What You Should Really Know About Debt Validation and Magic Beanstalk Letters

In this podcast, Damon Day and I talk about why debt validation isn’t really the magic solution some companies try to sell to consumers. There is much more to know about debt validation before you just leap at the incredible sales pitch.

If you think debt validation is the way you’d like to take care of your debt, that’s great. But before you leap at the sales pitch, at least understand the pros and cons of debt validation so you can make the best and most informed decision to feel confident debt validation is right for you and or your family.

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Steve Rhode: [00:00:00] Hey, this is Steve Rhode with Damon day; we’re back to talk about more money, credit, and debt subjects. Today. We’re talking about debt validation and Damon. This is a subject that is close to your heart. Isn’t It

[00:00:13]Damon Day[00:00:13] It is

[00:00:14] Steve Rhode: [00:00:15] Are you a pro all these companies that are trying to sell debt validation, or what is your opinion? Please tell us.

[00:00:24] Damon Day[00:00:25] I’m not pro debt validation is something I get a lot from clients in terms of questions about; hey, I was talking to this salesperson or talking to this company or reading about this and whenever it circles around to, oh, it’s this thing where I sign up, and I pay the money every month for a couple of years.

[00:00:44] And then my debt goes away. I go, oh, you’re talking to a debt validation company. And then I got to spend 20 minutes explaining to them why that’s not the best idea.

[00:00:56] Steve Rhode: [00:00:56] So let’s talk. What debt validation is, on the one hand, it really applies to third-party collectors that have to validate that the debt that you are being pursued for is an accurate debt.

[00:01:10] And the way they’re supposed to do that is by providing. Copy of the contract statements, information about the account even a copy of the original client agreement that was signed to prove that you actually owe the debt. And so that’s how these companies are claiming they can stop the collector from coming after you, or even the creditor by saying we demand that they produce this information and if they can’t, then the debt will go away, and people are buying into that.

[00:01:41]Damon Day[00:01:41] Yeah. And most validation companies use the fair debt collection practices act as their basis or their reasoning for what they can do, which does not apply to the original credit or anyway, but in a nutshell, to understand debt validation here’s what it is.

[00:01:59] Let me uncover the salesmanship for it, basically. So let’s say you owe $50,000. So the pitch is typically going to be for the low, low price of say $20,000 that you can break into monthly payments over two or three years that are just fees to this company. They are going to send some Jack in the Magic Beanstalk letters that are going to make the creditors shake in their boots to the point where they run away, kicking and screaming, and never pursue your debt.

[00:02:29] And after a couple of years, like magic, Your debt goes away, and you paid them 20 grand, and you got out of 50 grand, and everything is hunky Dory. And so my problem. It’s not necessarily with the debt validation process itself because there, there are legitimate times where you should validate a debt.

[00:02:48] For instance, if your identity was stolen and it wasn’t yours, you never spent the money; it wasn’t yours. You’d legitimately don’t owe it. It’s beyond the statute of limitations; in some creditors trying to go after you several years after the statute of limitations, you can send a validation letter.

[00:03:05] So what happens is these companies. Take the law that’s designed to protect consumers and. Bastardize it, if you will. And essentially morph it to fit their own scheme of we’re going to send these magical letters. That’s going to make the creditors run away and just pay us 20 grand or whatever the fee is going to be.

[00:03:26] And now obviously, the salespeople pitch it in a much prettier way than I just did. But when you. Break it down. There are no magic letters that are gonna make the creditors run away and not collect. Now you could get lucky. Creditors don’t go after every single person, and these companies kind of bank on the fact that not every creditor is going to sue every client for every debt.

[00:03:50] So they can throw this facade over this process, and you can pay him all this money. And let’s say you have 10 debts. It’s unlikely. You’re going to get sued on all 10 debts. So you enroll, debts.

[00:04:01]Steve Rhode: [00:04:01] and another point is that if they send one of these magic Jack in the Beanstalk letters and the debt collectors stop contacting you, that doesn’t mean that you. Oh, a legitimate debt. That just means that your account has now gone into a different queue. It can resurface again later; just because they stopped now doesn’t mean that it’s not going to reappear.

[00:04:23] And my big issue is someone has, say, five debts, and they send the magic letter, and one debt collector stops contacting you. And the other four don’t stop. You’ve accomplished nothing, really.

[00:04:37] Damon Day[00:04:37] All you’ve accomplished is losing money to this debt validation company. And my favorite is they typically set up a payment program for two or three years. And you’re going to pay them all of their money. If you got 50 grand in debt, and you’re going to pay some company 20 grand to supposedly magically make it go away.

[00:04:55] Why not just use the 20 grand to legitimately settle the debts. If you go bankrupt or don’t want to go bankrupt, why give it to a company? And here’s the other kicker. Most people live in states where the statute of limitations is four to six years. So some states even longer than that. And what that means is that’s the length of time.

[00:05:14] A creditor can typically go after you legitimately go after you and file a lawsuit, so if you live in a state that’s got a six-year statute of limitations. You might not get sued the first three years; you might pay this company $20,000 and think everything’s great. You never got sued. Your debt went away.

[00:05:30] And then in the fourth and fifth year, you start seeing lawsuits pile up, and then you’re calling this company that you’ve already given 20 grand to, and they go, oh yeah. We’re we’re sorry. If they’re still in business best, you’re going to get a pro-rata refund. For that one account, but I think it’s a perfect scam.

[00:05:47] So let’s say you got, and maybe I shouldn’t say skin yeah, scam. I think it’s a fair enough word, depends on your definition, but let’s say you have 10 accounts, and I know just by the numbers that you’ll probably get sued on three or four based on who the creditors are if I could charge you a fee.

[00:06:03] For wiping out all 10. And I know that probably five or six are just going to eventually go away on their own, whether I have magic Beanstalk letters or not. And then I offer a pro-rata refund if you get sued. So let’s play this out. So you pay me $20,000, and you get sued on say three of those. And I give you a pro-rata refund.

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[00:06:22] Let’s say it amounts to $4,000. And so can you get sued on those three? My bad. It didn’t work. The damn collector didn’t send the right debt validation. We still dispute it, but I’m sorry, you’re going to court. Good luck to you. Probably best that you settle that one, and then they send you the $4,000 back.

[00:06:40] As the debt validation company, I get to now keep $16,000 for getting you sued three times. And the other ones just went away now. Did they go away because of the magic Beanstalk letters, or did they go away because you’re not going to get sued on all 10 accounts? So my advice to consumers is number one, don’t go the debt validation route.

[00:07:01] But if you’re going to, you can get the magic Beanstalk letters on the internet for free.

[00:07:06]Steve: [00:07:06] The consumer financial protection bureau has them right on their site to download for free.

[00:07:13] Damon Day[00:07:13] Yeah. So if you think they’re going to work, which they’re not in the way these companies pretend that they’re going to work, you don’t have to pay the 20 grand. In fact, my advice would be, if you want to try it, fine, try it, send your debt validation letters. But instead of giving a company 20,000, save up the money, whatever payments they were going to ask you for, put it in your own bank.

[00:07:33] And then that way, when you do get sued on a couple of these accounts, which you probably will, at least you got some money you can negotiate with.

[00:07:39] Steve Rhode: [00:07:39] Here’s another thing that drives me crazy is somebody who lives in a state where the statute of limitations has already expired calls a debt validation company and says, I’m all concerned about my debt. They’ll still enroll them. They’ll still put them in this program, even when the best defense is to say, Hey, that debt is expired.

[00:08:03] Steve: [00:08:03] You, if you sue me over that, you really can’t collect. And debts are getting enrolled all the time. That really shouldn’t be. I’m curious how many debt validation companies enroll clients in like Texas or Pennsylvania, or other states where they can’t sue over the debt.

[00:08:22] Damon Day[00:08:22] Debt that has gone beyond the statute limitation.

[00:08:26]Steve: [00:08:26] Yeah. that They can’t garnish your wages over debts like in Texas.

[00:08:29] Damon Day[00:08:30] And now you’re getting into the problem with the whole debt relief industry. It doesn’t matter. I don’t care if it’s and I like; I have a lot of bankruptcy attorney friends, but a lot of bankruptcy attorneys, credit counseling companies, debt settlement companies, debt validation companies. The problem is every time you call one of these companies, for the most part, you’re getting a salesperson.

[00:08:50] That is there to enroll you in a program, not to say, let me draw on my years of experience and my knowledge, and let me sit down with you and let me figure out what the best strategy is going to be. And I guarantee you absolutely zero times has a debt validation. A salesperson came across a potential client and said, you don’t need our help.
[00:09:12] It’s never happened.

[00:09:12]Steve: [00:09:12] Here’s the other thing that drives me crazy too, is a person calls a debt validation company or gets a sales call. And people generally fail to realize that. A sales call. It’s an advertisement. They want to sell you the services. And instead of telling you something about your income makes you judgment proof, it’s something to consider or bankruptcy; you look like you’re good for a chapter seven bankruptcy.

[00:09:36] Your debt would be good and gone in about 90 days and costs. Less than $2,000 instead, they continue to make the sales pitch. I totally understand why they’re trying to make the sale to try and earn the commission, but that doesn’t necessarily mean that’s the best for the consumer.

[00:09:51]Damon Day[00:09:51] Oh, yeah, it usually isn’t best for the consumer. I know it’s a tantalizing pitch, this debt validation where the debt just goes away, and it would be. It would be more tantalizing if they didn’t charge—so fricking much money. Behind the scenes, they’re not really doing anything.

[00:10:07] They’re just literally taking your money. They send off the, oh, it’s by the way, I didn’t even get to this yet. Oftentimes these magic beanstalk letters with certain banks make you more of a target get.

[00:10:19] Steve Rhode: [00:10:19] Absolutely.

[00:10:20] Damon Day[00:10:20] Not only are they not helping, oftentimes, but they are also making it worse by sending these letters.

[00:10:26]And so the other thing is you gotta ask yourself if this really worked if you could send these letters and the debt just goes away, especially if you actually owe the money and you bought stuff. Plus, imagine being in front of a judge and having to explain the debt validation process, and the judge says did you get stuff with the money?

[00:10:43] And you’re gonna say yeah, but I don’t owe it because they didn’t have the right letter in response to my validation letter. And if you look at the CFPBs website or you start looking at the fair debt collection practices act law, it basically says validation is typically shown showing the charges showing that it was actually your debt, your name, and your address that was on there, verifying with the original creditor.

[00:11:10] That we have the right person there. It wasn’t an identity mix-up or something like that. But think about it this way. Let’s say debt validation was legit, and you can send these letters, and the banks had no way to prove that anybody that ever used a credit card owed the money. Let’s say the banks could not prove it.

[00:11:27] What would happen to our economic system in this country? If all of a sudden everybody starts reading on the internet, oh, I get this magic letter. I send it in, and poof. And everybody just has their debt wiped out because these magic letters like contract law don’t mean anything anymore. The whole society would essentially collapse.

[00:11:46] So what this guy is saying is true. We’re all screwed. It’s not going to work.

[00:11:51] Steve Rhode: [00:11:51] Here’s what I think about if you want to pursue debt validation, really what you’re talking about here is it’s a legal issue. You’re talking about contract laws, you mentioned, and the laws of your state make a real difference as to whether or not it can be validated if that’s what you want to do and you want to try it.

[00:12:11] Contact a local attorney and ask them to look at your situation, and they can represent you and make the legal arguments about why you don’t owe it or validate it or whatever, but get legal representation instead of just Johnny on the spot representation.

[00:12:31]Damon Day[00:12:31] Yeah, because as a consumer, look, I get it. If the debt collectors piss you off, they’re calling you at all hours of the night, and you just get to the point where you just hate them. I totally understand effin with them. And sending some debt validation letters and play in that game.

[00:12:45] There’s a game there to be played for sure. But the problem is consumers. Don’t go into that process with a full understanding of what they’re taking on in terms of what are the potential consequences of sending these letters? Because you can play that game since the validation letters. See if you can kick the can down the road, see if you can get that debt to run past the statute of limitations, save up some money to settle the ones that don’t.

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[00:13:09] Get past the statute of limitations or whatever; there are lots of games that you can play. But my problem is with these debt validation companies that get on the phone with these consumers, that act like it’s a foregone conclusion for the most part that, oh, we’ve got the sauce and you hire us, and you give us 40% these fees run like 25 to 40%.

[00:13:29] That’s how they come up with their fees. Somebody calls them, and they got, like I said, 50 grand in debt. They want to charge 15 to $20,000. So if you’re going to play that game, you don’t need to spend 15 to 20 grand on seeing if it’s going to work; save the money yourself, get the magic Beanstalk letters on the internet for free and send them in.
[00:13:46] If you feel confident enough to do that dance with those collectors, most consumers don’t have that confidence. So they rely on these debt validations, people that are taken advantage of.

[00:13:57] Steve Rhode: [00:13:57] So here’s a favorite ploy when you’re talking to the salesperson and the debt validation company. And they say with our approach; your payment will be half of what you’re paying right now. And the person goes, oh my gosh, half I can’t afford half. And then, so they’ll come back. How about 40%? How about 30%?
[00:14:16] It’s because that number is just totally made up.

[00:14:20] Damon Day[00:14:20] When you’re talking about debt validation, that number is just 100% their fee, you’d be surprised how many people I talk to that listened to the debt validation pitch from one or several companies. And still didn’t understand that the money they were paying in was just.

[00:14:37] They somehow thought the creditors were going to get some of that money. And so when they say, Hey, look, your monthly payments are a thousand dollars a month, but if you hire us, your payments are only going to be $400 a month for three years. That $400 a month for three years is their fee. So they sit on your accounts for three years and make their $15,000 or whatever it is.

[00:14:57] And that’s it. You have no money. If you get sued. You have no recourse. You’ve been giving them everything you could afford for three years, thinking you’re doing the right thing, thinking you’re getting rid of this. And then the creditor gets tired of this crap and sues you. And you’ve got nothing.

[00:15:13] You’ve got no money. And then you’re calling this company and these kinds of all; we’ve got attorneys in this state. That’s what you brought up a good point the other day. Steve, tell him what was that thing you said about a couple of questions to ask, as far as the attorney that’s going to be represented.

[00:15:27] Steve: [00:15:27] Oh, yeah. If you’re buying into a company that says we have legal protection and our attorneys have looked over your case, you cannot be represented by an attorney unless the attorney is licensed to practice law in your state. Who is the attorney representing me? Where are they in my state? And then you can check with the state bar association and see if they’re actually licensed.

[00:15:51] A lot of times, you’ll find there is no attorney in your state. And it’s all just been a; I’m trying to think of a polite word for a lie, a non-factual statement, and alternate truth.

[00:16:01]Damon Day[00:16:01] And the sales guys always make it because people will ask, what if I get sued? Oh, we’ve got attorneys, and they’re going to represent you. And they give the impression, okay, I’ve got this law firm, they’re representing me. They’re using the laws in my favor.

[00:16:14] They’re going to go after these guys. So if I get sued, there’s going to be Johnny Hancock attorneys going to walk into that courtroom. And he’s going to really give them the goodwill hunting business; if you will, he’s going to just dance all over, discover and shame them out of the courtroom.

[00:16:31] That’s not what’s going to happen. You’re not; they’re not taking this case to trial. They’re not defending this stuff. When you get sued, they’re going to come back and say, oh, and here’s our excuse of why. And this creditor is not playing by the rules, and it’s illegal.

[00:16:45] So at the of the day, they were going to end up settling that anyway.

[00:16:49] Steve Rhode: [00:16:49] Or what they will also say is if you go back and read your client agreement, you’ll find that legal services are either an additional fee or we don’t provide them, or we can refer you to somebody, but it’s going to be on top of sometimes it’s going to be on top of what you’ve already paid.

[00:17:05]Damon Day[00:17:05] Yeah. And at best, that legal service that you pay for on top is going to be a generic answer to their complaint, to buy some time, maybe some discovery. And if the plaintiff’s attorney doesn’t just roll over, which these days they don’t really do that. Then eventually, it’s going to lead to some kind of a settlement.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

[00:17:23] And then the salesperson, it’s more of forgiveness rather than permission, right? Three years later, when you’re already fully vested in this process, and you’ve given all the money. And that was one of the reasons I wanted to do this podcast today because I would much rather be able to have this conversation with the consumer while they’re still considering this process. I want to have an alternative point of view. You talked to as many salespeople as you want, and then I’ll tell you the opposite, and I’ll tell you why I’m right. And then you can decide who makes more sense. I’m fine with that.

[00:17:50] But I, I would much rather have that conversation before a consumer is out $10,000, which unfortunately happens a lot where a consumer will find me by doing searches online after getting sued. And then we find out, okay, they’ve been in this program for two years, they’ve paid all this money. They don’t have any money in their savings account.

[00:18:09] Maybe they should have gone bankrupt two years ago, or maybe not. But all we know right now is they’re getting sued for $5,000, and they have nothing. So we have to try to scramble, so it doesn’t turn into a default judgment and potentially a wage garnishment if they live in most states other than Pennsylvania and Texas.

[00:18:26]Steve: [00:18:26] And this is a reason to talk to Damon at DamonDay.com is that you can talk to Damon. You don’t have to. Do anything with Damon other than getting his opinion and talk to him because the more information you have as a debtor, as a consumer, the better decision you can make.

[00:18:48] and that’s always what I want to encourage people to do, get all the information so you can make the best decision for you.

[00:18:55]Steve Rhode: [00:18:56] Thank you so much for your time. And thanks for sharing your wisdom.

[00:18:59]Damon Day[00:18:59] Absolutely.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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