Today we’ll be also talking about the impact the new fee ban for debt settlement services is going to have. We’ll also talk about changes that are impacting credit counseling and why people need to address their problem debt now before the economy improves too much. All that and a caller question on today’s show.
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Steve Rhode: Thanks for joining us, I’m Steve Rhode, the Get Out of Debt Guy from getoutofdebt.org and this is the Get Out of Debt Guy Show.
With me today is a fellow debt coach and debt expert, Damon Day from damonday.com. We’ll be discussing several current debt topics today and answering a caller’s question. If you have a question you’d like to ask, just visit getoutofdebt.org and ask away.
Today we’ll also be talking about the impact the new fee ban for debt settlement services is going to have. We’ll talk about that and we’ll also talk about changes that are impacting credit counseling and why people need to address their problem debt now before the economy improves too much.
You’re listening to the Get Out of Debt Guy Show.
So Damon, this week we’re gonna be talking about a number of different subjects. The first one I’d like to talk about is the new fee ban that’s going into effect for debt settlement. It’s – we’re recording this, it is October 6, 2010 and as of October 27, 2010 there’s some pretty big damn changes going into affect, aren’t there?
Damon Day: Yeah, in fact, they’re gonna be banning all these upfront fees that you and I have been railing about for quite a while now.
Steve Rhode: You know, it’s interesting, I had a guy who commented on the site yesterday at getoutofdebt.org and he was saying I’m against all debt settlement and I don’t tell the truth and you know the rant, you’ve heard it before.
Damon Day: Yeah.
Steve Rhode: But that’s not really true that there is a place for debt settlement. The issue coming up, this new fee ban is trying to control whether or not consumers are gonna get ripped off for thousands and thousands of dollars before they receive the benefit of any service. You think that fee ban is gonna be effective in that way?
Damon Day: Yeah, I actually do. And mainly because these guys try to make the argument that, “Well, if we’re a legitimate company, or if we’re trying to help people then we should be able to charge all of our fees upfront.”
And the thing that they’re missing is with the specific service that they provide that it damages consumers and it puts them essentially behind the eight ball by charging them all that money upfront and having to put off those settlements. So just the very nature of the fee structure is damaging to consumers, and that’s the big difference.
Steve Rhode: So there will be some form of debt settlement, it’s just that the companies that have been charging upfront aren’t going to be around and that impact of those companies not gonna be around, that’s a pretty significant hurtle that we have to cross and we still don’t know exactly how that’s gonna affect people.
Are companies gonna go out of business in mass quantities or are consumers gonna be left stranded? What’s your crystal ball say?
Damon Day: You know, that’s tough to tell. You know, there’s still a lot of people out there in denial in terms of debt settlement companies. But I think what’s gonna happen is a lot of these companies are gonna go out of business just because they came in to get, you know, fast cash and once they’re not able to do that anymore they’re gonna go away and go into a different industry.
And I think a lot of these guys are gonna go out of business within the first couple of months of the fee ban where they can’t really figure out how to make it work because they are now gonna have to actually provide a legitimate service and their ability to get paid is gonna be a, you know, directly related to their service. So that’s gonna be very difficult for these guys.
Other guys that are larger, they may be able to ride the wave of, you know, monthly payments from existing clients for a while, so it may take 6 to 12 months before they finally close the doors.
And then there’ll be some other ones that have been charging upfront that, you know, maybe do consider themselves a good company and, you know, do turn the ship around and can survive.
And then there’s a very small handful of companies that have always or for a long time anyway, not charged a front loaded fee and they’ll be fine.
Steve Rhode: Now historically debt settlement companies, well, at least probably for the last six years or so, have been charging, you just mentioned it, a front loaded fee where consumers are paying most of the fee for the services which is thousands and thousands of dollars before all of their debt is settled.
And the problem with that is that in this transition period debt settlement companies that remain are going to have to find a way to exist on less income. Now, while we’re talking about they’re going to be earning some income in client fees, those client fees are not in the thousands of dollars individually, they’re in the tens of dollars individually each month. So there’s still gonna be a pretty significant income hit even during this transition period.
Damon Day: Yeah, and really what it’s gonna come down to is it’s gonna change the way these companies do business, and it’s gonna change it for the better. And what I mean by that is debt settlement is sold. It’s sold like a product, and that’s wrong. Debt settlement should not be sold like, you know, a late night infomercial or something like that.
And that’s really the problem with the industry at large, you know, when you look at bankruptcy and credit counseling and debt settlement is the model itself is broken where you typically have sales guys who are incentivized to go out there and sell the product, which is in this case would be debt settlement.
And they’re incentivized by that big upfront money. So now with this fee ban that upfront money is gonna be gone and now it’s gonna be – it’s gonna really align the consumer’s interest with the company’s interesting, because now the company is gonna have a vested interest in only – and really trying to do a better job sorting and bringing on clients that are more likely to be qualified and be successful in a settlement program. Otherwise that client is just gonna be a cash drain which is why you see these companies freaking out about, “How are we gonna be profitable?”
Steve Rhode: Yeah.
Damon Day: And when they’re freaking out about how they’re gonna be profitable, that’s an indicator that they really don’t understand what it means to only bring on qualified clients because –
Steve Rhode: Before –
Damon Day: – if you only bring on qualified clients you can be profitable.
Steve Rhode: Before the income was coming from everybody whether or not they were qualified. And now –
Damon Day: Exactly.
Steve Rhode: – you actually have to be a little bit selective and make sure that you’re selling to the right people. That’s a big –
Damon Day: Yeah, so –
Steve Rhode: – change in approach. And so, you know, it’s gonna be interesting. You can’t immediately turn a sales person into a qualifier person, you know, for the selling the right solution. Because many of those sales people were taught to sell, not to consult and put together the right solution for that particular consumer situation, and that’s what’s lacking.
If you took all the consumers and you said, “Okay, what portion of consumers is debt settlement right for?” It seems like in the past five years 70 percent of those people have been told, “Debt settlement is right for you.” In reality it’s probably – what would you say, 10 percent?
Damon Day: Yeah, it’s really low. It depends but, you know, I get consultations all the time where clients come to me and they say, “Oh, I want to do debt settlement, can you recommend a good company?” And I say, “Well, let’s talk about your situation first.” And once we go through it, you know, we realize that – or the client realizes based on the options that I present and the pros and the cons that maybe settlement wasn’t what they thought it was and now that they know there are some other options available that they decide, you know, not to go that route.
And, you know, the reality is the number of people that I talk to that end up needing debt settlement, understanding it and wanting to go that route is, you know, down, yeah, in the 10, 20 percent range, and the business model that these debt settlement companies have they couldn’t really exist with this massive amount of advertising and all this money going to sales people.
If they only put people in settlement programs that really should and understand what settlement is and really should be in those programs they would probably be crushed under their own weight.
So this fee ban is actually gonna force this major change in the industry and make companies strip and get lean and really focus on not selling 2,000 clients a month like a lot of these companies brag about, but getting smaller and more client focused rather than, you know, more numbers focused on profit and things like that.
Steve Rhode: All right, so a couple more weeks we’re gonna figure out exactly what’s gonna start to happen when the fee ban goes into effect. But for now, let’s help a caller, what do you say?
Damon Day: Sure.
Steve Rhode: All right, let’s take a call.
Elizabeth McGee: Hi, Steve, my name is Elizabeth McGee, I’m from Brooklyn, New York and I’ve had an account with Global Client Solutions since about 2007. I have been making payments on it, but I had stopped since last year, July of ’09 when I lost my job, and them call and they had put my payments on hold.
I recently read your article online about the class action lawsuit against them and Rocky Mountain Trust. However, I don’t understand a whole bunch of the financial logistics of it. So my question was, where do I kind of stand as an account holder? I haven’t heard anything from them recently except I did speak to a previous account I had with a cable company, a television company, and they said my account was still listed as outstanding.
So I wasn’t sure if Global Client Solutions had been making any payments or do I go ahead and try to make payments to Global Client Solutions, hold off on that completely, or is my debt therefore eliminated? I’m just unsure on it. I don’t mean to sound ignorant on it, but I was wondering if you could give me some advice or something to look out for.
Anyway, I thank you for your help and I really enjoyed your article, it was excellent, very informative. I thank you so much for your help, Steve, have a great day. Bye.
Steve Rhode: All right, you know it’s interesting that when I hear this call the first thing that comes to mind is that she’s confused about exactly who she’s working with, because Global Client Solutions is not an in-service provider. They are an escrow company that works with debt relief companies, accepts money on behalf of those debt relief companies and holds it as a third-party.
But yet it sounds like she thinks that Global Client Solutions is her debt relief provider.
Damon Day: Yeah, that was the first thing that stood out to me is not so much the concern over what’s gonna happen with her escrow funds, but what debt settlement program she’s in and whether or not it’s a viable solution for her.
Steve Rhode: So Global Client Solutions is an independent company. They do not sell debt relief services. But your money is entrusted to them and distributed to creditors once you reach a settlement. Typically they work with debt settlement companies.
If – my advice is that she needs to go back to whoever she believes is her debt relief provider and ask them for a status of her account. At the very least she could contact Global Client Solutions and ask them, “Hey, guys, who am I working with? Can you give me a phone number so I can track this down?”
Because if the cable company hasn’t been getting payments probably none of her other creditors have been getting payments and the only thing that’s happening is it sounds like maybe she’s making deposits and nobody’s getting paid. That’s not good.
Damon Day: Yeah, and that’s typical in a debt settlement program where they just have, you know, Global Client Solutions, you know, hold the funds and then they take out their fees and there’s really not much done for the first year, year and a half in any of these programs. And if you’re a consumer and you’re in a program like that right now you should be worried because those are the type of programs that, like we talked about earlier, in the next 6, 12, 18 months are not likely to be around because they don’t know how to change the business model and they can’t change the business model unless they’ve got a lot of money set aside to weather the storm of not being able to earn revenue upfront for a while.
Steve Rhode: Yeah, well, I’m not counting my chickens on that one because the reason they’ve been taking all these fees upfront is to generate a bunch of income early and not necessarily saving it themselves and being financially prudent.
Damon Day: Yeah, you’re right.
Steve Rhode: The class action lawsuit that she mentioned, I believe, is one – could be one of several that has sucked in Global Client Solutions as an alleged coconspirator with some of the debt settlement companies, alleging that the debt settlement companies mis-sold and lied to consumers about what they were actually selling and that Global Client Solutions as an integral part of holding the money facilitated that ruse and so is somehow liable and culpable.
The courts really haven’t figured that out. I don’t really have an opinion about that just yet, but people who have been sold these debt settlement programs and who have been told their money is in escrow and it’s safe and don’t worry about it, and you can get to it any time you want, what they haven’t been made very clear about is that the money that is left after we’ve taken our fees is sitting there but that’s it.
Damon Day: Oh, yeah. In fact, when they use Global Client Solutions as more of a sales tool to say, “Look, it’s third-party, it’s in an escrow account,” and there are a number of clients that are mislead into thinking that all the money they put in there is held in escrow, and it isn’t until 6, 7, 8, 9, 10 months later, you know, we’ll get an email or you’ll get a question about, you know, “I paid in $3,000.00 and I called Global Client Solutions and they’ve only got $350.00 in my account. Where did my money go?”
Oh, well, that was the debt settlement company’s fees. They forgot to mention that they have full access to that account as well, as long as they call it a fee they can take out whatever they want.
Steve Rhode: We’ve been talking a lot about debt settlement, but we’re gonna be talking about a lot more stuff coming right up. Just keep on listening. You’re listening to the Get Out of Debt Guy Show. We’ll be right back.
You’re back listening to the Get Out of Debt Show with Steve Rhode, and with me today is Damon Day from damonday.com. We’re talking about lots of things in the debt relief world.
In the first part of the show we kind of – actually, we spent the whole time talking about debt settlement. But there’s more going on and I’ll tell you what, people always think that the only thing we ever talk about, Damon, is debt settlement. That’s simply just not true. It happens to be the hot topic of the last year, but it’s not the only thing in the debt relief world. There are lots of other things like credit counseling, and the economy and credit repair and all sorts of stuff.
But I’d like to talk for a moment about changes that have really impacted credit counseling. The debt settlement companies feel that – at least this is what I hear, feel that credit counseling has somehow gotten a free pass and those guys are walking on Easy Street in selling their debt relief services, and that credit counseling will somehow tremendously benefit from the demise of debt settlement. Is that what you hear, too?
Damon Day: Yeah, but you hear, you know, you hear that from both sides and the very, you know, the industries are very adversarial to each other.
Steve Rhode: Which is funny because you would think that as debt relief providers if the consumer is the focus and their goal is to help the consumer, rather than being adversarial, it would be a relationship that was more collaborative. But that’s just simply not the case.
Damon Day: That’s true and it’s not and because I don’t believe that for the majority of people, mainly more I guess in the debt settlement industry, you know, credit counseling is much more highly regulated but in my opinion the majority of the programs and the debt settlement industry are not really client focused and that’s, you know, evidenced by what’s been going on.
Steve Rhode: Well, in the credit counseling world there have been lots of complaints that the number of consumers that are enrolled in the debt management programs has dropped tremendously over the past couple of years. And part of that blame is placed on debt settlement companies who have sold consumers an alleged “easy way out of debt.”
And that has just simply drained this smaller and smaller consumer pool of people who can afford to sign up for any service. And so credit counseling folks are feeling kind of like they’ve got to strike back at debt settlement.
Damon Day: Yeah, and I understand that position. You know, if I was in a position where I was providing a program that was really helping people and I saw this other industry come in and take potential clients of mine that I felt that I was gonna be of better help and then they took the clients and, you know, put them down the wrong road and got them in deeper trouble. Then, you know, I would be pretty upset myself and be kind of lashing out.
So I definitely see both sides of it, but the problem is the consumer’s the one that ends up losing in this, you know, back and forth of they’re bad, they’re bad, and this in fighting among the two industries.
Steve Rhode: Yeah, “That consumer is mine.” “No, it’s mine.” “No, it’s mine.”
Damon Day: Exactly, and the reality is that’s so hard for the consumer to find is just good honest unbiased information because if you go to a credit counseling program and they’ll, you know, look at your budget. And credit counseling, in my opinion, does a much better job of at least looking at the client’s budget and seeing if it’s something that they could actually qualify for.
Steve Rhode: Right.
Damon Day: Why is that? Because credit counseling can’t charge a couple thousand dollars upfront –
Steve Rhode: Right.
Damon Day: – like the debt settlement company can. So here you see they have an incentive to make sure this client could actually pull this off, because they get paid, you know, throughout the course of the program, not all upfront.
But the thing is when a credit counselor looks at a, you know, a clients, you know, budget and thinks that they’re not gonna have enough money to do it, they automatically just say, “Well, sorry, you don’t qualify, go file bankruptcy.”
Steve Rhode: Right.
Damon Day: That’s really the only option they give them, and then they’ll never recommend maybe even looking at settlement, maybe it’s good, maybe it’s not. And then, of course, debt settlement goes out there and says, “Never file bankruptcy, never do credit counseling, we’re always the best.”
So it’s very, very hard for a consumer to just have somebody sit down with them and say, “Look, here’s the different options and here’s how they would affect you differently, because there’s never a, ‘We’re always the best solution.'”
Steve Rhode: And, you know, credit counseling folks kind of boxed themselves into a corner over the years because they have come out a lot and said, “Debt settlement bad, debt settlement bad.” And then for them to turn around and immediately go, “You know what? Yeah, we don’t mean that anymore. We want to start offering debt settlement. I know we said it was bad and all that, but maybe you can forget about that.”
But, you know, even the creditors that they work with are not necessarily interested in the credit counseling people offering a debt settlement solution. And I think what’s very funny is that when you talk to 99 percent of the United States and you talk about debt relief, people always apply the wrong filter to whatever you’re saying.
See, they apply logic, and logic and debt relief have nothing in common. The hardest thing to do is to give creditors money, and people think that’s absolutely ridiculous. But the consumers who the credit counseling groups feel would have gone to them, would have used their services, I think that that number is highly over numerated.
Because – how about that, I never even thought about that phrase before, highly over numerated. I don’t even know what that means.
Damon Day: You’re blazing trails here.
Steve Rhode: I’m blazing something, that’s for damn sure. But I think that number – the number of consumers they feel that they have lost to debt settlement, I think is much lower because the big drawback about credit counseling is that when you enter a credit counseling program, sure your interest rate’s reduced, it might even go to zero, and sure the collection calls stop, and that’s all great, but your monthly minimum payment is gonna be about the same, or higher, than you were paying before. And if the problem is cash flow, then credit counseling program isn’t going to be the best solution for you.
Damon Day: Yeah, and the issue is that cash flow really is the biggest problem for most consumers today with the economy, with –
Steve Rhode: Right.
Damon Day: – you know, layoffs, the cutting back, it really is the cash flow and the cash flow is the more immediate problem that you have to fix. Sure you want to get out of the debt and you want to have an eye on that goal, but you have to balance the budget. If they have no savings, and no credit, you have no choice, you have to balance the budget, you know, they’re not – consumers aren’t the federal government, they can’t just keep making money.
They have to get it balanced and then create some kind of a monthly cushion so they can start saving at least in an emergency fund before they can even consider getting involved in a program that takes almost everything, or everything, they have every month and then go for the next four or five years without ever needing an emergency savings or something like that. It’s just not gonna work.
Steve Rhode: So the debt settlement company’s been very upset about recent rules and legislation that have been passed that have led to this advanced fee ban that we’ve talked about.
But credit counseling has been under a lot of attack also because there have been some pretty important legal cases that have passed recently. The most important one is one that said that unless the – even if they are an IRS approved non-profit credit counseling agency, if they don’t operate as a non-profit agency that complies with all of the rules, then any fee that that credit counseling program has charged over the years, a monthly fee, maybe an enrollment fee or something like that, then all of those fees can be viewed as them engaging in illegal credit repair services.
If they ever said, you know, “If you go into credit counseling your credit will get better, it will improve, when you leave the program your credit will be in better shape.” If they’ve said anything like that then they could actually be violating the Credit Repair Services Act, The Credit Repair Organizations Act, and that can put them in hot water. There are lots of big fees and penalties and legal costs and everything else.
So the credit counseling groups that have had tens of thousands of clients now have a huge exposure and, in fact, one of the largest credit counseling groups, Money Management International, just recently in the past week settled a lawsuit that they were involved in on this very same topic and they coughed up $6.5 million to settle that suit.
Damon Day: Yeah.
Steve Rhode: We’re not talking about little change.
Damon Day: Yeah, I mean, to me it’s just BS and, you know, I’ve got a, you know, kind of a craw with overregulation. I know there’s a need for regulation, but when you look at say this example, you know, you have a service that is definitely needed. You know, nobody could argue that there’s never a need for consumer credit counseling services where somebody that doesn’t want to go as drastic as a bankruptcy or a settlement that has good cash flow, that just can’t get their creditors to work with them, everybody knows how that goes, that can employ the services of a company that has agreements in place with creditors, knock their rates down to 8, 10 percent, and just pay it back over the next 3 to 5 years and have a good solid plan to pay off the debt.
And then you start getting, you know, a lot of this overregulation coming in to where these guys are getting to the point where at what point do they just say, “Forget it. It’s not worth continuing to try to do business in this kind of environment”? And at what point does it now start harming the consumer because now there’s not enough good providers left providing a service that is needed out there because it just doesn’t make sense to do it in that kind of regulatory environment, or you have to figure out how to make and charge even more money so you can stay in compliance with all the different regulations.
Steve Rhode: Well, and the problem is the regulations have always been about restricting services because some bonehead yahoo found a way to exploit consumers with it. But over the last couple of decades there really have not been any new tools that debt advocates, debt coaches like you and I, can use to help people other than credit counseling, bankruptcy, maybe some debt settlement, maybe some debt consolidation loans. It’s really very – it’s not rocket science. It’s some pretty basic stuff.
Damon Day: Well, yeah, and I mean, so is debt. It’s like you can get into debt you can get out of debt and you can try to create, you know, all kinds of different fancy ways and give it different names, you know, and a lot of people have tried to do that. But you’re right, it is basic stuff. “I owe this kind of money, and what can I do in my life differently to allow me to dig myself out of this hole?” You know, there’s only so many different things that you can do.
Steve Rhode: Well, I don’t know what’s gonna happen. There are lots of other credit counseling folks that have been charging feels and may not have been in compliance fully and while this is a little bit of a technicality it is kind of a cash cow for some of the lawyers that want to go after, you know, big class action suits and achieve big settlements.
Damon Day: Yeah, and that’s what really pisses me off, because again, say you have a company like MMI, right, who’s a good company, you know, national company out there, does good work for people and now they’re in a position to have to shell out millions and millions of dollars because of this, you know, this stupid regulation where it’s like with credit repair.
Well, you know what? If you go into a credit counseling program and, you know, you get through it and you get all your debt paid off, and all else being equal, your credit score is probably gonna be better, you know?
Steve Rhode: Um-hum.
Damon Day: So it’s like you can’t say this, you can’t say that, you’re right, it happens because a couple of – what did you call them, bonehead –
Steve Rhode: Bonehead yahoos.
Damon Day: – bonehead yahoos, yeah. You get some bonehead yahoos which you’re never gonna get rid of these bonehead yahoos, because what happened when you clamp down on consumer credit counseling programs, all the bonehead yahoos just went in and started doing debt settlement.
Steve Rhode: Exactly.
Damon Day: Which is not regulated, and so they ruined it for the good guys in credit counseling and now they’ve got all these regulations. And when you go into this, you know, Credit Repair Organizations Act, which these guys are now starting to get pinched on, and you start talking about you can’t charge any fees at all until the service is done, there’s a very big difference between the product of credit repair and debt settlement.
There’s very distinct difference, and the main one is that with credit repair, and the funny thing about credit repair is, you know, no professional can do anything that a consumer can’t do on their own anyway, but consumers just like the convenience oftentimes and they’re willing to pay for it.
So here you have a party that says, “Yeah, I’ll send out a whole bunch of form letters and we’ll see what happens,” and we have a consumer that says, “That sounds great, do it for me.” But now we’ve got this regulation where they can’t charge a fee to do that. So they’re either not gonna do that or they’re gonna, you know, charge money upfront anyway, or there’s no way the service can be performed.
And the difference is with credit repair the act of paying upfront does not damage your ability to repair your credit in any way, whereas with debt settlement it does.
Steve Rhode: Right, Damon, we’re just about out of time. Before we go I want to talk about one quick thing. I’ve seen some signs the economy is improving and jobs are kind of creeping up a little bit, there’s been more of a demand for service sector jobs.
Things are slowly improving over time. One of the concerns I have is people that during this down cycle have drained their assets, spent down their savings, talking about raiding their retirement accounts. And actually, one thing I think people should consider is that before things improve too much, if you’re drowning in debt really honestly think about bankruptcy.
What do you think Damon?
Damon Day: Well, yeah, and, you know, draining the retirement and just, you know, trying to throw everything that you can at this debt without having an overall plan is the worst thing you can do. I always hate it when clients call me and they say, “Well, look, you’re my last hope. I’ve drained everything.”
You know, always address the problem and resolve it as soon as you realize there’s a problem, not after you drain everything. Address it when you have the resources available.
Steve Rhode: Yeah, especially –
Damon Day: And now’s a great time to do it.
Steve Rhode: – don’t address it once you start making lots of money.
Damon Day: Yeah, and it’s very counterintuitive, but the better off you are, the less options you have available.
Steve Rhode: Well, and speaking of less options, that’s us. We’re out of time.
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Thanks for joining us; this is Steve Rhode, your Get Out of Debt Guy urging you to practice safe debt until we meet again. Bye for now.