Dear Credit Counseling, Times Only to Get Tougher.

Now that the last storm in debt relief is quieting, namely hurricane ‘debt settlement’ that was quelled by the FTC Telemarketing Sales Rules, it has given me an opportunity to poke my head up and take a wide look at the debt relief horizon. And what I’m seeing is concerning.

My roots in the debt relief world began with my personal bankruptcy which led me to want to help people. I founded a nonprofit credit counseling agency and spent many, many years inside that world. I am fully aware of the push-pull battle that exists between wanting to serve your customer, the consumer, and please the modern master, the banks that provide funding.

Since I wandered into the nonprofit credit counseling world in 1994 things have changed dramatically. Back in those days the creditor commission, or fair share as it is colloquially called, was 15% of the debt an agency paid back from the consumer to the creditor. But the big advantage of credit counseling and what attracted me to it as a tool to help people facing problem debt was the fact that when consumers were enrolled in a debt management program, administered by a nonprofit credit counseling agency, the interest rates went to 0% and the monthly payment was cut in half.

Creditors were hands off in those days and a lot of good could be accomplished but bad people took advantage of that as well and engaged in rampant profiteering, aka Ameridebt.

Today a slow but continued decline in creditor funding, fair share, of credit counseling has continued. Now, fair share is around 4% and payments in a debt management plan are about the exact same as the regular minimum payments the consumer is already dealing with. Rather than providing a payment break when times are tough, the lack of significant monthly payment reductions limits consumers to those that can already afford their minimum payment, a smaller and smaller portion of consumers in trouble. See Why credit counseling often fails by Liz Weston.

Credit counseling let all this happen. They have never been brave enough to stand up for consumers and fight back against the creditors that pay them.

Banks like Chase wield a unhealthy control over credit counseling. It seems if they don’t like the groups a credit counseling agency runs with or the way they look, they yank all funding and punish the agency for not doing what they want. Agencies are left in a Oliver Twist position, “Please Sir, I want some more?”

Over the last four years debt settlement knocked the crap out of credit counseling and poached many of their potential clients. It was easy to do. Debt settlement simply offered what consumers wanted to get from credit counseling, and couldn’t get. Debt settlement companies advertised payments cut in half and the avoidance of bankruptcy. Debt settlement didn’t steal customers from credit counseling, credit counseling did it to themselves and let it happen slowly over a number of years.

The wild west frontier of debt settlement has now been closed with the telemarketing sales rules and many of the bad actors and opportunists that were there, are or have moved on. The few big opportunists remaining will face upcoming regulatory action. Bottom line, as an old college chemistry professor always used to say, “That dog ain’t going hunt no more.”

Many opportunistic recent debt settlement companies will move on to form state non-profit companies and restart their engines selling debt relief services again. It’s what they know.

While legacy nonprofit credit counseling groups are celebrating the lack of authority and control over them by the Federal Trade Commission, since they don’t have the statutory authority to regulate nonprofit organizations, that will soon be a curse.

As the opportunists wander into the back doors of the nonprofits they will create new areas that consumers will need to be protected from. The new Consumer Financial Protection Bureau does have the authority to regulate all debt relief providers, including nonprofits. And to protect consumers the CFPB will pass regulations that control and impact all.

Regulation paints with a broad brush and good guys, as well as bad guys will be painted out of business or at least into a new future that will be entirely different than the present.

By credit counseling groups today not moving proactively to accept the FTC guidance on selling debt relief services and embracing performance transparency, they are doing themselves and consumers a terrible disservice.

Over the past couple of years it has become much harder to run a credit counseling agency. The cost per client acquisition has been increasing, the cost of marketing to find new clients has risen and it is just harder to retain clients. The reason, the underlying product, the debt management plan, does not meet the needs of hard hit consumers.

Some nonprofit credit counseling groups have avoided some of this strife. They have direct relationships with creditors and get consumers handed directly to them to service for the creditors. That is, as long as they remain in good graces with the creditors they have allowed to destroy credit counseling.

Those inside agencies marketing costs are less per consumer acquisition. Typically these are the larger credit counseling groups that carry a lot of authority and power in the credit counseling world by really suckling up to creditors and making them happy. But many independent agencies don’t have these relationships or free referrals. Like it or not, without change here, these less powerful agencies are really slowly dying.

So while debt settlement had kicked the ass of credit counseling, while it remained inflexible, times have now changed. The pool of people able to be sold debt settlement or credit counseling services is quickly shrinking.

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Evidence of this shrinking pool is the apparent lack of the 2011 January bump. For decades there have been traditional patterns in debt relief services. When holiday bills roll in, in January, debt relief demand spikes. These are the consumers that overspend during the holidays and begin to panic when the final accounting arrives. The bills prompt action. Phones at debt relief providers ring hard.

This year, in all areas of debt relief, both debt settlement and credit counseling providers are wondering what happened. Where is the January bump?

The lack of the January bump is just further evidence that the entire marketplace has changed. It is no longer that one industry or another is poaching clients. The new reality is there are fewer consumers that can benefit from single source debt relief services, well, except for bankruptcy of course. And bankruptcy filing rates continue to spike, month after month.

The Current Debt Relief Reality (click on image)

Consumers tapped out on underwater homes, worried about jobs, in a slow economy don’t have extra bucks for debt repayment. They don’t need to adjust their debt payments, they need a fresh start. And that’s what they are getting with bankruptcy.

They may try credit counseling or debt settlement first, but for many the end game is just plain old bankruptcy.

One debt settlement company, “We did the consumer a favor and just took them to bankruptcy quicker and better qualified after they spent all that money on settlement fees.” It might not be a pretty statement but it is probably a fair one.

The future of debt relief needs to begin to change now for good groups to be able to provide help into the future. Those that will change will survive. Those that don’t change will die.

Nonprofit credit counseling needs to grow a pair of balls, right now, and make a stand against the creditor control over them and decide who it is they really serve. Is the charitable purpose to please the creditors or to serve the disadvantaged consumer in trouble?

This is Nothing New

Here is a press release I sent out in 2005 about creditor control. Less than a year later I closed the nonprofit.

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.”

The Logical Future

While the past approach has been of segregated solution providers on a national reach, the future needs to be inclusive providers with a local focus.

It’s just getting too hard to engage in national shotgun marketing where you try to service clients in many states and comply with the ever changing patchwork of regulations, licensure, and bonding.

Moving forward the key will be to focus on owning your local market and most importantly to offer a wide range of solutions to consumers needing debt help.

While credit counseling has been judgmental and acting as if they are superior to debt settlement and bankruptcy, the reality is, it is they that most need to change. But do they have the fortitude to make the hard choices and finally break the golden handcuffs of the creditors that control them? Frankly, I don’t think they do.

As long as the Chase Banks of this world dictate what credit counseling groups can say or do, they will never be free to stand up and truly fight for consumers.

Not true you say? I challenge you to go out and find me any substantial evidence of organized credit counseling or the NFCC, proactively coming out against unfair creditor policies from creditors that fund them. You won’t be able to. the creditors have muzzled the credit counseling groups with funding.

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And while you are on the hunt, I also challenge you to find the actual performance data of credit counseling agencies. They are a charity, were is the transparency? There isn’t any. While credit counseling has be hypercritical of debt settlement they have also not embraced the same rules that debt settlement must operate under and do not provide any independently audited performance data.

Since I stood my ground in 2005 as you can see in that old press release above, credit counseling agencies have not been brave enough to stand up against the creditors and still their funding was cut at least by 50% or more since 2005. Playing along is not saving the industry. In fact I would argue that credit counseling today appears to be trapped in a “Stockholm Syndrome” situation.

In psychology, Stockholm syndrome is a term used to describe a paradoxical psychological phenomenon wherein hostages express adulation and have positive feelings towards their captors that appear irrational in light of the danger or risk endured by the victims, essentially mistaking a lack of abuse from their captors as an act of kindness.Source

Credit counseling has fought against debt settlement. In fact the National Foundation for Credit Counseling even played an instrumental role in drafting and pushing for the tough Debt Settlement Consumer Protection Act legislation put forward by Senator Schumer and McCaskil last year. Read this past article.

Credit counseling has been so busy trying to stack the deck in their favor that they’ve taken their eye off the future. Instead of protecting their market share they are simply boxing themselves into a dark corner.

Until credit counseling can break the creditor self-serving bonds that control the type of solutions they provide, the cost of finding the right niche client and turning everyone else away will kill them. But what to do?

Herein lies the problem. The creditors don’t want credit counseling groups to actively and aggressively get into debt settlement or add arrows to their quiver of solutions to help many of the consumers they otherwise turn away. What I’m hearing from my credit counseling friends is the current creditor marching orders are to keep putting consumers into debt management plans and make them pay or risk losing more.

If a credit counseling agency had the bravery to break ranks from those orders they risk the very diminishing funding which they get today. I get that. But there are options.

But if a credit counseling agency does not break ranks and become a wide range debt relief solution provider, what does the future hold?

The credit counseling agencies today, for the most part, are not leaders in the debt relief world, they are slaves and groupies to the creditors. They feel they can’t break out and expand the services they see consumers want, like debt settlement, for fear of irritating their controlling and funding creditors. The reality is they are not leaders, they are prisoners.

The two emotions that will hold them back from change at this critical time are powerful. Both fear and denial are unhelpful passengers in taking bold action, but change is what is needed. Revolution is needed.

Now picture this. A nonprofit agency develops close bonds with a debt settlement provider and local bankruptcy attorneys. Rather than advertise nationally they instead take the same advertising dollars and blanket advertise locally. Their good local reputation helps them to get loads of word of mouth referrals and they develop close relationships with the community. Rather than turning people away that don’t fit their single product solution, the DMP, they instead provide a solution for all. And the revenue opportunities expand greatly with that approach. That is, if you know how to do it.

Evidence of this more modern collaborative approach are the members of the AACC (American Association of Credit Counselors) which include a nonprofit credit counseling agency, a for profit credit counseling agency, debt settlement companies and attorney model debt settlement groups; all putting consumers first.

Some credit counseling groups will say they are pursuing that path by trying to seek the cooperation of the creditors to do so. They have been pursuing an approach called the Less Than Full Balance (LTFB) plan, which is essentially debt settlement. In the time that they have been trying to get creditors on board, debt settlement companies have been settling debt.

Citibank just announced they are terminating their Call to Action program where they offered special reduced terms for hardship cases, people that otherwise could not afford a traditional debt management plan. But effective February 1, 2010, credit counseling groups will not be able to offer that. At the same time Citibank continues to settle debts with debt settlement companies.

Dear Credit Counseling,

The moment has come to ask yourself, who do you really serve. Is to act in the best interest of the consumer who deserves your trust and who needs a single source provider of a wide range of solutions or is it the creditor to whom you answer.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Damon Day - Pro Debt Coach

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12 thoughts on “Dear Credit Counseling, Times Only to Get Tougher.”

  1. More current information is available but the tricky reading of the raw data is how many voluntarily converted to 13 and only filed 13 as part of a solution, like to avoid foreclosure. Bottom line, the overwhelming majority of 7s result in a full discharge and last I looked 70% of filers were 7s. Here is the link to the most recent numbers for BK. Looks like 3Q 2010 7s were 70.28%.

  2. If you are a chapter 7 candidate, in most cases I don’t see how you could last long in a Debt Settlement Program. Although, in this new age will help because they can simply use the Special Purpose Account money for a BK attorney.

  3. This isn’t a great source, but in the article you linked/sourced for CC:

    Of course, I have to note that Chapter 13 bankruptcy doesn’t have a whopping success rate either. Fewer than 40% of Chapter 13 filers examined in a 2007 study actually completed repayment plans. Some were converted into Chapter 7 filings, which allowed the debtors to erase most of their unsecured debt, while others were simply dismissed, leaving borrowers once again vulnerable to collectors.
    Many Chapter 13 filings fail because the debtors are trying to stop a home foreclosure but don’t have enough income to pay off their back mortgage payments even after a plan is in place, said Richard Marshack, a bankruptcy attorney in Irvine, Calif.



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