plans were known as debt management plans. Under this program the member agency would collect the money due from the consumer plus oftentimes a nominal processing fee and in turn would cut up the one payment into smaller checks payable to the individual creditors.

National Foundation for Credit Counseling has long presented itself as a way to help people overcome the need for bankruptcy. Even back in 1968 the Wall Street Journal was proclaiming there was a bankruptcy boom and the social stigma of bankruptcy was quickly fading. At the conference the speaker was concerned about letting those trends continue. Funny how those sakes concerns and statism are made today as if they are new.

From the very early days of credit counseling, financial support has been an issue. Even though the groups are non-profit corporations they still need to operate as a business. People are confused and the ink a non-profit group should operate and not show a profit when in fact the only reason they are called non-profit is simply because of their tax status.

This creditor funding model, where creditors pay back a portion of money credit counselors collect from consumers and return to creditors, is know as the fairshare or fair share model. This has always been a problematic funding mechanism and subjects itself to apparent skepticism as the primary funder of the service is the creditor and not the consumer.

Creditor contributions based on the amount of funds received from the service give the program the appearance of being a collection agency for creditors, and I think what they really meant to say was “It gives the appearance to the program of being a glorified collection agency.” – Fred Stotts, NFCC 1968 national conference.

Before the National Foundation for Credit Counseling

In the late 1940s and throughout the 1950s, debt poolers or debt adjusters created an alarm that warned consumers they were being taken advantage of. In 1955 the National Better Business Bureau warned, “These operations are well on their way to becoming a national scandal. Within the past year or two their number has multiplied and the geographic scope of their operations has increased at a prodigious rate.” – Source

Prior to the official formation of the National Foundation for Credit Counseling there were a number of companies that promised to help people to “restore your credit without a loan.” In the early 1950s these groups were known as debt adjusters, proraters, debt lumpers, or debt poolers.

National Foundation for Credit Counseling – Yesterday

A Look at One Founding Agency – Family Debt Counselors

Since the Family Debt Counselors was started in 1958, it has helped nearly 1000 Phoenix families to extricate themselves from debt entanglement. Richard K. Steinman, a founder and director, believes the organization has saved possibly 500 of these families from bankruptcy. In addition, in the past three years FDC has distributed $1,643,000 of clients’ money to their creditors. Normally, most of this money would have gone down the bankruptcy drain.

It was Steinman, who heads a local chain of small-loan companies, with other members of a committee from the Arizona Consumer Loan and Finance Association (which put up $500) who started FDC. At first, they encountered considerable resistance. “Everyone agreed we had a serious problem with our rising personal bankruptcy figures,” Steinman says, “but few could agree on a solution and even fewer were willing to pay for it.” However, they won the support of the Legal Aid Society, the Family Service Association (a social-welfare group), banks, and the AFL-CIO Central Labor Council, which contributed $1500, and FDC was launched.

“At first I thought we should have a free service,” Steinman says, “but people experienced in social-service work urged that we charge a small fee. By doing so, they pointed out, we would enable people to retain their self-respect.”

“There’s a tremendous need for this agency,” says Bernard Wielewinski, executive director of the Phoenix Family Service. “In fact, any good-sized American city needs an FDC. We know that emotional reasons often drive a family into great debt. A family agency like ours can help solve the emotional problems, but the debt itself can be resolved only by an intelligent, community-minded outfit such as the FDC.”

Even older than the Phoenix FDC is the Economy Budget Service of Columbus, Ohio. Begun in 1955, this service is financed at a $15,000 annual cost on a no-profit, no-charge basis by the Capital Finance Corp., an operator of small-loan companies. More than 400 families have been successfully helped from debt with personal bankruptcies avoided.

Drawing on the experience of the Phoenix and Columbus setups, similar services have been established in Salt Lake City, in both Kansas cities, and in South Bend, Ind. Before the end of 1964 the list will include Indianapolis, San Diego, Denver, Cleveland, Charleston, W. Va., Atlanta and Flint, Mich. By the end of 1965 some 80 other communities will probably have similar programs, thanks to the free services offered by the Consumer Credit Counseling Service Committee of the National Foundation for Consumer Credit in Washington, D.C. – Source

National Foundation for Credit Counseling – Today

Today credit counseling groups are still facing funding struggles as the creditor community that boldly supported them up until around the early 2000s began to significantly cut back on funding while asking the National Foundation for Credit Counseling members to perform relatively the same function. Funding by creditors has been controlled exponentially while control by creditors has increased as a corresponding rate. As evidence of this is the Chase 2003 “Pay for Performance” plan rolled out to all credit counseling groups, including NFCC members. – Source

The National Foundation for Credit Counseling today consists of the largest trade association of consumer credit counseling service members.

The NFCC is the nation’s largest and longest-serving national nonprofit credit counseling network, with nearly 100 Member Agencies and more than 800 offices in communities throughout the United States and Puerto Rico. In 2010, NFCC Members assisted 3.2 million consumers, helping many to drive down their debt and take control of their finances. – Source

Today, creditor control over credit counselors has reached an apparent point where the NFCC is no longer apparently able to operate as an independent group that represents consumers first but must gain the approval of creditors that fund the operation before they branch in to new areas and solutions to assist debtors like debt settlement.

There was a time I was very familiar with in the 1990s when creditors would fund credit counseling agencies in a very hands off way. But as time marched on the creditors began to exert more and more collection quotas, targets and control over the operations of the credit counseling groups that exist as members of the National Foundation for Credit Counseling.

NFCC members have struggled for years now to bring forward a NFCC endorsed solution know as the “Less Than Full Balance” LTFB approach (a debt settlement solution) where consumers would be able to enter repayment plans based on what they could afford to repay, rather than the full amount currently required by participating creditors. Despite their close creditor relationships they have been unable to move this plan forward to allow all members to offer it to consumers in need.

NFCC has tried to valiently persuade the Office of the Comptroller of the Current to adjust some banking regulations to allow greater acceptance by banks. But even though other groups sought this change from the OCC to better assist consumers, the OCC to date has refused to make the LTFB approach as friendly for lenders as the lenders want.

National Foundation for Credit Counseling – Tomorrow

The future of credit counseling is uncertain today. While there will appear to be member agencies as far into the future as can be seen, the numbers of agencies is in question. Predications today say that as many as 2/3 of all credit counseling agencies may be gone in as little as five years through merger or failure due to less consumer demand and lower funding opportunities.

Credit counseling groups have worked themselves into a corner, primarily dependent on creditor funding and shrinking government funding to support their operations. For years NFCC has pushed back at allowing members to branch out and offer more fee-for-service solutions to consumers and that has significantly limited funding opportunities to keep the doors open of these educational non-profit groups.

In my opinion, for NFCC members to continue to be strong they must diversify the hands-on solutions they offer to consumers and become more comprehensive financial health centers and not just the master purveyor of debt management plans.

@GetOutOfDebtGuy

Dear Credit Counselors, You Are Your Own Worst Enemy.

Steve Rhode — Fri, 24 Jun 2011 15:04:52 +0000

From How to Get Out of Debt

I’m frustrated.

For the life of me I can’t understand why credit counseling continues to look at debt settlement as the enemy. The anger and desire to kill the solution seems to be opposite of what a charitable industry should be trying to do.

The other day over a delicious Cracker Barrel lunch I was asked which side of the fence I’m on. The question really struck me. First, I didn’t realize I needed to be on one side or the other. Second, my allegiance is to the consumer, not the industry. I’m on the side of the consumer and that side should be all sides. We need to tear down that fence.

Granted, there were a lot of bad players in the debt settlement world that were charging consumers in advance and never delivering the services. The FTC Telemarketing Sales Rules put in place in 2010 went a long way towards clearing that out. And all that is left to deal with are the attorney model loophole groups that continue that effort. But action is in the works to deal with that. All eyes are on Illinois and the Attorney General suit against Legal Helpers Debt Resolution as a watershed case. It will just take some time.

But the more I hear the rustle of conversations from friends and contacts from the credit counseling world, the more I’m either angry or perplexed, I’m not sure which is the prevalent feeling yet. And the reason I’m feeling this way is because leaders in the credit counseling field are making moves and taking action that does not help consumers in the long run but instead cuts their own throats and restricts their chances to survive moving forward.

If we believe that credit counseling is a charitable field that should serve consumers and save those that need saving then how does one resolve the fundamental issue that while credit counseling wants to speak out against debt settlement, they do little to speak out about their own broken product, the debt management plan.

Credit counseling also does little to nothing to speak out about bad creditor practices. A true cynic might say that this lack of speaking out is subconsciously controlled by the fact the credit counseling pay comes from creditors. Having run a credit counseling agency myself I’d say the creditor funding absolutely hampers credit counseling charitable groups from doing the right thing.

Ponder this, when was the last time the National Foundation for Credit Counseling (NFCC) came out proactively against creditor policies or spoke out about the fact the debt management plan does not provide enough relief for many consumers?

I took a look at the NFCC press releases and all I could find was that in May 2010 the NFCC came out in support of cutting debt settlement fees to 5% of debt. In May 2009 they published a release in support of Cuomo’s debt settlement investigation, and I couldn’t even spot a press release they put out support or pushing for the CARD act to protect consumers. There certainly wasn’t a release talking about how creditors cutting their funding and the damage that does to consumers.

Credit counseling does itself and the consumers they are created to serve a terrible disservice by continuing this us against them battle against debt settlement.

Credit counseling needs to open their eyes to see this field needs to change and in the world today, the responsibility is to provide consumers with best advice about ALL debt solutions and not just to drive people to DMPs.

I see a future where we stop talking about credit counseling and debt settlement and instead convert this industry into one called debt relief where both for profit and nonprofit providers exist.

For the sake of consumers that need good help they can trust, this needs to stop being a turf war as quickly as possible. Consumers need the best advice possible from all debt relief providers and not to be just sold the widget at hand on that side of the fence.

Modern debt relief consists of credit counseling, debt settlement, and bankruptcy. The nuanced variations include an understanding about chain of custody of old debt, statute of limitations and other underlying issues.

Debt settlement is an appropriate solution to use at times, just like credit counseling is, at times, but they are not mutually exclusive, they are each different tools that a skilled provider can use to BEST help the consumer.

As credit counseling continues their attack on debt settlement you have to ask, can they really be that shortsighted? Can they really want to box themselves into a no-income corner at the same time they beg for more from the creditors? How can credit counseling leadership even think that’s a good idea. It makes no sense, it’s not logical, it’s like lining up the last nail to be driven.

I have to wonder, if NFCC isn’t taking the lead to push and fight for all solutions that are best for the consumer, their charitable class of members they serve, is there an undercurrent they serve the creditors first and distribute their wishes to member agencies?

And for those credit counselors that think killing off debt settlement creates a larger market share for your product, you are flat out dead wrong. The underlying issue with the debt management product is that it’s fundamentally broken and does not provide consumers with meaningful breathing room to financially recover in tough times. On top of that you need to understand dwindling enrollment is a function of the extended recession, not debt settlement at this point.

Dear credit counselors, it’s time to get real and look in a mirror if you want to survive. And if you want to talk about this then come to the July, 2011 free class in Raleigh and let’s take an honest look at the future.

The ball is in your court. Now is not the time to lose it over the fence. Now is the time to play it wisely.

@GetOutOfDebtGuy

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.

NFCC Offers Tips on Protecting Consumers’ Identities During the Holidays Don’t Let the Grinch – or Anyone Else – Steal Your Identity

Steve Rhode — Sat, 11 Dec 2010 19:34:08 +0000

From How to Get Out of Debt

The following is a press release from the credit or debt world. The publication of this release by this site is not an endorsement of the release.

Silver Spring, MD (Vocus) December 10, 2010

Identity theft is a problem any time of the year. While consumers are focused on giving during the holidays, the crooks are focused on taking. “If there’s one thing consumers don’t need, it is dealing with identity theft during the holidays. Having your access to credit suspended or compromised during the largest shopping season of the year could put a damper on anyone’s good cheer,” said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC).

The NFCC offers the following tips to help consumers protect themselves during the weeks ahead:

Have a constant awareness of your surroundings. The sidewalks and malls will be crowded, and shoppers will be distracted, the perfect combination for a pick-pocket. If someone bumps into you, don’t assume it was an accident. Clutch your purse close to your side or in front of you, and keep your wallet hidden at the bottom, or for men, in an inside coat pocket.
Don’t carry large sums of cash. If you choose not to charge your purchases, using a debit card may be right for you. Be aware, however, that certain protections are put in place when you make a purchase with a credit card that are not provided with a debit card. This is a good time of year to call your credit card issuer and become familiar with that perk. Further, when you use a credit card, you can dispute a purchase before paying for it. With a debit card, the money is removed from your account at the time of the purchase. A thief can wipe out your checking or savings account before you ever realize the theft has taken place.
Guard your PIN number at the ATM. If you choose to pay with cash, yet do not want to carry large amounts of money on your person, it is likely that you’ll be making frequent trips to the ATM. Be aware of anyone lurking around the machine, and if someone is standing too close to you, simply ask them to step back. However, people aren’t your only concern at the ATM. Thieves can install devices that read your information without you knowing it. If you notice anything unusual about the ATM, use a different one, and report what you’ve seen to the bank.
Don’t let your credit card out of your sight. Unscrupulous clerks or waiters can skim the information from your card into a second machine and later make a new credit card for themselves. Worse yet, they can sell your information to an organized crime ring.
Lighten your wallet. Remove anything from your wallet that you don’t absolutely need to have with you. That way, if someone is successful in stealing it, they won’t get as much.
Never carry your Social Security card with you, but check other cards that might use your SS# as an identifier. If you’re not going to be using your checkbook, leave it in a safe place at home.
Make copies of your credit cards. Copy both sides of all your cards. If you lose your wallet, you’ll have easy access to all of your account numbers and Customer Service phone numbers, allowing you to alert the issuer immediately.
Keep up with all receipts. Not only will you need them to make returns easily, but crooks are very interested in stealing the information they contain. Never stuff the receipts into your car visor or leave them exposed in any way. Thieves would much rather have your receipts than any gifts you’ve purchased.
Open your credit card statements as soon as they arrive. Check the bill for any unauthorized purchases. Even better, keep a watchful eye on your accounts by going online and reviewing your accounts each week. If you notice anything out of the ordinary, report it immediately to your bank. Doing so will likely remove any payment responsibility you might have for fraudulent purchases.
Secure all personal information even while at home. Unfortunately, many times an ID thief is someone we know. During the holidays, you may have guests in your home. Remove temptation by putting personal information out of sight.
Consider signing up for a credit monitoring service. Such services alert you via email anytime there is an inquiry or other activity to your credit report. In other words, if someone tries to open an account in your name, you’ll know about it. Such services are offered by all of the major credit reporting bureaus, and could be money well-spent.
Order your credit report. Consumers are allowed one free credit report every 12 months from each of the three bureaus. Order a report now from one bureau, and order another one in January from a different bureau. This will give you a good snapshot of activity and will alert you to anything unusual.

“Here’s an idea…put a lump of coal into the crook’s stocking by giving personal shredders as gifts this year,” Cunningham continued.

The NFCC has created a Web site with more tips and information about identity theft at http://www.ProtectYourIDNow.org.

In spite of all your efforts, if you are victimized by ID theft, reach out to an NFCC Member Agency for help. Their certified counselors can assist in walking you through the steps to recovery. To find the agency closest to you, dial (800) 388-2227, or go online to http://www.DebtAdvice.org. To locate a Spanish speaking counselor, call (800) 682-9832.

The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation’s largest and longest serving national nonprofit credit counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior and build capacity for its Members to deliver the highest quality financial education and counseling services. NFCC Members annually help four million consumers through close to 800 community-based offices nationwide. For free and affordable confidential advice through a reputable NFCC Member, call (800) 388-2227, (en Español (800) 682-9832) or visit http://www.nfcc.org. Visit us on Facebook at http://www.facebook.com/NFCCDebtAdvice and on Twitter at http://twitter.com/NFCCDebtAdvice.
Contact:
Gail Cunningham
(940) 691-6322 – direct
(240) 672-2700 – cell
gcunningham(at)nfcc(dot)org
# # #

National Foundation for Credit Counseling (NFCC) – Scam, Complaint, Review, or Praise?

Steve Rhode — Mon, 15 Nov 2010 21:12:12 +0000

From How to Get Out of Debt

Please share your experience with this debt relief association and provide your review and feedback, in the comments section below.

The goal of this page is to allow people to share information that may be important to help others to make a more informed decision regarding their experience with this debt relief association. Here are some potential questions you might be able to provide feedback about.

Do you feel this association represents the interests of members over those of consumers?
Is the information this association puts out publicly significant and of importance in protecting consumers?
Does the association respond to your communications promptly?
If you were or are a member of the association, are the fees for membership fair?
Does the association publicly say who their members are?
If you were or are a member of the association, did you receive a valuable benefit by being a member?
Did you have a really good experience with this association you can share?
Did you have a bad experience with this association you want to share?
Is there any other information you’d like people to know that might be considering this association?

It is important to understand when reading comments below that they are the opinions of the individual posters and may not be representative of the overall impression of all consumers that may have or have not used the debt relief services of this company. But everyone does deserve to have an opportunity to express their opinion, even the association itself, be it good, bad, or indifferent.

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

National Foundation for Credit Counseling – Scam, Complaint, Review, or Praise?

Amanda Miller — Sat, 13 Nov 2010 18:31:19 +0000

From How to Get Out of Debt

Please share your experience with this debt relief company and provide your review and feedback, in the comments section below.

The goal of this page is to allow people to share information that may be important to help others to make a more informed decision regarding their experience with this debt relief company. Here are some potential questions you might be able to provide feedback about.

How did you feel about the customer service experience you received?
Was the company easy to communicate with before or after you became a client?
Did the company respond to your communications promptly?
What were the fees charged for the services you received?
Did the company give you the terms and conditions for the program you were interested in before you gave them any personal information?
Was the program successful for you and accomplish the goals you had when you entered the program?
Did you have a really good experience you can share?
Did you have a bad experience you want to share?
Is there any other information you’d like people to know that might be considering the services of this company?

It is important to understand when reading comments below that they are the opinions of the individual posters and may not be representative of the overall impression of all consumers that may have or have not used the debt relief services of this company. But everyone does deserve to have an opportunity to express their opinion, even the debt relief company itself, be it good, bad, or indifferent.

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

CareOne Sends Notice to NFCC That They Should Comply With FTC Rules

Steve Rhode — Wed, 01 Sep 2010 20:05:18 +0000

From How to Get Out of Debt

Here is a copy of the letter that CareOne sent to the National Foundation for Credit Counseling yesterday asking them to comply with the new FTC telemarketing sales rules. Apparently both ACCPros and AICCCA received the same letter.

August 31, 2010

Susan C. Keating
President and CEO
National Foundation for Credit Counseling
801 Roeder Road,
Suite 900
Silver Spring, MD 20910

Dear Susan:

As leaders in the debt relief industry, both of our organizations were early supporters of the efforts by the Federal Trade Commission (FTC) to raise standards in the industry. Over the next two months, tough new rules issued by the FTC will go into effect, including the ban on upfront fees for debt settlement and increased consumer disclosures for all aspects of the debt relief industry. These are significant rules that will greatly change how the debt relief industry operates and ensure greater consumer protection.

Unfortunately, because of limits to the FTC’s authority, the new rules will not ensure that all debt relief companies are held to these high standards. There are two specific issues which need the support of the National Foundation for Credit Counseling to ensure that millions of American consumers are adequately protected.

The first issue concerns the applicability of the new rules. As you know, the FTC does not have oversight of any nonprofit, tax-exempt credit counseling or debt relief agencies. Given the fact that nonprofits constitute more than 85 percent of the debt relief industry, a tremendous loophole has been created.

The NFCC has stated publicly that it is working with its members and creditors to offer debt settlement products and “less than full balance” programs. My understanding is that some of your member agencies have already begun pilot settlement initiatives with several large credit card issuers. I fully support your efforts on this front because we agree that there is a critical need for these kinds of programs and that the FTC has created a clear path for companies to appropriately provide that service.

However, there is deep concern that nonprofit, tax-exempt providers will increasingly offer debt settlement products while not being held to the same strict standards or complying with the same rules that for-profit companies must follow. As history has shown us, some of the most notable examples of predatory and unscrupulous practices in our industry have come from tax-exempt providers.

To help ensure that these types of abuses do not reoccur, I am asking that the NFCC, as the nation’s largest tax-exempt credit counseling association, adopt a resolution requiring all of its member agencies to comply with the revised Telephone Sales Rules (TSR) as it relates to debt relief services.

The second issue that must also be addressed is the inherent conflicts of interest that exist when debt relief agencies are compensated by both the consumer and the creditor. While this is the primary revenue model for the debt management plans that are offered by the majority of your membership, this model is a clear conflict of interest when offering “less than full balance” programs or other settlement programs.

The role of a legitimate debt relief agency is to represent the best interests of a consumer in helping
them regain economic self-sufficiency. When debt settlement is the best option for that consumer, it is the role of the debt relief agency to negotiate and advocate solely in the best interests of that individual without being compensated by the creditor with whom it is negotiating. All debt relief agencies – regardless of tax status – should be held to this standard.

To that end, I would ask that the NFCC require its members who provide “less than full balance” programs or other settlement products to not accept payments, grants or other forms of compensation from creditors.

I am making these same two requests of the Association of Independent Consumer Credit Counseling Agencies and the Association of Credit Counseling Professionals.

Adopting these standards will strengthen the transparency of our entire industry. It will also ensure that consumers who seek help are fully informed about their choices, that there is no conflict of interest in representing consumers and that all consumers are protected from predatory providers to the greatest extent possible. I hope you will support me in seeking these changes.

Yours Sincerely,
Mike Croxson
President, CareOne Services

Cc:
Allison Brown, Division of Financial Practices, FTC
Dave Jones, President, Association of Independent Consumer Credit Counseling Agencies
Russell Graves, President, Association of Credit Counseling Professionals

Debt Settlement Trade Group Blaming New York Activists for Debt Settlement Legislation But Banks Were In On It As Well

Steve Rhode — Wed, 05 May 2010 20:21:53 +0000

From How to Get Out of Debt

Interesting messages floating around about the Debt Settlement Consumer Protection Act of 2010. At least one debt settlement trade group is trying to vilify the creators of this legislation by saying the bill was secretly drafted by New York based liberal activists.

But the major drivers of this bill appear to be primarily D.C. based entities and while the debt settlement industry wants to say the bill was drafted in secret for the past nine months, I happen to have an email showing others were in on the legislation and knew of it before it was made public.

Sure the National Foundation for Credit Counseling scored a coup on this bill but take a look at some of the other entities that were in the loop as well as National Foundation for Credit Counseling (NFCC), Consumer Federation of America (CFA) and the National Consumer Law Center (NCLC) that applauded the bill.

Bank of America
Capital One
Credit Union National Association
Discover
Financial Services Roundtable
HSBC
MasterCard

So before everyone gets their britches in a bunch that this bill is some liberal only undertaking, you might want to ask the banks what they did or did not do to stop it. It appears they had members in the loop.

@GetOutOfDebtGuy

I’m Up to My Ears in Debt. – Nathan

Steve Rhode — Wed, 03 Mar 2010 21:33:49 +0000

From How to Get Out of Debt

Nathan

“Dear Steve,

I am up to my ears in CC debt. I thought about going through companies like care one, etc. I have two cards with capital one, one with wachovia, one with chase. what do i do. this is on top of student loans and i am spreadin very very thin on money. i tried to reason with the companies and working out a plan and they dont want to. they referred me to national credit consuling. why wont they work with me personally if im wanting to come up with a plan that i can afford?

What do i do? how can i get out of this debt totally $7,800 i dont have a whole lot of money each month. i just get by, student loans are killling me. luckily i am eating. i am trying and trying to find PT job on top of my FT job to make ends meat. no such luck yet

Nathan”

The Answer:

Dear Nathan,

CareOne is a credit counseling group. With any credit counseling or debt management company the monthly payment isn’t a whole lot less than the minimum payment you are paying right now. However, the interest rate can be lower. But if you can’t make the minimum payment, big deal.

My concern is that with you living so close to the financial edge each month, I have a hard time envisioning that to be safe for you. Your priority to repay your debt should be student loans, some money in a savings account each month, and then credit card payments.

If you have not looked into lowering your student loan payment, you should. Check out the IBR, Income Based Repayment program and see if you can lower your student loan payment.

If you can, then consider a debt management program. If you can’t get lower your student loan payment and you can’t save and make your credit card payments each month then I think you should consult with a bankruptcy attorney and talk about what bankruptcy would mean for you.

Bankruptcy would not get rid of the student loan debt but it would get rid of the credit card debt and that might give you the breathing room you need each month to get by, save, and oh yes, eat.

Big Hug!

@GetOutOfDebtGuy

2009 NFCC State of the Credit Counseling and Financial Education Sector Address

Steve Rhode — Mon, 14 Sep 2009 19:23:59 +0000

From How to Get Out of Debt

Below you will find the presentation given by Susan Keating of NFCC regarding the state of credit counseling in the United States.

I was pleasantly pleased to find the NFCC talking about possibly leaving the door open to pursue offering debt settlement in the future, efforts to regulate the debt settlement industry, and an admission that the Call to Action debt management plans are not working as well as hoped for. A fact that I previously wrote about.

The Speech

This year, I am going to break with tradition.

Often, annual conferences are places to spell out grand initiatives. Speakers promise to break new ground, reach for new horizons, set new standards of leadership, and take on important new challenges. As most of you know, I certainly like to think big. In the past, I’ve identified big initiatives and spelled out an NFCC vision for the future. Since my first address as President and CEO of the NFCC in 2004, we’ve worked together to set the gold standard for counseling ethics and we’ve reclaimed our profession from profiteers who abused the honor of being designated as a “nonprofit.” We’ve become an intellectual force that policymakers look to for counsel and leadership when evaluating financial services and their effect on consumers. We’ve enhanced the value of our brand by making clear to all that there really is a difference when working with an NFCC Agency. Most importantly, we have expanded our range of services in response to our clients’ changing needs, and we’ve consistently found ways to boost our capacity to meet new contingencies ranging from bankruptcy reform to the housing crisis to a recession that created a whole new set of challenges. These were important and substantive achievements, which often lent themselves to the “big initiative” approach.

But this year is different from the others. In the 12 months since my last state of the sector address, we’ve experienced a major financial crisis, a freeze up in the credit markets, a collapse in housing prices and sales, record foreclosures, a painful recession, a huge jump in unemployment, a surge in bankruptcies, and a dramatic increase in the demand for NFCC Member services. So, instead of a big new vision or goal, I believe our country and our sector will be best served by focusing on fundamentals. I think this is a time to build upon our successes; to continue to do what we do best; and to continue pushing forward on the initiatives defined this past year and bring them to full fruition. To borrow a phrase, during this next year, we need to “keep on, keeping-on.”

The challenges are bigger than ever. Just as our economy faces a long uphill climb to recovery, our sector faces the long, continuous work of helping millions of individual Americans regain their financial footing. Completing that task isn’t about a lot more new initiatives; the opportunity lies in more of the same hands-on work that NFCC Member Agencies and counselors have been performing at record levels over the past several years. When we last met, a year ago in Baltimore, our economy was already struggling mightily and the demand for our services was climbing rapidly. We didn’t imagine that things could get much worse. But just weeks after that meeting, our credit markets virtually stopped working and the U.S. government had to step forward with emergency measures of a magnitude not seen since the Great Depression more than 75 years ago. What began almost three years ago as a problem in the housing market had turned into an economic calamity. All of you have seen the evidence in your offices every day as more and more consumers look for help in finding a way out.

You’ve responded heroically. In 2008, NFCC Member Agencies provided education and counseling services to more than 3.2 million Americans – more than double the number from two years before. I don’t think any of you will be surprised to know that data from the first two quarters of this year shows that we will almost certainly serve even more people in 2009.

The tale of our economy is also told in the changing mix of the services we provide. Some of you in this room remember when NFCC Member Agencies were primarily single service, offering advice on how to deal with credit card debt. Today we live in a new economic reality, including complex financial products that many people don’t fully understand. This complexity is best illustrated by the variety of exotic mortgage loans that helped finance the housing boom. Unfortunately, when the housing boom turned to bust, this creativity produced unhappy endings for many borrowers and lenders alike. For NFCC Member Agencies, those bad endings have meant record demand for housing-related counseling. Between 2006 and 2008 – two short years – the demand for housing counseling more than tripled. Over the past year, the NFCC network has been the leading provider of counseling services under the National Foreclosure Mitigation Counseling Program (NFMC Program). During that same period, the demand for bankruptcy counseling more than doubled as the number of Americans filing for bankruptcy protection reached its highest level since the 2005 reforms.

So, it is not surprising that housing and bankruptcy counseling represent the lion’s share of the services we provide today. Of course, we continue to lead in the area of financial education – something that our recent experience shows is more important than ever. While I don’t pretend that widespread financial literacy would have prevented our economic difficulties, I am certain that fewer consumers would be in such deep trouble if more Americans had the knowledge they need to properly evaluate offers and make solid financial decisions. If more Americans were financially literate, fewer Americans would be struggling today with debts that they are unable to repay.

In each of these areas, the next year will look a lot like this year because even as the economy begins to bounce back, it will be a while before hiring expands and incomes begin to rise. For millions of Americans and their families, getting back to financial stability will remain a work in progress for some time to come. That means that NFCC Agencies and counselors must commit to another year of “keeping-on.”

As we look at the numbers, the one area that did decline for NFCC Member Agencies between 2006 and this year is the number of clients enrolled in Debt Management Plans – certainly not because the need declined, but because economic conditions deteriorated so much that even as more people came to us for help, fewer had the resources to qualify for DMPs. If you don’t have a job, you simply don’t have the money to service your debt obligations even with substantial concessions. Millions of Americans were, and still are, faced with making tough decisions they never anticipated. Will I put gas in my car or fill my prescription? Will I pay my mortgage or my credit card bills? Thus, the dip in DMPs is itself an indication of the depth of our country’s economic difficulties. This is one of the reasons why it was so important that we worked with creditors through the NFCC Advisory Council working group over this past year to improve interest rate and fee concessions.

Our counseling services are just one of the ways that we stand up for consumers. A year ago, in addition to those initiatives that help individuals and families address their financial challenges, we also committed to work aggressively to help protect them from opportunists who come out of the woodwork when people are desperate. I am pleased to report that we have made considerable progress. But there remains important work still to get done. The NFCC is committed to staying ahead of those who prey on troubled consumers, and the strongest weapon we have is empowering Americans with financial education.

In response to the dramatic changes in our economy and in public policy since last year’s annual meeting, CEOs and senior executives of NFCC Agencies came together for a midyear Leadership Summit in March and updated the NFCC agenda by identifying a trio of top strategic priorities. As a result of that work, I believe the NFCC Membership is as wellaligned as at any time since I assumed the position of President and CEO in March 2004. Here are the strategies we mapped out together:

Capitalize on the current environment to drive critical legislative and regulatory change at the federal level.
Pursue a new range of funding opportunities that support Member Agencies’ core services.
Build new national partnerships and reinforce existing relationships with key organizations.

I am here to report that you spoke — and we are acting with speed and serious intention.

In Washington, our reputation for excellence and ethics has opened policymakers’ doors and created opportunities for us to insert our voice on issues related to financial services and their impact on consumers. The power of the NFCC brand, which you have all worked so hard to enhance in recent years, also has helped us attract respected partners and build coalitions on important policy issues.

Empowered by our collective reputational capital, we have achieved some significant legislative success. Last spring, during congressional debate over so-called mortgage cram downs, both the House and Senate were presented with serious proposals for eliminating bankruptcy-related counseling. Working with others who understand the value of financial education, the NFCC and key allies helped beat back these ill-conceived proposals. This effort created an even stronger legislative history on the side of education and solidified relationships among those who support credit counseling and financial literacy.

We also have worked hard for continued federal funding of foreclosure mitigation counseling, and presented formal testimony on the issue at a House subcommittee hearing in April. While funding levels are not at the levels needed, we believe they might have been lower except for our efforts. We must continue to work in this area, because additional funding will be up for Congressional consideration again in 2010. Whatever the outcome, our visibility in this fight has reinforced our position as a voice in Congress on counseling issues. Many in Congress know who we are, the quality of the work we provide, and the difference we’re making in people’s lives.

I am also pleased that in the very near future, lawmakers will introduce legislation to protect consumers with important new regulations for the debt settlement industry. The NFCC has played a lead role in assembling a broad coalition of consumer advocates, financial services organizations, Democratic and Republican Attorneys General of several states, as well as other regulators in support of this important reform. With this kind of grassroots support, we believe passage of this legislation is possible before the end of this year.

If enacted, this legislation will help address the abuses that have riddled the debt settlement industry and protect consumers from deceptive advertising, misleading claims, and excessive fees charged by a number of these companies. Among other things, the proposed law would require important new disclosures about the services offered, fee schedules, possible adverse consequences, and the inability to guarantee success. The measure also would prevent debt settlement companies from collecting fees until after they have provided specific services.

It’s taken a lot of time and effort to get legislation to this point. That work included drafting, consultation with allies, and meetings with Members of Congress and their staffs to write a bill that has a chance to become law. Now, we have to finish the job. We will follow up the introduction of the legislation with aggressive outreach to lawmakers to win its passage. Stay tuned, because we will be turning to Member Agencies and other allies to reach out to their local members of Congress to tell them why this reform is so important. This is another example of “keeping-on.”

I also am encouraged that at the end of July, the Federal Trade Commission issued a proposed rule to eliminate deceptive advertising and marketing of debt settlement services. The NFCC testified at an FTC workshop on the subject and members of an NFCC working group also met with the FTC and provided additional input. These collective efforts made a difference. The proposed rule is out for public comment until October 9 and a public hearing is scheduled for the first week of November. The NFCC is preparing comments and plans to testify. Member Agencies also may wish to review the proposed rule and provide comments to the Commission by sharing clients’ stories about their experiences.

Let me be clear. There’s nothing wrong with settling debts for less than 100 cents on the dollar. It can be a reasonable option for consumers trying to avoid bankruptcy. But there’s a right way and a wrong way to offer any service. Just as we worked with Congress and regulators a number of years back to end misuse of the “nonprofit” status, our goal is to eliminate abuses in the practices of the debt settlement companies through expanded regulation and by educating consumers so they can recognize traps to avoid. Too many consumers have lost large sums of money and wound up with higher debt and lower credit scores after working with a debt settlement company.

In addition to our work in Washington, we intend to redouble our legislative outreach at the state level to address issues identified by Member Agencies, better protect consumers, and level the playing field between nonprofit counseling agencies and for-profit companies.

As we all know, a large number of states have opened the door to for-profit counseling companies in recent years. If for-profits truly serve consumers by providing them with a full-range of education and services, we welcome them to the marketplace. But we strongly believe that for-profits must play by the same rules as non-profits. Right now, nonprofit agencies face greater regulatory scrutiny and more obligations than agencies for whom profit, not service, is the first priority. That’s backwards. It’s time to redress the imbalance. The NFCC is expanding our legislative resources to provide Member Agencies with the tools, the training, and other resources necessary for effective state and local advocacy on this issue and others that Member Agencies deem important.

As you all know, funding is a perpetual work in progress, and has become an even greater challenge this year. Many who have funded agency services in the past are overwhelmed by their own set of challenges, and have cut back grants to our sector. This is especially true within the financial services industry.

To some extent the gap has been filled in recent years through various government programs such as the NFMC Program that supports housing counseling. But much of the program money is likely shorter-term and not sustainable. I noted earlier that current levels are not enough to cover the demand for counseling. In fact, the latest round of NFMC Program funding for foreclosure mitigation counseling was reduced considerably from the height of the mortgage crisis. This cut drives home the importance of our second key strategy from the Leadership Summit — the diversification of funding sources. In response, the NFCC is expanding outreach to a host of new and non-traditional partners from the public and private sectors with the hope of securing new revenue sources. We also are examining the federal appropriations process to identify possible new sources of funding for financial education and counseling services.

Our focus on partnership, an area that I have emphasized for many years, is increasing further.

In the past year, we have expanded on our longstanding partnerships with financial institutions, working together in both the Call to Action and the Debt Settlement Working Groups. These initiatives have broken important new ground by demonstrating the value of cooperative action by creditors and agencies. These efforts also have drawn us closer to a number of consumer-oriented advocacy groups and open the door for ongoing collaboration on other issues. Just as we recognize that cooperation among agencies under the NFCC umbrella enables us to have a greater impact on public policy discussions than a single agency acting alone, we also are learning that collective action by many organizations joined in a common cause may have more impact than that of a single group such as the NFCC acting alone.

The Call to Action, issued at last year’s leadership conference, has produced important success, but also a significant continuing challenge. On the positive side, we won an unprecedented commitment from the 10 largest creditors for an improved set of concessions that will enable more consumers to qualify to pay off their debts through a debt management plan. I consider this a significant step forward, both because of the potential benefit to individuals who need help and for the model it provides for joint action. We’ve also begun expanding this effort with an eye toward including the next tier of creditors.

But as many of you know, implementation of this important commitment has involved some frustration as well. Some agencies and some creditors have not been able to move as quickly as others. Consequently, volumes under the new program are running lower than we’d like.

Disappointing but not surprising. Almost any new program of any size and substance is going to encounter a few bumps at the outset – especially an effort that requires significant changes in internal systems and computer programs at large financial institutions as well as 103 counseling agencies across the country.

We are devoting a one-hour roundtable for a more in-depth discussion of the Call to Action during the Conference. But, for now, let me sum it up this way:

We have achieved an important agreement with creditors, and are well into the difficult phase of broad-based agency implementation. Our job is once again to keep on keeping-on – working the issue to reach the finish line of full implementation by the end of the year. We have to stretch for more creditor standardization and get efficiencies for what is a cumbersome operating system. And we have to do these things quickly. There are too many people in need of the CTA and hardship workout products.

Although sometimes taken for granted, the Annual Financial Literacy Poster Contest and the National Protect Your Identity Week also are a valuable part of our partnership strategy. The list of external coalition members involved in these initiatives read like a Who’s Who of respected and influential consumer groups, financial service entities, and government agencies.

This year, National Protect Your Identity Week, will be co-hosted by the Council of Better Business Bureaus, which includes some 200 corporate supporters and 120 local BBBs. This type of collaboration opens the door to longer-lasting partnership between the NFCC, the Council, and other members of the Protect Your Identity Week initiative such as the Consumer Federation of America, the Credit Union National Association, the National Council of La Raza, the FTC, and the OCC to name a few. As we get to know one another, projects like these open doors both nationally and locally to other types of continuing collaborations. Steve Cox, the incoming President and CEO of the Council of the Better Business Bureau will have more to say about that initiative and the potential for future partnerships this afternoon. Similarly, I am pleased that Debbie Bianucci, President and CEO of BAI, has joined our Advisory Council and will be with us tomorrow to discuss BAI’s work in national consumer research in which the NFCC has begun to participate.

Some partnership efforts take longer to mature than others. But if we see potential we will work to enhance them. For example, I continue to believe that our work with the Department of Defense on the Military OneSource Program can provide important benefits to both the NFCC and our men and women in uniform over the long term. There is no doubt that many members of the military and their families would benefit from financial education and counseling if they were more familiar with our services. We intend to continue to work with our partners at DoD through Military OneSource to make this program more effective.

In addition, we are realigning our internal resources to support a plan for expanded partnership outreach within the public and private sectors over the next 12 months. It is too early to get into specifics right now, but the groundwork is under way to support this important strategy as formulated at the NFCC Leadership Summit.

Our agenda also includes the work that continues to happen every day. In the final analysis, our mission is about helping consumers address their financial challenges – to help them find a path out when they are overwhelmed by debt; to help them consider the implications of major financial decisions such as buying a home or financing a college education; to help them achieve financial literacy so that they have the know-how to take charge of their money and manage it responsibly; and, increasingly in the aftermath of the economic downturn, to help them rebuild their finances and restore appropriate access to credit after a fall.

We are focused in these areas.

Over the past 12 months, we’ve served as a continuing resource for consumers and Member Agencies by producing up-to-date and relevant educational materials such as one of our newest features – Financial Fast Facts – a series of informational videos that consumers can access online to learn about such fundamentals about improving their financial situation, how to protect themselves against identity theft, and how to choose a credit counselor. These videos are on the NFCC Web site, on Facebook and YouTube, and have been made available to the Member Agencies for placement on their own Web sites. We’ve developed tip sheets on such vital issues as finding foreclosure assistance, how to survive job loss, and even the implications of financial problems for marriage and family life. These are also placed on our Web site, and sent to partners for them to distribute. Just about every product we produce is available in Spanish as well as English. And, our communications team has worked aggressively to spread this information and other important data, such as our financial literacy survey, to the widest possible audience. By every measure – the number of reporters we’ve talked to, the number of media placements, the size of the audience and hits on our Web site – our reach has expanded dramatically.

During the next year, I believe we must operate on the premise that we have experienced a different type of recession and that we also will experience a different and slower type of recovery. Although we have seen a number of good economic omens recently, consumer confidence remains low. Housing values are still well below their pre-bust peaks and the value of most Americans’ 401(k)’s, college savings plans, and other investments are also far lower than they were two years ago. That means that NFCC Agencies will continue to face enormous demand for services for the foreseeable future. It also means that some of the tools that have worked well in recent years may not be as effective as in the past, and that we have to look for new ways to help.

To that end, we are working hard to identify new products and services to meet consumers’ changing needs. While the expanded concessions offered by creditors in response to the Call to Action will enlarge the universe of consumers who qualify for DMPs, it does not meet the needs of every client. We need to design new strategies for those who do not want to file for bankruptcy, but for whom the DMP is not a workable solution.

Accordingly, the NFCC plans to field consumer research to ensure that any new products and programs match up with what will help the most consumers especially during these trying times. Through the Advisory Council, there is also an initiative underway to catalogue the research projects that have been conducted by various organizations over the years. We believe this research demonstrates the value provided by counselors every day as they help millions of Americans.

I like to think that the NFCC can help convert the current economic troubles into opportunity – opportunity to deliver financial education to a larger number of Americans; opportunity to restore a better balance between spending and savings; opportunity to highlight responsible credit so that lenders and borrowers once again connect borrowing to the ability to repay; and the opportunity to crack down on financial predatory practices.

Consider financial education.

Historically, a large amount of our national resources has been used for damage control to help consumers after they’re in trouble. Wouldn’t it be better to prevent personal financial problems through financial literacy programs that teach consumers to manage their finances more effectively? While good money and credit management cannot offset the impact of external events such as losing a job or a costly health problem, it can enable consumers to prepare for the unexpected and avoid the types of mistakes that lead to mortgage defaults, bankruptcy, and general problems with credit.

The fact is too many Americans lack the financial skills they need and too few are stepping forward to get help, even if they recognize that they need it.

For example, our 2009 Financial Literacy Survey found that 41 percent of Americans grade themselves as a C, D, or F on personal financial knowledge. Almost three of ten – 28 percent – of mortgage holders admit that their mortgages have turned out to be different than expected when they took out the loan. Numbers like these speak eloquently of the need for better financial education.

Those of you who provide counseling know this reality better than I do because you see the problems up close every day. In this room I am largely preaching to the choir. What we need to do is keep preaching this message in our communities, find creative ways to make financial literacy appealing to consumers, and persuade other leaders to join with us to make financial education something that every American takes part in.

I should add that we have valued partners in this work. Three of them – financial journalist Jean Chatzky of the Today Show, U.S. Congresswoman Eddie Bernice Johnson, and Illinois Attorney General Lisa Madigan – are with us this week to receive “Making the Difference” awards for their work in advancing financial literacy and consumer protection. We are honored to be at their side.

Together, we can make an even bigger difference, by pushing forward in this important cause. Our goals should include:

Basic money and financial management as part of the standard school curricula in every state;
Pre-purchase counseling for first time and at-risk homebuyers as a pre-requisite for a mortgage loan; and a similar requirement for subprime mortgage financing;
Lender incentives such as lower interest rates for individuals who successfully complete a financial education program or otherwise demonstrate financial literacy; and
Improved credit histories for those who have taken part in financial education.

We also know that hard times open the door to financial predators who take advantage of fear. When people can’t pay their bills and are worried about losing their home, it’s not surprising that they may be seduced by someone who promises to fix it all. As the economy goes down, consumers are increasingly bombarded with the siren song of false promises to cut their debt in half, fix their credit, and stave-off foreclosure.

Over the past year, the NFCC has created a number of educational materials to alert consumers to these bogus services and tell them where to get the right kind of help. You’ve all seen the tip sheets, the brochures, the DVDs, and the online materials. Warning consumers about financial dangers is an ongoing part of financial education that we will press ahead with over the months ahead.

Finally, I believe that the changes in our economy will require us to devote more resources to helping consumers understand what they must do to regain responsible access to credit.

Our economic difficulties have sparked two beneficial developments – consumers are saving more and lenders are becoming more conservative in their lending decisions. While these developments may slow the pace of recovery because spending and credit makes our economy go, there will be long-term benefits if we get the balance right.

Still, the short-term challenges of tighter credit are real. As lenders try to limit risk, consumers whose credit histories have been tarnished by debt payment problems, foreclosure, and bankruptcy will find it increasingly difficult to get credit. Lenders who once happily extended credit to consumers with credit scores in the 600s, now want to see credit scores of at least 720-740. By that standard only about 40 percent of Americans may qualify for the best loans. Even some of those who have managed to pay their bills and stay above water are finding it harder to get credit as lenders close accounts and reduce credit limits.

To some extent, of course, that is as it should be. If you’ve struggled with credit, your access to loans should be limited until you’ve proved that you can once again handle credit reliably. But that also presents a bit of a Catch-22: how do you prove you can handle credit until you’ve found somebody to give you a loan?

It’s not the NFCC’s job to make credit appear, but it seems to me that it is very much our job to help consumers understand how credit reports and credit scores work so they manage their finances in a way that improves their prospects of obtaining a responsible level of new credit. This is particularly relevant in today’s environment.

Some agencies may choose to identify local financial institutions with loan programs that help consumers gradually regain access to small amounts of credit. For example, in one program, consumers can borrow up to $500, which is placed in an interest bearing account or CD, so they can establish creditworthiness by making consistent and timely repayments. Or, agencies might connect graduates with local lenders who may provide low lines of credit to individuals who have recently been counseled by an NFCC Member Agency.

As we look for ways to meet changing needs and provide the services consumers want, the fact remains that we live in a credit-dominated society. Therefore, I believe in the broad area of rebuilding personal finances and credit opportunities for fulfilling our mission, for creative partnerships to help our fellow citizens get back on their feet, and for financial education to help people learn to manage credit effectively.

Over the past year, we’ve faced enormous challenges and we’ve achieved much – expanding our service to consumers to meet changing needs, raising awareness of risks that consumers should be alert to, partnering with creditors to help consumers gain control of their debts, and partnering with a range of concerned individuals and organizations for needed regulatory changes to protect consumers. Over the next 12 months, we need to consolidate these gains, continue to meet the growing demand for services, complete the implementation of new programs to make them effective, and finish the job of legislative and regulatory change especially aimed at predatory practices. We need to keep driving financial education and help our clients rebuild their finances. We are going to “keep on keeping-on.”

In other words, we do have important work in progress and important goals to achieve. By next fall I hope to report that:

The federal debt settlement legislation has become law;
The FTC has adopted final rules to protect consumers from deceptive advertising and abusive business practices by the debt settlement industry;
The Call to Action has been fully implemented by each of the top 10 creditors, that agencies and creditors are successfully putting the new DMP model to work, that a growing number of consumers are taking advantage of the modified DMPs; and that creditors from the next tier are also participating;
We have received the maximum amount of federal funding available for foreclosure mitigation counseling;
We have tapped additional sources of revenue from federal programs and secured new private sector revenues as well;
We have advanced the cause of financial education and gathered additional support from policy makers; and
We’ve reinforced public understanding of the difference between nonprofit credit counseling and the for-profit sector.

That’s my perspective on the challenges and opportunities for our sector over the next year. Now, I need to hear from all of you. As we demonstrated in Baltimore during the Leadership Summit this past spring, we have a wealth of creativity and energy within our membership. Every counselor and Member Agency has insights to offer and, working together, we have positioned ourselves well for the future. I want to thank everybody for the ideas they’ve shared in the past and will continue to share.

Thank You.

Source: 2009 NFCC State of the Credit Counseling and Financial Education Sector Address

The Truth About The Success Rates, Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy.

Steve Rhode — Wed, 17 Jun 2009 17:15:09 +0000

From How to Get Out of Debt

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 is 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, or less. 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.

For example, Pioneer Credit Counseling on their 2008 990 return (source) said:

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.

In fact in a latter statement TASC is cited as saying that only 34% of people in debt settlement programs settle debts. And that statement isn’t even saying that 34% settle all debts. – Source. That number is much, much lower. With the moving estimates given by the debt settlement trade association from 50% to 45% to 34% you can only conclude that the actual percentage of people that are able to settle debts is probably 24% or less.

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 and I am confident is assuming the number is actually twice to three times as high as that.

Insider wisdom is that approximately 10% of all debt settlement clients settle some debts while about only 1% settle all their debts.

The actual number of settlements 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 17% of their total debt, plus monthly maintenance fees, plus default rates on their debts and penalty fees and/or fees up to $5,000 or more for debt settlement services. Debt settlement for most people is a suckers play.

There is also sufficient evidence to question if most debt settlement companies want to settle their debt at all?

This quote comes from a former bank Vice President in charge of collections:

I have had numerous DSC’s (debt settlement companies) admit they have no intention of settling debt and in fact it is counter productive to their purpose to do so; their main purpose being to enroll consumers, collect fees, and provide such poor customer service and results that most consumers drop from the program and thereby leave the DSC with thousands of dollars in unearned benefit. – Source

The Attorney General of Illinois says this about debt settlement companies.

“What we have learned is that 65 percent of people who initially enroll with debt settlement companies drop out before any communication (with creditors) has been made. Before any of their debt has been settled at all,” says Madigan, whose office has seven lawsuits pending against debt settlement companies. “Those people don’t get a refund. They don’t give you your up-front fees back, they don’t give you your ongoing fees back. You still owe them whatever you signed up for based on that contract.” – Source

The Illinois Attorney General in further investigation stated to the Federal Trade Commission that:

In a statistical review they have done in connection with debt settlement cases, they have found that debt settlement companies have helped less than 10% of consumers resolve any debts at all, and no consumers had had all of their debts resolved through a debt settlement program. – Source

Here is what the Better Business Bureaus had to say about debt settlement to the Federal Trade Commission.

If clients did the math, here’s what they’d find: Assuming the program worked as represented, they’d likely pay the settlement company approximately 40% of the savings balance on the debts settled. When one takes into account that the balances of the debts swell with interest and other fees, the amount of the savings are even more negligible. Finally, in many cases, the amount of debt forgiven is taxable income, thus subjecting the client to yet another surprise which further lessens the savings. Consider the damage done to the credit rating and the potential for lawsuits, etc., and there is no real benefit.

The debt settlement business is insidious. In reality, very few people have debts that are settled and most wind up in much worse financial shape that when they entered the program. We repeatedly see cases where people are forced to file bankruptcy to rid themselves of the lawsuits and their debt. – Source

Here is what Chase Bank had to say about debt settlement in a recent court case.

In recent years, fraudulent debt settlement schemes have flourished throughout the country, spread by the Internet and other mass-marketing routes. Promoters of these schemes generally claim that, for an up-front fee, they will eliminate or substantially reduce a consumer’s debt obligations to creditors without any further material payment to the consumer’s creditors. These schemes, however, have no valid basis in either law or fact, fail to provide any of the promised relief to the consumers who fall victim to them and ultimately result in consumers who are deeper in debt with severely damaged credit scores. These schemes have become so varied and prevalent that the federal Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation now warn consumers about such schemes on their websites and through a formally-issued Alert to other regulators and banks.

Bankruptcy

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.

But don’t think this is all a modern problem. As far back as 1955 these types of arrangements had poor success rates. “D.F. Bush, the leading chain office operator in the field, who operates 31 debt-adjustment offices in 13 states and Washington, D.C., told me that only 10 percent of his clients ever complete their payments to creditors.” – Source

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.

@GetOutOfDebtGuy

Disturbing and Potentially Deceptive Move by Credit Card Industry. HelpWithMyCredit.org

Steve Rhode — Mon, 20 Apr 2009 17:50:56 +0000

From How to Get Out of Debt

It what certainly feels like yet another self-serving action by the credit card industry, Bank of America, Capital One, Citi and Discover Card, as well as the payments networks MasterCard and Visa have launched a new website HelpWithMyCredit.org that misleads consumers.

What appears to be even worse, is that a CNN personal financial reporter that I normally respect, Gerri Willis, has fallen for the trap. See CNN.

The website promotes itself as a banking industry effort to assist consumers that are struggling with debt problems. It even provides a self-help section that allows visitors to answer questions and guide themselves towards an appropriate solution. But what you don’t notice, until you look closely, is that the site simply guides consumers to credit counseling groups, and makes no mention of bankruptcy. The credit counseling groups specifically recommended on the site are Money Management International, Novadebt and Take Charge America, along with the networks of the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies.

I cringed when I read the site, for me, it is a strong and open reinforcement that the relationship today between credit counseling groups and credit card companies, is self-serving at best and truly deceptive at worse. What concerns me most is that consumers are being lead to believe that credit counseling is a legitimate solution for them at large, with no mention that credit counseling groups are compensated, by banks, by a percentage of the money the credit counseling companies collect from consumers and return to the banks.

If this credit card industry was truly interested in assisting consumers with their debt situation, instead of simply directing people into the hands of only one self-serving solution, credit counseling, in the interest of balance and fairness, there would be equal information provided about bankruptcy or even lump-sum debt settlements as a legal and viable option. There is not. What are we to deduce from that glaring omission?

@GetOutOfDebtGuy

Consumer Credit Counseling Service, CCCS, NFCC, and National Foundation for Credit Counseling

Steve Rhode — Mon, 12 Jan 2009 20:27:23 +0000

From How to Get Out of Debt

I often get questions from people asking me about Consumer Credit Counseling Services, also known as CCCS. I thought I’d give you a quick little summary of CCCS and the types of services they offer.

CCCS offices are members of the NFCC. The NFCC used to stand for the National Foundation for Consumer Credit but changed their name to National Foundation for Credit Counseling. I could never understand the original name of National Foundation for Consumer Credit since they were actually working to get people out of credit obligations rather than promoting consumer credit. I guess that’s exactly why they changed their name.

The NFCC collects fees and royalties from non-profit companies that pay to be a member and certified or recognized by the NFCC. You can learn more about their income streams by looking at their 2007 990 non-profit tax returns. Interesting, they don’t make this easily available on their website like other non-profits do? It would be more transparent that way. To see additional years you’ll have to go to Guidestar.org and register to look at them.

The NFCC makes a significant amount of money from housing counseling as well as credit counseling. There has been some conern about their housing counseling efforts. NFCC to HPF: “Let us run the show or else”

The debt management programs put forward by CCCS groups only extend the credit policies and terms to consumers rather than creating a repayment solution that best meets the consumers needs. CCCS is also primarily funded by creditors which creates a horrible and obvious conflict for member agencies. On one hand they are thought to be impartial and protect consumers from debt problems but on the other hand their money comes from collecting payments from consumers and returning them to creditors. I’m not aware of any industry that will turn and be on the offensive, when needed, against their funding source.

In fact if you do a search of Google it will clearly show you little proactive effort by CCCS or NFCC to help stamp out bad creditor behavior and as a charity, to lead the march to defend consumers against financial services abuses.

A credit counseling agency typically receives most of its compensation from the creditors to whom the debt payments are distributed. This funding relationship has led many to believe that credit counseling agencies are merely a collections wing of the creditors. This fee income, known as “Fair Share,” are contributions from the creditors that originally earned the agency 15% of the amount recovered. However, in recent years, Fair Share contributions have dwindled steadily, with contributions of 4-10% being the most common.

Still the NFCC considers bankcard companies to be one of their primary “constituents,” and the NFCC website promotes the fact that they collect $5 billion for creditors each year. It also promotes their efforts to steer consumers away from bankruptcy. – Wikipedia

In a perfect world it would be nice to see CCCS and the NFCC operate independent from creditor funding, to have a fiduciary duty to represent the best interests of the consumer and to work for solutions that best help the person in trouble. But then again we don’t live in a perfect world, do we?

Consumer Credit Counselling Service in the UK has had some serious facts brought forward, including the fact that they have a direct tie to a PR firm that works for credit card companies to avoid negative press about credit cards.

I am not certain about the business relationship between CCCS of the U.S. and CCCS UK.

Banks Agree to Wipe Out Up to 40 Percent of Credit Card Debt But Watch Out.

Steve Rhode — Fri, 31 Oct 2008 14:51:17 +0000

From How to Get Out of Debt

Credit card lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings have finally come together with the help of the National Foundation for Credit Counseling, Consumer Federation of America and the Financial Service Roundtable to start the process of creating a debt solution, other than bankruptcy or credit counseling.

That could be potentially really good news for consumers as it starts to make some major movement towards the perfect debt assistance program I outlined before.

At the heart of this new initiative is the Office of the Comptroller of the Currency giving banks permission to write off up to 40 percent of the balance owed on credit cards on a case by case basis. If banks did this it would give consumers a possible solution to pay what they can afford without bankruptcy. That is good news.

But with every good news story there is a catch, and pretty significant ones at that. Banks don’t want to book the loss on the loan until the consumer pays off the reduced balance through a payment plan. That will mask the true losses by the banks under this plan for years. But the primary reason for this is probably because the banks want to and will come back in full force and vengeance to collect the total amount due and then some, if consumers fail to complete the entire plan as scheduled. That could be very dangerous for consumers that have a slip or two during the long and difficult 60 months of repayment.

Worse yet is that rather than in bankruptcy where consumers do not have to pay any income tax on the amount of debt forgiven, in this plan, they will. The group is asking that borrowers be able to defer payment of income taxes they will owe the IRS on the forgiven part of the debt until after the remainder was paid off. You have to pay income tax on forgiven debt, just as if you earned the money. That just puts the banks squarely ahead of the government and leaves the consumer with potentially years of additional debts payments to make after five years of paying back creditors.

No Lingering Tax Liability- Unlike now, where any forgiven debt is taxed by the IRS as if it was earned as income, except for debt discharged in bankruptcy, the IRS needs to not bill consumers for the that amount owed that creditors may write off under this plan. Getting a tax bill for debt you already can’t pay is a strong disincentive for consumers to even bother with repayment. – The Perfect Debt Assistance Program

And the forgiven debt tax issue is a big one. If banks write off a total of $60,000 worth of debt to help you avoid bankruptcy, depending on your tax rate you can wind up with an IRS obligation of $12,000, more or less. Finishing a long and hard repayment schedule over five years only to wind up owing the IRS and paying for another couple of years seems cruel and a huge disincentive.

Scott Talbott, senior vice president at the Financial Services Roundtable is quoted as saying that under this plan “Both parties win”. I’m afraid that is an optimistic statements at this point and while we are potentially headed towards a good plan, we are not there. Right now I’d have to say the current plan heavily favors creditors.

Currently, the only thing the plan does is potentially leads consumers into a five year payment plan that is not binding on the creditors under law, leaves the debtor owing the IRS at a latter date, masks the banks write offs until the reduced debt is paid.

Since the plan is not binding, it will only take the actions of one creditor with excessive collection pressure, or arbitrarily changing their mind to conform with then current bank policy to continue participating to tank the whole repayment plan, maybe years into it. And creditor flip flops are not a worry of something that might happen, they happen now in a normal debt management plan, especially as creditors buy and sell portfolios of debts.

If the plan fails years into the repayment plan, consumers will have wasted years of struggle and payments and potentially be in worse shape than if they just went bankrupt to begin with. In order for this plan to be effective it must be contractually binding, just like an Individual Voluntary Arrangement (IVA) in the UK is.

Even though I once served on the board of directors of a consumer credit counseling office that was a member of the National Foundation for Credit Counseling (NFCC), I have been hypercritical of the NFCC in the past, feeling as if they are not doing enough to defend consumers against bad creditor behavior and actions since they are primarily paid by the creditors. But for this effort of trying to create a new solution for debtors I’ll give Susan Keating, the president of NFCC, a provisional thumbs up for finally seeing the light that better solutions for problem debt need to be made available to consumers, other than the traditional debt management plan (DMP).

I also see my old contact at Consumer Federation of America, Travis Plunkett, is quoted as saying that “In this case we have a clear common interest”, we do Travis but we’ve got further to go before this is a good plan for consumers other than bankruptcy, where no lingering tax liability exists and the plan is binding on the creditors. Keep up the good work Travis.

Having spent the past few years in the UK and working with similar plans there, this new debt write off plan being put forward here could be something great but unless we tighten up some major issues, as I laid out in the perfect debt assistance program I’m afraid that it will not be as beneficial for both parties as it could be.

A final sticking point is that this plan only address part of the consumers financial struggles and does not provide a single solution to address all debts, as bankruptcy does. Not mentioned in this plan is how consumers in trouble would be able to incorporate a failing mortgage into one single and coordinated solution handled by a third part in the time of monetary crisis. If a plan can be created that address all the issues and wraps things up into one package, then we’ve got a world class solution.

Keep working on this guys, we are halfway towards a decent debt repayment solution for good people with bad debt.

Steve

How to Get Out of Debt With the Get Out of Debt Guy » national foundation for credit counseling

Credit Counseling Industry Accused in Potential Historic Turning Point Lawsuit

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Referrals From Creditors Are Not What Consumers May Believe

Now It’s Your Turn to Read The Suit

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