Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation’s largest debt settlement firms, he is the author of the Debt Settlement Success Seminar™, an 8-hour audio-CD course that teaches consumers how to choose between debt program options based on their financial situation. The course focuses on comprehensive instruction in do-it-yourself debt negotiation & settlement designed to save $1,000s. Personal coaching and follow-up support is included. For a free 32-page download on DIY debt settlement, please visit www.zipdebt.com.
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This article is offered primarily for the benefit of people inside the debt settlement industry, but I believe consumers will find this information helpful as well. My intent is to describe a unique process I call Fast-Track Debt Settlement™. In theory, “fast-track” is defined as the client having settled all accounts within 12 months or less, measured from the date of initial default. In practice, however, we aim to settle a majority of accounts prior to the 6-month charge-off deadline. My method is based on the do-it-yourself approach, or more accurately, DIY-with-a-Coach. Clients first receive a core education via training CDs (8 hours of audio instruction), supplemented by live coaching via email or telephone. It is important to note that 100% of negotiations are handled by the clients themselves.
I realize these statements must come as a shock to most industry professionals, who have been taught to think in terms of 36-48 month programs (or perhaps 24-36 months), and who also believe consumers should not attempt to settle their own debts. When I recently published the results achieved by my clients using this method, I was quickly accused of having fabricated my numbers. Once I made it clear the data was indeed accurate, the criticism changed to my results being “too good to be true,” and that I was just helping consumers “game the system,” rather than assisting people who legitimately needed debt relief.
In this article I will set the record straight, describe my methods, then explain how my findings might be of value to third-party debt settlement firms struggling to survive in the post-2010 era. This is not just about promoting my DIY-with-coaching method, or defending my own published results. If you are a debt settlement company CEO and you are serious about helping consumers solve their financial challenges, then please set aside your skepticism and hear me out.
Who Is This Guy, and Why Should I Care What He Says About Debt Settlement?
This won’t become a biographical piece, but since my background in debt settlement is what led me to develop the fast-track approach, a brief discussion of my resume will provide some necessary context. I started providing debt settlement services in 1997, one-on-one with local clients in San Diego. This was a solo practice, so I did sales, customer service, AND negotiating, (plus janitorial and IT services as well). I remain convinced to this day that most of the folks in the industry don’t understand their business as thoroughly as they should, simply because they have only worn one (or perhaps two) of the three key hats necessary to a full understanding of what it takes for clients to be successful at debt settlement. If you have to do the actual work of negotiating for a client, trust me, you become much less inclined to just “sign people up.” Remember, this was in the day where we only charged a percentage of savings. In 1997, I was already operating under the model you guys are struggling to figure out in 2011.
In 1999-2000, debt settlement went national, and I joined a startup firm as VP Sales. We went from 40 clients (the actual number on the day I walked in the door) to 4,000 clients in less than two years, not a huge company by today’s standards, but one of the first of its kind back then. I wrote the original “Four Doors” presentation that was later copied throughout the industry. (You know the pitch – there are only four options – do nothing, credit counseling, bankruptcy, or debt settlement. Talk down the first three and then explain why settlement is best, etc.) Most of the FAQ answers provided on debt settlement websites today are modeled (in many cases plagiarized verbatim) from copy I wrote more than a decade ago. My original 32-page info guide to debt settlement (first published in 1999) has been ripped off and copied more times than I care to count. Contract language, marketing graphics, lead generation, sales training, underwriting standards, the first industry trade conferences – you name it, I was involved in all aspects of the early development of debt settlement as a large scale enterprise.
More to the theme of this piece, I am the person who originally promoted the 36-month approach to quoting debt settlement programs. As far as I know, no one else was presenting settlement with a standard program duration before I taught my sales staff to use this approach. This was in the year 2000, as we were kicking into serious volume for the first time. I implemented the 36-month approach strictly as a template for the sales reps to apply, since otherwise we had a “Wild West” situation on our hands in terms of client suitability. I had no idea it would later become a “meme” that would spread throughout the industry. Most of the people quoting 36-month programs today have no clue where it originated, or the rationale behind it. The point just about everyone seems to have forgotten is that the original idea was to use 36 months as a LIMIT, not the automatic standard for program duration!
By 2003, it became clear to me the writing was on the wall, and Federal and/or State regulations severely restricting debt settlement practices were inevitable. (I still remain surprised it took as long as it did!) I wanted no part of what I saw coming, and the movement to the front-loaded fee structure disgusted me. I had to make a change, so in 2004 I went back into solo practice, but not as a third party debt settlement service provider. Instead, I created an audio training course teaching consumers how to negotiate and settle using the DIY approach. (In 2008, I updated the audio course and expanded it based on what I’d learned working with consumers over the previous four years.) Initially, I intended to sell only the kit itself, but it quickly became clear that coaching provided an essential layer of support most clients required for a successful outcome.
From 2004 to the current day, I’ve been working directly with consumers, coaching them through settlement of their debts. I have *personally* communicated with THOUSANDS of people about their debt problems and developed a clear understanding of who is and who is not a good fit for debt settlement.
Over time, my approach evolved from thinking in terms of 36-month programs to much shorter durations, and the reason for this change is simple. When you coach consumers day-to-day (and don’t just delegate the job to a subordinate), you naturally tend to focus on rapid client success. You learn to develop screens to filter out clients who simply don’t have sufficient resources for the program. It’s emotionally draining to work with a client month after month when they have no money for settlements and little prospect for success. Fortunately I already learned this lesson back in the ’90s. I already knew how to nudge clients to “go find the money” to make a settlement happen. Over the past seven years, I have refined this approach into what I now call Fast-Track Debt Settlement™.
Time for a Paradigm Shift in Debt Settlement—Faster is Definitely Better
For the year 2010 alone, my clients settled more than $16 million of debt balances at an average of just over 33% (balances at time of settlement). There were 1,193 settlements reported, and more than 90% of those were negotiated before the charge-off deadline. Virtually all were DIY settlements, with no third party involvement to support the client directly during the negotiation. Over the 5-year period of 2006-2010, 74% of my coached clients successfully completed the process of settling their accounts, and 80% reported being more than half finished with settlements at time of coaching subscription expiration. Refund requests tracked at less than 3% for the same period, and known bankruptcy filings were less than 6% of coached clients. A more detailed breakdown of success rates and methodology is available on my blog.
Settlement data is located here.
I realize many of you will be skeptical of these results. So I’ll share with you how we accomplished it. To start with, it comes down to the enormous difference between Chapter 7 and Chapter 13 bankruptcy. In the old days when I was gunning for high volume enrollments (yes, I admit it) and trying to grow the country’s largest debt settlement firm from the ground up, I took the position that personal bankruptcy should be avoided if at all possible, and I made no distinction between BK7 and BK13. People were motivated to avoid bankruptcy – period – for a variety of reasons, and it was my job to help them accomplish that aim. But with all the attention surrounding the 2005 bankruptcy law change, coupled with my own additional experience, I started to change my thinking on the whole subject of bankruptcy avoidance and suitability for debt settlement programs.
Let me state my conclusion boldly: Debt settlement is only a suitable alternative to Chapter 13 bankruptcy, not for Chapter 7. This holds true for the vast majority of debtors. There can be exceptions, such as the person who might lose a job security clearance if they file a public record BK, etc., but what I learned in working more closely with consumers is that the folks who qualified for Chapter 7 were mathematically better off using that approach. Further, most who were eligible for Chapter 7 would never have sufficient financial resources for settlement to be successful.
When you only recommend debt settlement to individuals facing Chapter 13, the game changes completely. Now you are dealing with a pool of prospective clients who have incomes above the median and usually have assets that would be force liquidated in a BK. You are working with people who have a *mathematical* reason for avoiding BK, not just an *emotional* reason. Big difference!
Yes, I realize this greatly restricts the pool of potential clients, but that is precisely the point! Debt settlement has been grossly oversold to anyone with at least a $10,000 debt balance. The true demographic for this strategy is a much narrower segment of the public than just “people in debt $10k or more.” I am quite certain most of the BBB or AG complaints filed against debt settlement companies were by clients who should never have been enrolled in such programs in the first place!
After applying the initial filter to separate the Chapter 13 cases from the clear-cut Chapter 7 cases, the next suitability filter to be applied is RESOURCE ANALYSIS. I no longer recommend debt settlement – even to people facing Chapter 13 – if the ONLY resource available for settlement funding is limited to their monthly household income (i.e., savings into their set-aside fund). I tell clients they MUST have something else to work with as they enter the process, and this is where the rubber meets the road. Normally, we are talking in terms of a 401(k), IRA, or other retirement account, cash value life insurance policy, sale of vehicles or other household items, funds borrowed privately from family, and so on. We take the starting debt load and multiply by 40% to arrive at an approximate settlement funding level, needed within 12 months (ideally within 6 months). Next, we take the clients’ conservative estimate of their monthly savings target and determine how much of that 40% can be relied on from savings. The difference is the amount the client needs to plug the gap, and that is where additional sources must come into play.
Understand – THIS IS A PARADIGM SHIFT. The old approach in selling debt settlement is suitability analysis on the basis of the client’s INCOME situation, with the ASSET picture almost entirely ignored during the enrollment process. It’s all about the monthly payment, and of course, it’s far easier to enroll people that way, right? Just tell them they can back off from $750 a month to $500 a month and still be out of debt in three years. It’s not easy to push hard on clients to cash in a retirement account or sell that 4-wheeler sitting in the garage. But the moment you change your thinking and start looking for assets, it becomes possible to greatly accelerate the pace of settlements.
I’ll anticipate a criticism that’s already been leveled at me – that clients who have sufficient resources to settle within 6-12 months really don’t have a legitimate hardship in the first place and should therefore simply pay their debts in full. I was astonished when I heard this accusation, because it demonstrates a complete lack of understanding on the basics of financial planning. Income is only one part of the story. Yes, income is usually the key factor that forces the day of reckoning on the debt load, whether it be job loss, reduction of overtime hours, loss of benefits, or similar squeeze to the paycheck. We’re talking about people with embedded debt of $50,000 to $100,000, higher in many cases. A loss of income (medical problem, divorce, etc.) has put them over the edge, and they are no longer able to sustain the minimum payments. Before the CARD Act blocked universal default, consumers were getting hammered mercilessly with interest rate spikes across the board. Total minimum payment loads of $1,250/month on $50,000 of debt would suddenly jack up to $1,750/month and leave people with an unsustainable situation in terms of cashflow.
Had I taken the old approach with these clients, I would have advised them to bank $1,000 per month and plan for a 24-30 month process. Instead, now I ask about their retirement accounts and perform a net worth analysis. The vast majority of my clients are insolvent based upon a standard net worth review. Add up the assets at face value, subtract the debts, and I get a negative number almost every time. And the folks who do have positive net worth are typically those with some equity in real estate – equity that is no longer accessible to them since the credit crunch of 2008.
When a person is insolvent, it does not mean they have zero lump-sum resources. In many cases, they have IRA accounts in modest ranges like $20,000 to $30,000, and owe $50,000 or more in unsecured debt. A hardship loan of 50% of the IRA balance yields $10-15k for settlement funding, and can thereby greatly compress the amount of time needed for settlement. Besides retirement accounts, there are numerous other options for freeing up settlement funding with this caliber of client, but none of this has anything to do with people dodging their obligations or making use of these techniques without an appropriate need to do so. The basic point here is that YOU HAVE TO ASK ABOUT ASSETS in order to find out this information. Focus on your prospective client’s total financial picture, not just their income situation, and you will be amazed at what you find.
To summarize my current approach, I recommend debt settlement only to consumers who would otherwise be facing Chapter 13 bankruptcy, and who can raise adequate settlement funds within a 6-12-month timeframe, through a combination of asset liquidation and monthly savings. I believe my clients’ results speak quite clearly to the effectiveness of this approach.
My Advice to Traditional Debt Settlement Company Executives
This is all terrific, you’re probably thinking, but how does it help you if you run a traditional debt settlement company? Let me clarify some points that are totally obvious to me after 14 years in this industry, which might not be so obvious to the owner of a struggling firm in 2011.
- In the era of no front-loaded fees, you have a new incentive to accelerate the process of settlements so you can get paid. By focusing squarely on your clients’ asset situation, you can free up settlement dollars for immediate use. Voila, faster turnaround on files, lower servicing costs, higher profit.
- Stop selling debt settlement to people who qualify for Chapter 7 BK, and/or people who will require 3-4 years to complete the process. This is exactly the type of client most likely to (a) get served with multiple lawsuits because they took too long, (b) burn out your negotiators and customer service staff, and (c) generate complaints.
- Start by restricting your program to people who have sufficient resources (between assets and savings potential) to finish within 12-18 months, and who would otherwise be forced into Chapter 13 BK. You’ll see retention increase, complaints decrease, and a lot more testimonials from happy clients. Then try filtering back to 12 months max and you’ll see additional improvements.
- You have to face up to an important fact of life. DIY settlements are routine and normal. More than $150 billion of credit card debt got charged off in the past 3 years, and a lot of it was due to settlements taking place. We don’t have accurate figures for this, but even if it’s only 10% due to settlements, we’re still talking about $15 billion of negotiated balance reductions overall. The settlement industry handled probably around $1 billion of that, but so what? What this number tells us is that most settlements were negotiated directly between the consumer and the creditor or collection agency. It’s time for debt settlement industry executives to understand the role and place of DIY settlement, and to move past the knee-jerk reaction that “consumers can’t negotiate SIFs on their own.” If nothing else, my own results prove otherwise. But nobody need take my word for it. Just ponder the $150 billion number, and realize that consumers settled one hell of a lot of debt themselves – without your help.
- Settlements will be offered by mail to your clients. Virtually all major credit grantors do this on a cyclical basis. In the era of front-loaded fees, you could shrug your shoulders if the client accepted a deal on their own without consulting you. You had already collected your fee anyway, right? Not the case today! If you have not encountered this yet, trust me – you will! Your clients will soon begin accepting offers on their own. When that happens, guess what? You don’t get paid. Why should they pay your negotiation fee when the offer came in the mail and they just called and took the deal on their own? Go ahead, try systematically collecting from clients who have negotiated their own deals based on automated offers, then watch your BBB complaints soar. I’ve been there, done that. In fact, this problem is what led me to the idea of creating a DIY program in the first place.
- The smart debt settlement exec will develop a method of assisting clients to settle with original creditors prior to charge-off, without the use of the power-of-attorney or actual third-party intervention. In other words, the wise CEO will acknowledge right up front that offers may come automatically and should be discussed for improvement, but if a client wishes to accept and offer as-is they will only be charged a nominal flat fee. You can still protect your client by reviewing the settlement letter and ensuring they conduct their transaction safely, and it is fair and appropriate to charge suitable fees for this type of service. Isn’t it better to acknowledge reality and develop a way to monetize what would otherwise be a basis for dispute between client and settlement company?
- Faster settlements means far fewer lawsuits, which results in lower average settlement percentages, and translates to higher negotiation fees.
- On October 27, 2010, when the FTC rule-change went into effect, debt settlement changed overnight from a business in which a company could sit back and collect fees month after month, with no true financial incentive to get the debts settled, to a business in which “settlement velocity” is the name of the game. I’m referring to the ratio of debt settled to debt enrolled per month, plotted on a rolling basis. Pay-for-performance firms will live or die based on whether their velocity trend line is below 100% (potential rising income) or above 100% (potential falling income). Whatever name you give it, I suspect it will become an important metric to you before long though. My gift to you chaps.
The above should be sufficient to get the creative debt settlement CEO thinking along different lines than the traditional model. We’re in a new period now for the industry. From my perspective, it’s just another phase shift. I’ve been around long enough to see debt settlement morph from a small cottage industry to a business sector with hundreds of new firms. Now that the boom times are over for the aggressive marketers who came to exploit the front-loaded fee structure, my forecast is that the industry will shrink to a reasonable number of quality firms. The twin pressures of competition and regulatory scrutiny will force inferior companies out of the market. There will always be bad actors, but the majority of surviving companies will provide a valuable service at a fair price. However, to survive the in-progress shakeout of the industry, executives will have to become creative and consider new business models and new approaches.