Business Models Debt Relief Industry

Debt Settlement Companies Poised to Eat Credit Counseling for Lunch. What a Difference a Day Makes.

It’s funny how a little thing like the FTC telemarketing sale rules can lead to change and eventually revitalize an industry.

Last year I wrote and talked about how the debt settlement industry needed to expand their horizons with a combined debt management plan (DMP) and settlement approach. They could focus on settling some debts quickly, earning revenue, while parking the remainder of the accounts in a DMP instead of just letting the lawsuits hit consumers.

Well it certainly looks like that trend is happening and in a fast way. In just a couple of weeks TASC is going to be holding a training session on the hybrid approach at their upcoming debt settlement conference in Las Vegas.

The reality is this never would have even been a consideration for the debt settlement world if the TSR had not fundamentally rocked it. But out of change, good things can happen.

The TSR has been painful for many companies but the irony is it will lead to stabilization of the debt settlement space and new entrants will have clear guidelines and boundaries to follow to grow under. Testimony is coming from debt settlement companies supporting the California 15% fee cap and it is quickly becoming a new world of opportunity for debt settlement groups that can operate wisely.

Getting into the hybrid debt settlement / DMP model greatly expands the potential customer pool of debt settlement customers. Debt settlement companies providing this hybrid approach will now offer better and more expanded services than credit counseling can, does or will in the short run.

The credit counseling world has been trying unsuccessfully to tip-toe into debt settlement with their Robert Manning model and Less Than Full Balance (LTFB) approaches. Both attempts and approaches are fundamentally flawed and don’t work but yet debt settlement companies are settling debt every single day.

Credit counseling wants into the debt settlement space but only with the good graces of the creditors. And creditors don’t want credit counseling in the debt settlement space, at least the departments that supervise credit counseling don’t. I am told, one creditor has even instructed credit counseling agencies that if they get into settlement they will lose their fairshare funding. Yet this bank routinely settles debt daily. It just an administrative cluster, you know, that has been holding credit counseling away from better helping consumers. That and the fairshare handcuffs.

If credit counseling wasn’t handcuffed by creditors they would have been into debt settlement a long time ago. If the goal is to help people best break free from debt then the settlement option would have been a great tool to use.

Credit counseling suffers from their own historical point of view on this. They’ve made debt settlement the villain for so long they forget the only reason they are not doing it and better is because the creditors don’t want them to, not because it’s not the right thing to do.

Settlement was only really bad because credit counseling was not offering it. And another reason credit counseling could not wrap their head around it was because credit counseling groups think in terms of monthly payments and disposable income and not assets on hand. They completely miss that part of the equation.

As long as credit counseling only thinks in terms of disposable income they will hurt themselves. And why do they approach consumers this way, well the answer is routed in that age old problem of, because they always have.

Let me give you a real example of how the hybrid model works.

For the Credit Counselor:

Bob calls a credit counseling group and say he has $25,000 in unsecured debt and his monthly payment is $500 and he just can’t get by. At $500 a month he can’t save and he is living paycheck to paycheck.

Consumer Bob has $4,000 on hand. The $4,000 comes from the sale a unused second car, putting his baseball card collection on eBay, money from a family member, etc.

Either with one or a couple of his debts the credit counseling group settles $10,000 of Bob’s debt with the cash on hand and earns additional money from doing that. They just lowered Bob’s payment from $500 a month to $300 a month for the remaining debts and guess what, Bob can now afford a DMP for the remaining debts and have enough leftover to start saving instead of living month to month.

The credit counseling group just took a consumer they could not help and would have turned away and sent to bankruptcy into one they can help and retain.

For the Debt Settlement Company:

The debt settlement companies will approach Bob a little different. They will be able to earn money from the fast settlements and plop Bob into a DMP for the rest where he is happy, not getting collection calls and not getting sued. When Bob is ready to settle his next debt, who do you think he is going to pay to settle it for him?

It is also obviously clear that debt settlement providers are getting into the debt management space and adding that solution to their arsenal. Credit counseling had better do the same thing and by tomorrow. Why? With the move by debt settlement companies adding DMPs through friendly nonprofits they just widened their customer pool and now offer a more comprehensive service than credit counseling.

The question of “if” credit counseling should be doing debt settlement or at least offering it as a solution in those cases when it is appropriate is obvious. That shipped sailed.

Debt settlement companies, with the addition of DMPs will potentially murder market share of credit counseling groups stuck hoping that a LTFB solution will work. Credit counseling should have been doing debt settlement 12 months ago, not 12 months from now.

Credit counseling is suffering under the same diminishing customer pool as debt settlement has been. But right now credit counseling tells callers that if you can’t afford our payment we can’t help you. Debt settlement, with the addition of DMPs as a solution can tell people they can help.

If credit counseling is a nonprofit educational charity then why don’t they focus on educating people how to do their own settlements in cooperation with Michael Bovee at the Consumer Recovery Network or Charles Phelan at Both companies focus on training consumers and could assist credit counseling groups to offer these services by this time next week.

It is mind boggling how much power the creditors have had over credit counseling, to the detriment of credit counseling and the very consumers credit counseling purports to help.


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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.


  • That is taken way out of context. The point I was making is that credit counseling was using debt settlement as the villain to sell credit counseling services.

    In my days of running a credit counseling agency I used settlement successfully to help consumer eliminate debt, in the right way, at the right time, and by using the right approach.

    I have been very outspoke about the advanced fee models and the lack of results. But that’s a separate issue from settlement alone and does not represent the fact that every day creditors do settle debt.

    Debt settlement is not a one sized fits all solution but then again neither is credit counseling. Use at the right time and in an effort to best meet the goals and circumstances of the individual they can both have a role either individually or jointly.

  • 11th para- 1st sentence…

    “””Settlement was only really bad because credit counseling was not offering it. And another reason credit counseling could not wrap their head around it was because credit counseling groups think in terms of monthly payments and disposable income and not assets on hand. They completely miss that part of the equation.”””


  • Nope. A settlement company only needs to refer the consumer over to an established credit counseling provider. They don’t even need a referral relationship.

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