I’ve been perplexed for some time now why credit counseling isn’t getting into debt settlement. They spent a couple of years vilifying it to “protect consumers” but let’s be honest, that was really for their own competitive advantage and to protect marketshare.
For nonprofit credit counselors, debt settlement as a solution is the holy grail and the third rail at the same time right now.
On one hand they strive for effective solutions that assist consumers and raise revenue, on the other hand the DMP departments at creditors taunt them with extinguishing fairshare if they play in that sandbox.
For now years, credit counseling groups have been embarrassingly begging creditors to let them offer a bastardized form of debt settlement they call the Less Than Full Balance (“LTFB”) program (which always reminds me of LGBT).
In that program creditors would pay them a fairshare based on the reduced payments a consumer can actually afford rather than the DMP payment the creditor wants.
I find myself compelled to state the obvious to my credit counseling brethren in an effort to help them see the path to follow here.
Non-profit credit counselors are recognized for their exempt purpose, education.
Rather than leap into debt settlement the way it was done by the problematics of old where you would collect a monthly payment over a long period of time and take an advanced fee and the consumer would not ever settle their debt, how about focusing instead on education.
Teach consumers how to settle their own debt. They don’t need to pay you monthly to save for settlement, you don’t need to be involved in individual settlements, and consumers can self-save so no escrow account is needed. You can charge a fair and sliding scale fee for the education, which is your exact exempt purpose, and generate revenue.
Some consumers will require additional assistance or want you to help them out with settling some individual debts. Most won’t if you promote the solution correctly as education.
For those that do want your help you can either contract out that help to groups like Consumer Recovery Network and Michael Bovee or ZipDebt.com and Charles Phelan. Both of those groups have been education focused settlement companies for years now. They both have a proven track record in this area and it works. You can see the performance data of Consumer Recovery Network, here, Charles Phelan’s performance data is here.
For those that you help settle you can charge a fair fee upon settlement. I’d say between 15 percent to 30 percent of the amount of debt saved through settlement as measured from the original balance. This is performance based so no fee is collected up front.
Special Message: For that group of counseling agencies that is trying to bring back legislation to limit settlement fees to 15%, why are you boxing yourselves in? Stop it and get behind a maximum of 30% of savings based on original balance and let the market dictate what the consumer wants to pay. Your efforts are a waste of time and a misdirection. Get behind UDMSA which already provides for uniform limits.
So let’s look at this example with Bank of America, who by the way settles debt every single day yet the Bank of America DMP department doesn’t want counselors touching settlement. So let’s extrapolate this, Bank of America would be punishing you for assisting the consumer with a resolution to their debt that they accepted? The bank accepts settlements routinely and in fact is a favorable participant in settlements. They will even keep the account in-house and settle it.
If credit counseling wants to offer settlements here is the critical message you need to hear, you are being held back from offering this tool to assist consumers in trouble not because of reality, but because credit counseling leadership and the self-serving interests of the DMP departments don’t want you to.
Successful settlement is dependent on suitability. Not every consumer is suitable for settlement. It’s not a one size fits all solution, but neither is a DMP.
But let’s move this a step further. Let’s take the large number of people that come to you that can’t afford a DMP. Now instead of turning them away, what if you taught them how to settle one or two of their debts and then made room for the DMP. You’ve now rescued a DMP client and fairshare and assisted the consumer avoid bankruptcy if that was their goal.
There are so many things you can’t see about effectively using settlement because you’ve consumed the Kool-Aid of credit counseling leadership. They don’t want you to be involved in settlement because the DMP departments at the bank told them so. Not because the same banks want you to avoid it.
Let’s be honest here, the current credit counseling leadership has become an embarrassment to common sense. I recently wrote an article addressing the messages from the recent NFCC conference and it could not clearer that offering settlement as a tool is needed.
Following the article I heard from a number of credit counseling groups that all told me the same thing I’ve heard before, “We know we need to offer settlement to consumers but we are afraid of losing fairshare.”
Here is the really embarrassing part, you’ve allowed the DMP departments at the banks to drive down your funding to basement levels and arbitrarily hand out “grants” which you are now begging for but you are not educating consumers about one of the very tools they could be using to get the help you promise and are mandated to deliver as part of your charitable purpose.
Let me be blunt, you are selling the people that come to you as a charity for help, down the river. “I’m sorry we can’t educate you about your options because one department at the creditors won’t let us.”
I got out of credit counseling and closed the non-profit group I founded in 2005 because for me I made the choice that consumers come first. I’m not telling you that to say I’m better than you. I applaud your ambition that things would change. It was not my path.
Even back in the early 2000s at the nonprofit credit counseling group I founded, we did settlements but we limited settlement to those consumers that had cash-in-hand to settle right now. We charged a flat rate of $495 and if we could not get a suitable settlement to both creditor and consumer we refunded the entire fee. It was simple and creditors took the settlements.
In fact my favorite story was about Capital One. It taught me a lot about banks and settlements. This client had one creditor and owed Capital One $43,000. Even though we advised him it was a horrible idea to liquidate his IRA and he should consider bankruptcy first, he didn’t want to. So we agreed to try and get him a settlement. The most he could raise was $30,000 and Capital One refused it even though he had a narrative about the recent miscarriage and cancer he and his wife faced that led to his current situation. We told him about the rejection and he was bummed. The next day he called and was over the moon happy. Turns out when he got home that day there was a letter in his mailbox from Capital One offering him a full settlement for $21,000. Capital One actually turned down $30,000 to take $21,000 and the DMP department would even talk to us about an offer at all.
May I suggest a different approach to your dilemma getting into settlements:
- Teach consumers about settlements and how to do it themselves.
- Contact the guys I’ve listed for help.
- Grow a pair and send a group letter from a number of counseling groups to the heads of the banks asking for permission to help consumers through education and sliding scale assistance. Publicly shame them by asking for permission. This is the perfect economy to do that.
- Take this issue way above the DMP departments and let it filter down. Make it about helping consumers
- And for goodness sake, please put consumers first. It’s time to break the bonds of DMP department slavery and start being the best you can be for the people that need you the most.
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