The FTC Does Not Want Debt Settlement to Survive

A tipster (send in your tips here) sent in the following comment I wanted to address.

But now that debt settlement is dwindling, it is clear the FTC wants this industry not to survive or rebound. DS needs internet marketing. FTC is shutting down lead gens, who are not companies, and pretty much everyone right now.

It might certainly feel like that but from a slightly outside the industry position I’m not sure I see the same thing. This isn’t my first time watching this rodeo.

While the FTC may be taking action to cleanup what they perceive as abuses that have or will harm consumers, I certainly don’t think they spend time thinking about how to shut down debt settlement as a whole.

In the debt relief world there have been some memorable actions the FTC has taken against credit repair, upfront loan fees, credit counseling, and now debt settlement. It’s just debt settlement’s turn in the barrel but it’s been brewing for a few years with the high-flying abuses.

All of those previously targeted industries survive, albeit differently. But from the people I know and talk to at the FTC, the FTC has no agenda to shut down debt settlement. In fact in this video you can even hear Allison Brown from the FTC say so. Here is what Evan Zullow from the FTC had to share on this topic.

The Commission adopted the amended TSR with one goal in mind: Protecting consumers of debt relief services from deception and harm. Debt relief providers who comply with the rule and provide services in a fair and honest manner have nothing to fear from the FTC. – Evan Zullow, FTC

When I lived through the credit counseling regulatory actions, it felt personal. I talked about that time in this article.

And while the actions of the FTC and other regulators impacted my debt relief group at that time. In the long run the changes put in place did eliminate most of the abusers in the industry and did serve to better protect consumers.

The Greatest Dangers to Debt Settlement Today

Without a doubt the FTC actions and proposed state regulatory action will significantly impact the debt settlement industry. Fee caps and the loss of advanced fees change the old way of doing business. And that’s just what they change, the old way of doing business. But the industry will remain in a different form.

The key now is not to spend energy fighting against what has changed but to reinvent the individual debt settlement company so they can live within the rules and survive. The best companies poised to survive will be the smaller shops with less legacy overhead.

Those companies that did not become fat, dumb, and happy during the go-go days of debt settlement will be better able to survive. Companies right now that are not restructuring to be able to live on 15% success fees may not make it. If you hesitate and live primarily off your residual servicing income from before the TSR implementation, you will be screwed.

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Let’s look at the non-profit credit counseling world. The actual performance numbers of the average agency are not wonderful. If you took someone with say $30,000 of debt and factored in the $50 initial fee, monthly fees and fairshare over 3 years before the person left the program. You are probably looking at around $2,400 in income on that consumer.

So what would a debt settlement company need to do to accomplish the same level of income at a 15% success fee cap? Well they’d need to settle debt so the consumer saved $16,000. Frankly, that’s not impossible to do.

The greatest danger to the debt settlement industry today is not the actions of the past but the inability to embrace change and morph itself into a complaint model. The solutions are obvious:

  • Don’t want to wait three years to get paid? Don’t take on clients that can’t settle sooner.
  • Not making enough per client? Don’t enroll clients with low debt or many low balance debts. Start looking at a hybrid solution where you settle the big debts now then and send the consumer to a credit counselor to manage the smaller ones. The settlements will give the consumer breathing room to succeed.
  • Harder to get new clients with complaint advertising? You’re just going to have to deal with that. Getting clients through deception is not the fall back position.
  • Can’t afford to run your business on reduced income? Cut, cut, cut. It’s basic budgeting. You need to cut expenses to fit within projected income. Need to restructure current debt, think bankruptcy.
  • Don’t want to layoff employees? Too bad. You have a responsibility to your clients; the consumers that trusted you. You’ll just have to make the cuts necessary to deliver on those promises. It totally sucks to layoff 20 employees but it’s even worse to screw over 2,000 consumers by closing without providing the services you sold them.
  • Can’t afford to pay marketers and affiliates? Those guys got paid way to much in the past. Continuing that practice is not good business sense. Instead of paying marketers, look to developing better ties in your local community and reaching out to groups like the credit counseling folks do. Build regional awareness and local bonds. Most importantly deliver exceptional customer service so customers rave about you and bring more clients by word of mouth. Hey, credit counseling has acquisition costs as well.
  • What to be able to survive into the future? Adapt, adjust, embrace change, do the hard things, and make tough choices.

It Sucks

I get it. I really, really do. At one point in my life I had to make the decision to essentially layoff all my staff and regroup. I still had cash in the bank and I faced a crossroads. I could have either run the cash down to zero, fighting the good fight, or I could take the cash, pay out staff severance and make sure I had enough money on hand to cover an orderly solution for the remaining clients. And that’s what I did.

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The decision to close was tough, it hurt and I wound up being one of those guys that laid people off and cried with them. That does not mean it was not the right thing to do. It means it was a tough thing to do.


For my debt settlement friends, the future looks obvious and full of opportunity. Many debt settlement companies will not survive this transition because they will not realign themselves and if you can restructure your business where you are focusing on a few states you are compliant in, you target the right clients and you settle debt quickly, you can still make a good income. In fact a year from now new people will be entering the field and they will do well. It’s the transition from the old to the new that is toughest.

The Real Future Risk

The real future risk in the next few years is not regulation, it’s the potential customer pool. It’s shrinking. There will be continued demand for debt relief services but fewer consumers can afford any of the solutions and bankruptcy will be more appropriate. Those that have been maxed out have dealt with it so the short term potential clients are the newly tapped out. With banks restricting credit there are just fewer people loaded up with credit that are hitting the wall.

I’ve written about the discouraging search trends in the debt relief space, here and here. In reality in order for some debt relief providers to survive the supply of affiliates and debt relief companies is going to need to shrink to meet demand.

Want You to Shut Down?

I’m not aware of any regulator that wants the debt settlement industry to “close down” but I am aware of many that want it to be cleaned-up.

The bottom line is if you are complaint with regulations, you operate within your income, you avoid misleading promotion, you enroll the right clients, and you provide exceptional customer service, the future is yours.

Damon Day - Pro Debt Coach

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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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