The following guest post was contributed by Angelo Anzalone of Active Debt Solutions.
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Success based debt Settlement, the Attorney Model, Non Profit CCC’s and DMP’s, Do it yourself kits, Debt Validation, Debt Elimination, Bankruptcy – the list of available options seems endless and although we can argue all day about the legitimacy and success rate of these options they are here and available to consumers. When I think about where the industry is headed it’s a complete guessing game with way too many variables to see a clear path.
The new buzz word is “Hybrid Programs”. The non profits want desperately to get into the debt settlement space but are afraid of the strong arm of the banks that pay them fair share funding, the Fair share handcuffs as Steve has referred to them. Ultimately, unless the non profits stand up to the banks that pay them, dipping their toes in settlement will be very tricky. If the non profits were not ruled by creditors they would have been into debt settlement a long time ago and I applaud the few that have made the break and chose the for-profit approach. We saw the push for the 60/60 plan and the Less than Full Balance approach by the nonprofits as a way to “earn a blessing” by the banks that pay them fair share and one can’t argue the ethical concerns – accepting a 60% settlement and spreading payments out over 60 months on a charged off account is not in the consumer’s best interest when most accounts are settled between 25%-35%. How does a company in good conscience accept a 60% settlement on a charged off account when that account can be settled for much less?
Fact: Capital One and Discover balances typically double within 12-18 months followed by an aggressive lawsuit, regardless of the balance or financial situation of the consumer. In my opinion, consumers with Discover and Capital One accounts are the ones that are best suitable for a hybrid plan. Unless there are enough funds to settle either of those accounts first (and in most cases at 50%) then a DMP is where they belong. Again, accumulation of funds is the major factor but Capital One and Discover do not belong in a traditional 36-48 month settlement program. Another factor in placing Capital One and Discover accounts in a DMP are the new FTC reporting guidelines that state that “settlement fees must be calculated using the amount saved at time of settlement” and no longer base fees off the balance at time of enrollment. For example, a Capital One account with a $1,000 balance increases to $1700 and you negotiate a 50% settlement ($850), you technically saved the consumer $150 and at 20% of savings made a whopping $30….certainly not worth the liability.
A few major hurdles that I see the industry facing in order to survive:
Compliance/ Bonding/Licensing – The current requirements for bonding and insurance are flawed. What exists is a system that over-insures smaller companies and under-insures large ones. Bonding should be indexed according to client base and the $5,000 deductable should be raised. Finding an A rated major insurance carrier to provide coverage with a $5,000 deductible is near impossible (UDMSA). Higher deductibles and allowing lower rated carriers to provide bonds will open the available pool of providers, in turn lowering costs that can be passed on to the consumer i.e., lower fees.
Attorney Model/ LHDR – We are beating a dead horse here. I completely understand that the FTC is understaffed and overwhelmed but I’m extremely disappointed that the FTC has not cracked down on the attorney model. We can scream, kick and claw all we want but they have deep pockets – LHDR is rumored to have over $8 million set aside to fight the FTC, my guess is these guys and other similar attorney models are here to stay; which is truly the saddest part because they are simply ruining people’s lives with their lies and deception and nothing is being done about it. There is always an extreme disadvantage when a sector of the industry is playing by a completely different set of rules. LHDR client agreements show they collect over 30% of the consumer’s debt in fees.
There is no level playing field and we are all sadly mistaken if we think that the upfront players will be gone any time soon.
Data/Transparency: There seems to be no standardized reporting method in this industry. Lawmakers and regulators welcome actual performance data to shed some light on the effectiveness of debt relief solutions for both Settlement and DMP’s. Similar to a mutual fund using its historical returns to entice investors, settlement claims should be substantiated using a standard reporting method. We are seeing claims of settlements with fees included and claims without fees included, settlement claims based off enrolled debt instead of balance at time of settlement so all of this confusion creates the temptation to inflate claims for the sake of getting that phone to ring. Everyone agrees that providing good and comprehensive data to regulators can change minds yet any attempt to collect this data is ignored. I’m sure there are those who just said “that’s because the industry is a scam and there is no data” and while I won’t argue this when it comes to the advance fee settlement/attorney model, anyone who has been providing success based settlement services knows better.
The truth is, nothing will change until DMP’s and Settlement companies are given a level playing field and report using a standard method. For example, in the minds of the DMP’s if a consumer makes payments to creditors for 90 days and drops out that consumer is considered a success because of the “education provided to them taught them to do it on their own”. This does not sit well with settlement companies because if a consumer enrolls 6 accounts and 4 are settled then the consumer feels confident to settle the last remaining accounts on their own, that would have to be reported as a failure.
Those that had been strong advocates for the advance fee ban didn’t see the mass exodus or the reduced lead cost that was anticipated, instead there’s more confusion as companies struggle between right and wrong. Those that made the change over to the success fee model are seeing revenue from their previous model come to an end and they are not seeing the revenue from settlement they anticipated. Why? Many are accepting higher term settlements in an effort to collect fees right away. Settlement is a waiting game and accepting higher settlements locks up accumulation funds and in the event of a summons, companies are forced to accept much higher settlements, meaning lower fees and higher fall off. My concern is the wave of companies that will be closing down over the next year and of course what happens to those consumers. The Life Raft rescue plan that Steve has initiated will help some but not all.
In a perfect world, the industry would be as regulated as the financial planning or insurance industries – certain employees should require licensing. There would be a standard reporting method for both settlement and non Profits. The national affiliate driven attorney model would be banned and trust/dedicated account companies like Noteworld or GCS should require proof of licensing from the debt relief company before allowing distribution of funds in that state. When these changes take place that will be the day that consumer can truly make an educated decision on which option is best.
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