Why I Love Debt Settlement and Why Debt Settlement Isn’t Going Away

Based on some of the things I’ve written about debt settlement some people may think I actually hate debt settlement. In fact nothing could be further from the truth so I wanted to talk about it.

Debt Settlement Dog

With all that has gone on in debt settlement with the investigations, FTC telephone sales rules, Senate hearings on debt settlement, the Debt Settlement Consumer Protection Act, and lawsuits by Attorneys General against debt settlement companies it’s important to focus on the reality that debt settlement isn’t evil when used appropriately.

In my professional credit & debt life I have helped people to settle debts. We did it for a flat $495 fee per account and refunded 100% of the fee if we were not successful. We did not tell people to fall behind and only took on those people that had cash on hand to settle right now, not save for years in hopes of settling latter. Sometimes we were successful, sometimes we were not. But at the end of the day the consumer we were unable to get a settlement offer for that was acceptable, was not out anything but a few weeks to negotiate with their creditors.

There are some very good companies that offer debt settlement services that recognize that in order to achieve success with debt settlement you have to be selective in who you take on, offer a fair and reasonable fee structure and don’t create unrealistic expectations.

Now, compare the reasonable players with the downright fraudulent and deceptive marketing that many newcomers into the debt settlement field had spread around. Claims that they could make creditor calls stop, settle for pennies on the dollar, prevent lawsuits, come up with any payment plan the consumer wanted, and wait years while money was hopefully saved. And all the while these interlopers were collecting all of their fee, based on debt enrolled in the program, and taking that money, putting it in their pockets and spending it before they actually did much, if any, work at all.

The claim of crisis in the debt settlement field right now seems to be that legislation like the Debt Settlement Consumer Protection Act will kill the debt settlement industry. And it will probably kill most of it when passed. But let’s not vilify the wrong guilty party here. The only need for regulation is because the numbers of consumers getting screwed by quick-buck debt settlement marketing groups was massive and growing, fast.

If the debt settlement industry was only filled with the reasonable players, or those that had a similar approach to my old way of settling debts, we would not be having hostile arguments about the current wave of debt settlement regulation. There never would have been a need for it. The bad actors would have not screwed people with such lies and deception that it made regulators step up, take notice, and take action.

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What upset companies that label themselves as good guys can’t see is that regulation is designed to impose sweeping controls over an industry run amuck, to protect as many consumers as possible. It’s a broad brush and often paints over some good companies along the way. Not that that’s right. It’s just the way it is.

I for one would love to read any other regulation proposal which will suck the quick-buck profit out of debt settlement and protect consumers. But I don’t see any other proposals forthcoming. All I hear are debt settlement trade associations crying foul but I have not seen them putting forward any alternative suggestions that limit up-front fees, provide for consumer refunds, and have a fair performance based fee structure.

The credit and debt world has endured a constant cycle of regulatory crack downs to address abuse. This isn’t our first time at this dance.

The regulatory debt settlement tussle isn’t the first and it won’t be the last. As I remember the 1930s and early 1940s had regulation on storefront lenders. The 1950s and 1960s had crack downs on debt adjusters and aggregators. The late 1990s took a swipe at advance-fee loans and credit repair. The early 2000s beat up bankruptcy and credit counseling and now in 2010 it is the turn for debt settlement and payday loans.

Where there is quick and easy money to be made, there will be abuse. Where there is widespread abuse there will be regulation. Where there is regulation there will be dramatic implications. It’s the way it has always worked and always will.

Now let’s not forget that debt settlement isn’t wiped off the face of the planet with new regulations. How it can be sold is dramatically different but smart companies, that will be smaller and leaner will figure out a way to play within the system and still offer services.

Under the current regulation, a client with $50,000 of debt over three cards that had their debt settled for 50% would pay $50 + 5% of $25,000, or a total of $1,300. Considering technological advances to make it a less expensive service to deliver, that’s not a bad fee to earn. It can be done, just differently than with a big group with huge overhead operating costs, paying massive marketing bills and front loading fees.

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With regulation, gone will be the 15% of debt enrolled, or $7,500 fee, in my example, that will be pocketed and spent before debts are settled. Gone will be clients that will be told to stop paying creditors for years and years in hopes of saving money after the fee is paid to use for settlement. Gone will be what has clearly appeared to be misleading and deceptive advertising. And why will that all be gone, because the regulation will have driven out the profiters and sent them packing. But don’t worry they’ll emerge again, real soon, just pushing some other credit, debt, or money related service. It’s what they know. It’s what they do.

And for those that say the sudden scramble to attorney model debt settlement will protect companies to keep playing this game as they have, my bet is that dog ain’t gonna hunt for long. Many lawyers are going to lose their licenses over that, just watch.

Offered in a fair and consumer friendly way, debt settlement is just another arrow in the quiver of the consumer to consider in their specific debt situation. Debt settlement isn’t better or worse than the other arrows labeled credit counseling, bankruptcy, or additional income, just different.

After regulation passes debt settlement will still be around but offered in a more fair and reasonable manner. And for the right person, in the right situation, with the cash on hand, debt settlement will still be something to consider.


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1 thought on “Why I Love Debt Settlement and Why Debt Settlement Isn’t Going Away”

  1. Steve,

    So there is no confusion – I work in the debt settlement industry, so my opinion should be construed as biased, but I will try to state as many objective facts as possible.

    1. The average amount of unsecured debt the typical customer registers with a debt settlement company is around 24k (source: 15,000 data points from personal, business affiliates, and industry studies)
    2. The average settlement rate of debt that does eventually settle is 50%
    3. At $50 signup fees and 5% fees you make $650/customer
    4. The industry drop-off rate is ~75%. Lets make some assumptions and say that the 24k is over 3 different creditors with 8k each, and lets say that drop-off is spread evenly between the 3, so you have 75% of customer settle 8k, 50% settle 16k, and 25% settle 24k, which comes out to a weighted average of 12k settled per customer.
    5. At $50 signup fees and 5% fees you make $350/customer (5%*(12k*50%))
    6. This is over 2 years
    7. The current industry CPA (cost per acquisition) for customers stands at around $300-$700 depending on who you ask. Even with the most conservative CPA estimate its impossible to make this business work.
    8. The argument that as companies leave the industry the CPA decreases does NOT work, because liquidity in the leads market also decreases as lead providers leave the market. So you end up with 20% of the companies remaining fighting over 20% of the leads remaining, and the equilibrium price doesn’t change much.

    This piece of legislation is nothing but negative, and limits consumer choice. There are ways to achieve the same purpose without destroying the industry, because make no mistake about it, the debt settlement consumer protection act of 2010 will essentially eliminate the industry and put money in the pockets of credit card companies and bankruptcy lawyers.

    As a final thought – for comparison – even the Illinois Debt Settlement Consumer Protection Act, sponsored by one of the industry’s staunchest opponents, allows for a fee of 15% of savings. 15% is a fair level which allows legitimate companies who are willing to commit to bettering processes (reducing acquisition costs, improving settlement rates) to continue to operate. 5% shuts out the legitimate players and promotes off-shore scams which the politicians don’t seem to care much about.


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