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What to Do When Your Debt Settlement Company Goes Out of Business

With regulation of the debt settlement industry around the corner and the debt settlement groups saying that when debt settlement companies are prevented from collecting fees before providing service that 85% of them will go out of business, it’s time we talked about what to do when your debt settlement company fails.

The vast majority of debt settlement companies that have sold services to consumers have done so on an advanced fee model. They have collected the bulk of the total fees to be paid for providing settlement services before services were performed. In essence much of the money that was taken as income today and spent, was for work that would not have been delivered for years into the future. These debt settlement companies wound up operating just like a massive Ponzi scheme instead of placing the money received in protected accounts to actually be taken as income when the services were performed.

FACT: If your debt settlement company goes out of business is there is probably little money left in the company to offer refunds.

Many debt settlement companies have grown bigger and bigger with the massive advanced income they took in. They obligated themselves to larger office spaces, and more overhead even though there was no expectation the ride would continue.

The industry was marketing a product they had no control over and one day that business model could be dropped to its knees if creditors or regulators decided to make changes. If you are reading this, that day has probably come.

FACT: When the debt settlement companies fail there will be large amounts of secured creditors that will go after them for money due for overhead expenses and the debt settlement corporations will go bankrupt so the owners can escape legal awards against the companies and end monetary claims by creditors.

While you may have some money left in a third-party escrow account with a company like Global Client Solutions or NoteWorld, any money that was paid in fees to the debt settlement company will only be recoverable by participating in the bankruptcy of the debt settlement company as an unsecured creditor. You will be asked to fill out a claim form for submission to the bankruptcy court and you will probably receive a notice by email but certainly in the mail at your last known address. Make sure your debt settlement has your current email and mailing address on file in case they fail suddenly.

READ  What to do Right Now if You Are a Debt Settlement Company and You May be Going Out of Business. Lessons Learned.

FACT: In the bankruptcy of the debt settlement company there will be little money to pay unsecured creditors. Unfortunately that means you.

Consumers that have had their debt settlement company fail are going to be dumped back at square one. There will be no foreseeable company or enterprise to take over abandoned clients for free. People will find themselves effectively back to being in debt, without the support they paid for, and without the thousands of dollars they paid in fees.

FACT: When the debt settlement company fails you will be left back in debt and without another company to take over your account. The money you paid in fees will be gone or what little may be recovered will take months or years to do so.

The moment you hear that your debt settlement company has failed you need to deal with your debt. For most people that will be to seek protection under bankruptcy. You can click here to find a local bankruptcy attorney and go talk to them.

If you were enrolled in a debt settlement program because you could not pay your creditors what they were due then bankruptcy is going to be the most logical solution.

Bankruptcy will stop collection activities, block lawsuits against you from creditors, stop wage garnishments and most people will qualify to have their debt eliminated under bankruptcy in just a few months.

The bankruptcy trustee may file a lawsuit against the debt settlement company to recover money you paid the debt settlement company.

FACT: Most people will file bankruptcy when their debt settlement company fails.

Some debt settlement companies may actually be closed down by the state they reside in. In that case a court appointed receiver will contact you in an attempt to help you get a partial refund from money that was frozen when the company was seized. When the company is taken over by the receiver, debt settlement services will most likely end immediately and a slow moving claims process will begin.

FACT: If your debt settlement company goes out of business and falls under a court appointed receiver, services will stop and it will take a long time to get any refund.

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You may feel that you want to file a lawsuit against the debt settlement company when they go out of business. That is your right.

You can either contact a licensed attorney in your state for help or you may just want to file a lawsuit through your local small claims court. Small claims court will be less expensive and probably faster for you. You may want to pursue a claim against the marketing company that sold you the debt settlement program, the company owners and the company itself. You can locate the people responsible for the company by searching state corporate records online.

If you do decide to sue in small claims court you may want to find and use a self-help book like this one.

FACT: If you want to sue the debt settlement company then small claims court will probably be a faster and cheaper way to do it.

It is well within your right to file a complaint about your debt settlement company when they go out of business. When that happens you will be angry, feel victimized, and oh yea, still pretty angry.

You might feel you want to complain to authorities about what happened to you. You can file a complaint with the BBB, your State Attorney General and any local consumer protection office. However, if the company went bankrupt there will be little the complaint will actually achieve.

FACT: If the debt settlement company goes out of business and bankrupt there is little that will be achieved with a consumer complaint other than documenting the treatment you received.

Bottom Line

The end result is that there are no good options for you if your debt settlement company goes out of business.

You need to understand the thousands of dollars you paid in fees will for all intents and purposes be lost for good. If any money may be recoverable under a company bankruptcy or court appointed receiver, that will take a long time. In the meantime you will need to deal with your debt and you will either need to:

  1. find a new debt settlement company and pay fees all over again but this time only pay fees after a debt has actually been settled;
  2. come to a payment agreement with your creditors directly; or
  3. seek protection by filing bankruptcy yourself.





About the author

Steve Rhode

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

20 Comments

  • Did you happen to mean FBL Associates instead of FPL? I’ve had a rash of reader questions lately that are unhappy with FBL. Maybe you can post some answers on these posts to help the readers.

    Steve

  • Listen, I worked for a company in Miami that served as a third party selling the ESP Software. They also used FPL Associates and Noteworld along with Global Logistic as assisting companies in settleling the consumers debt. In the end, this company is a scam along with FPL and Noteworld. My clients all of them have had fees taken out with no letters what so ever sent out to creditors and get this, the software that we told the customers that they can log on to, well, its bogos. No bank or creditor has been able to log on to the software because it is not a 6 million dolar software with a portal for customers to log on too. In my research, I found out that these people use to be P&E Solutions and Life Guard. Same owners and players. Now they have the nerve to sell Foreclosure Defense Insurance. Maybe the FTC and the FBI will finally catch up with these guys and close them down like they often do other fraud companies. My clients are being reffered to their attorney general, FTC and FBI. To think that I represented this company believing that they would really help people settle their debt. I think one of those Fed jumpsuits will look good on all of them.

  • Listen, I worked for a company in Miami that served as a third party selling the ESP Software. They also used FPL Associates and Noteworld along with Global Logistic as assisting companies in settleling the consumers debt. In the end, this company is a scam along with FPL and Noteworld. My clients all of them have had fees taken out with no letters what so ever sent out to creditors and get this, the software that we told the customers that they can log on to, well, its bogos. No bank or creditor has been able to log on to the software because it is not a 6 million dolar software with a portal for customers to log on too. In my research, I found out that these people use to be P&E Solutions and Life Guard. Same owners and players. Now they have the nerve to sell Foreclosure Defense Insurance. Maybe the FTC and the FBI will finally catch up with these guys and close them down like they often do other fraud companies. My clients are being reffered to their attorney general, FTC and FBI. To think that I represented this company believing that they would really help people settle their debt. I think one of those Fed jumpsuits will look good on all of them.

  • Robert,
    Bonds licenses and minimum insurance levels, would not resolve the problem. The problem is that upfront fee programs sold to consumers (many of whom did not belong in a settlement program) put them on a path to financial ruin. Simply refunding a consumers fees after they have been led down the wrong path would not make them whole. Give a consumer who is dealing with 3 different lawsuits for 30K a few thousand bucks back as a refund and ask him how good he feels.

    I agree with you that a reasonable retainer should be allowed to be charged, however the industry had years to clean up their act, and the trade associations where too busy making money hand over fist and encouraging an environment of front loaded fees to actually do anything proactive about it. So they dinked around too long, and now you have what you have. It isn’t perfect, but it will put many programs out of business that have no business in business.

    The industry is an easy target because the majority of companies in it are nothing but scam artists, cons and profiteers at worst and at best, are selling programs that they themselves don’t understand, and are not good solutions for most of the clients they sell it to.

    So the FTC is going to put most of them out of business. That was the actual point.

  • OFF THE MARK

    “When the debt settlement trade associations said the vast majority of their members, 85%, would fail”, They where right, yet very far off the mark.

    Here is the reason why.
    80 percent or more Americas debt settlement agents and or counselors work for front end marketing companies; meaning they are not the acutal service side of he debt settlement equation. They pay the hefty upfront cost of marketing. This costly marketing in combination with the FTC-TSR (no upfront fees) passage, cause most companies find other business ventures.

    Steve is off the mark…

  • The Boogie Man Commeth.
    It looks like Steve Rhodes has been reading the FTC TSR release and the concerns from debt legitmate settlement companies. 90% of companies will be affectivley out of business, meaning they will take on (Zero – No More -Nada) ziltch, in the way of new clients. This does not mean clients with reputable settlement companies are left out in the cold. Their is a reason for the up front fees belive it or not.

    • Old Debt,

      I’m trying to understand your point. The information you posted, about the number of debt settlement companies estimated to go out of business originated with the United States Organization of Bankruptcy Alternatives (USOBA). The issue about upfront fees was not decided by me, but by the Federal Trade Commission after years of study.

      Based on the abuse of consumers by companies that charged upfront fees, I have been vocal in supporting this issue with my opinion on it. But based on the guidelines the FTC put out a debt settlement company should be able to make the transition between a front-loaded fee model and a fee for performance model by adjusting their business strategy. In fact the FTC TSR did not make debt settlement illegal, nor did it limit the amount of fee that a debt settlement company could charge.

      Steve

      • ” the FTC put out a debt settlement company should be able to make the transition between a front-loaded fee model and a fee for performance model by adjusting their business strategy.”

        The Federal Government is excellent at determining business models and viability. Just look at, Fannie Mae, Postal Service, The Federal Government (10+ trillion dollar deficit)…

        I assume the FEDERAL Trade Commission is a very reliable source for how to operate businesses.

        HOWEVER, let me assert that Up-Front-Fees, at the previous industry model (3-4Fee payments only) was responsible for the “broker shops.” But, this could of been regulated by requiring bonds, licenses, minimum insurance levels. To sat that a debt settlement business provides 0 service prior to settlement is absurd. Everyone knows the amount of communication (between creditor and company, client & company) is vast and requires much capital. The client continually needs to be re-educated, reminded of the goals of settlement when dealing with these ruthless banks.

        I think some fees prior to settlement are appropriate to off-set a business costs. Of course, this industry is an easy target and many of the people operating in it make it this way.

        • Robert,
          Bonds licenses and minimum insurance levels, would not resolve the problem. The problem is that upfront fee programs sold to consumers (many of whom did not belong in a settlement program) put them on a path to financial ruin. Simply refunding a consumers fees after they have been led down the wrong path would not make them whole. Give a consumer who is dealing with 3 different lawsuits for 30K a few thousand bucks back as a refund and ask him how good he feels.

          I agree with you that a reasonable retainer should be allowed to be charged, however the industry had years to clean up their act, and the trade associations where too busy making money hand over fist and encouraging an environment of front loaded fees to actually do anything proactive about it. So they dinked around too long, and now you have what you have. It isn’t perfect, but it will put many programs out of business that have no business in business.

          The industry is an easy target because the majority of companies in it are nothing but scam artists, cons and profiteers at worst and at best, are selling programs that they themselves don’t understand, and are not good solutions for most of the clients they sell it to.

          So the FTC is going to put most of them out of business. That was the actual point.

  • Steve,

    Again, much like the FTC, you use the Trade Associations data when it is convenient for your point. Yet, when in other cases they bring data to show a point supporting the service, supporting the industry, the data doesn’t have “merit” for whatever reason.

    In either case, the title of the post fits with your goal… drawing attention. But here is my point, everyone has a “slant” that’s just human nature to have perspective. However, it seems most your points are obviously completely slanted without much consideration of the other side of the story.

    But I am not defending deceptive Debt Settlement Companies. I am pointing out that you start with the conclusion and work from there.

    If your not authentic, genuine, “real”…. the internet world will know. You have a lot of traffic now with just the timing of the media, but this will decline shortly. one thing i’ll give you, you choose an easy target (anyone against the banks)

  • Your such a fearmonger. Nice title “What to do WHEN” instead of IF. Much like the FTC that claims “1% success rate” for a company they shut down (leaving all active clients with no where to go.. hence, slated failure rates)… you love to look at data that leads to Debt Settlement not being a viable option.

    You’ve started with your conclusion and everything else follows. But, I’m sure this is exactly what you want… you obviously have some skill in writing to create some type reaction (as you’ve succeed in this post).

    in either case, you are a highly subjective and anyone reading this site should look at other places. If you want fear, this is your site. If you want some objective solutions, look else where.

    • It seemed to me that when the debt settlement trade associations said the vast majority of their members, 85%, would fail under the new rules that was far more a when than an if.

      Just curious, if you don’t like my point of view or the FTC, where should people go for a second opinion and information outside the debt settlement community?

      Steve

  • I work for Credit-Advisors and we have been preparing for this regulation for quite some time. Our company will announce a “Safe Haven” program for all consumers who’s debt settlement company has gone out of business or consumers who are afraid that their debt relief provider will go out of business. We are offering 100% credit of what has been paid to failing companies in advance to consumers who are in need. The press release will be published tomorrow on our website. We applaud the FTC for a well needed change to our industry

  • Steve, you make some amazing and VERY true points here. Consumers should be VERY concerned about the “Advance Fee Model”. Exposing yourself to this kind of risk while you are already facing a difficult financial situation is never a goos idea.
    We have seen many consumers contact us with this concern after they have paid most of their fees.
    I am very hopeful that some regulations take place soon to protect the consumers and to truly seperate the companies that actually do perform a service.
    In the meantime, I highly suggest only dealing with a company that uses not only a performance model but also GUARANTEE their service and results.
    Thanks Steve!
    Alex V.

  • If you suspect that you may be stuck in an upfront fee debt settlement program, you may want to contact them right away, preferably before the next monthly debit or they go out of business.

    Ask the company to change you over to performance based fee structure or at least suspend the fees they collect, until this mess is sorted out. It’s only fair and how they respond to this fair request, should tell you a lot about the company you are working with.

    If they refuse or try to say that paying upfront fees is “cool”, you may want to seriously reconsider your involvement with them right away. Getting out while you can, before they collapse, could save you lots of money, time, and frustration.

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