At the start of a new year I always like to look forward and contemplate what the debt relief industry is going to look like in the next twelve months.
I believe 2012 will be another year of stark closures of debt settlement companies and aggressive merging of credit counseling groups. I don’t see any evidence pointing to a substantial influx of new consumer credit issued that would quickly lead to a universal default situation like was caused by the recent U.S. economic downturn in 2008-2009.
The lack of new credit and the time that has past since consumers loaded up on credit creates a pattern where there will be declining demand for debt relief services.
The good news is there is opportunity on the horizon for those debt relief companies willing to take action and fundamentally restructure into more truly consumer focused groups.
In April 2010 I posted an article talking about my projections that the way forward for companies was:
The companies that will survive this industry transition will be those that face reality right now, immediately get lean, significantly eliminate legacy operational overhead costs, slash staff, and prepare to coast through a transition period till they can settle debt to earn money again. Just because these are not easy decisions to make does not mean they can’t be made. It just means they are tough to make. – Source
A few companies headed that advice at the time and have managed to survive. But many companies rejected my assessment or felt they saw a different path. Those companies have been closing and failing at a brisk pace.
The ability for a debt relief company to move forward under a new no advanced fee regime but to carry forward legacy costs and the way of doing business under an older model, was always suicidal.
The day of being able to start a debt relief company and strike out offering national services in a number of states is over as well. The risk and liability of offering services in a tightening regulatory environment makes it illogical to operate in anything but a 100% regulatory compliant fashion.
This means that companies should first make sure they are licensed in the states they do business and registered to do business in those states. My focus for 2012 will be to expose companies that claim to offer hands on services for consumers in states but are not registered to do business in those states. If you are offering services in states but not registered to do business in those states, get registered now. Fair warning.
I believe that companies should regroup and first start with their home state and check all regulations to make sure they are complaint. People that want to use the debt relief compliance online tool for free are welcome to register. It is my understanding that USOBA will no longer be offering any advocacy or regulatory assistance, effective immediately, so access to this tool is very important.
Getting back to local markets is a smart and cost effective thing to do. Not only can companies focus on more local and less expensive advertising and marketing efforts but a stronger local presence will create more word of mouth referrals that will be significantly less expensive than paying for leads.
ACTION ITEM: If your debt relief company is not yet listed on Google Places, now is the time to do it to get in front of your local market.
In 2012, thinking local and working hard to capture your local market will be the key to survival for those that are most likely to operate successfully.
The other trait of survival companies will be to take a very sharp knife to ALL expenses, including salaries, and to trim all expenses back to brutal levels. Every penny must be justified and watched to lower operational expenses to levels that will allow a company to survive on less overall income. The idea that a company can grow sales to meat legacy costs is not a logical approach. Cut costs, at all costs.
This is the year to ditch the fancy offices, hand back the expensive leased cars, get smarter about technology and reduce liabilities and legal costs by focusing on regulatory compliance and exceptional customer service. That is if you want to remain in this debt relief industry.
Speaking again of compliance, companies that are 100% confident they are compliant with all requirements and regulation in their home state should then focus on neighboring states with the intention of creating strong regional outfits and larger local markets to help with debt relief. Get local, focus local, needs to be the mantra for 2012.
ACTION ITEM: Another benefit of acting locally is your access to local media and advertising outlets which other debt relief companies do not utilize or know about. A company sitting a thousand miles away isn’t going to know the local free papers offered in your area to reach consumers. Take some time to drive to a sample of convenience stores in your area and pickup a copy of every local publication available and consider it for advertising.
It makes much more logical sense for companies to be experts and well recognized in their own regional territories or specific states and then to work cooperatively if a consumer contacts them in a state they don’t service. If that happens, send the consumer to a compliant company in that region without any expectation of a referral fee.
This idea of referrals without an expectation of compensation is a hallmark of professional trades. Your doctor or lawyer does not refer a consumer with the hopes of a kickback, and neither should debt relief companies. They should operate in such a way that the goal is to work cooperatively to make sure each and every consumer gets the right assistance from a complaint provider.
In the debt settlement arena I fully expect to see a rise in educational services to better educate consumers on how to settle their own debt. Groups like Consumer Recovery Network and ZipDebt that have quite a number of years of experience in educating and coaching consumers and I believe they have the right approach moving forward.
Soon, Consumer Recovery Network will be rolling out a very low cost DIY debt settlement educational course for consumers that can allow them to have access to experienced debt settlement coaches if the consumer needs advice or runs into an issue. I think this will be a game-changer in the debt relief industry.
Their education focused approach is also more compatible and clearly inline with the educational non-profit status of credit counseling agencies. I expect to see the smart credit counseling groups get more involved in this educational approach with debt settlement.
ACTION ITEM: For companies that agree with this assessment I’d suggest you contact Consumer Recovery Network and ZipDebt to talk about working with them. They already have a well constructed wheel that has worked well for many consumers. No reinvention needed.
In my opinion, these human powered solutions are going to be much more effective than many of the simply automated only solutions that some have tried to roll out that crank out offer letters.
While creditors have been holding credit counseling groups back from broaching the reality of debt settlement in appropriate cases, it would be difficult, read that as an idiotic public relations nightmare, for creditors to hold a tax exempt educational non-profit organization back from providing debt settlement education.
If that happens, let me know, I’ll expose it for what it is, naked creditor control of the mandated mission of tax-exempt organizations.
Speaking of credit counseling, 2012 marks yet another year I wish them the best in breaking free from creditor control which has only driven them down a dark hole from which many will not emerge. It is doubtful that any credit counseling groups that count on fairshare will have the courage to break those golden handcuffs, although they need to.
Creditors have cut funding and limited the effectiveness of the debt management plan down to a point where it makes less and less sense for consumers. DMP enrollments should continue to decline unless credit counselors can get terms from the creditors that significantly cut the monthly payment of consumers on a DMP program. Another attractive and possible benefit would be the forgiveness of X amount of debt upon progress milestones. For example, on each anniversary of successful on-time payments, get 10% of the balance of your debt forgiven.
HUD payments for credit counseling programs, another source of funding, is going to remain uncertain as long as forces are active in reducing the government budget. HUD housing counseling has not been able to prove it is effective and studies that came out in 2011 are not encouraging.
I would expect to see continued declines in bankruptcy filing rates and thus credit counseling bankruptcy counseling income will remain flat or decline as well.
But the bright spot in credit counseling is that groups that have been around a long time and done all the difficult work of getting compliant and registered everywhere. They hold all the required bonds and don’t have to face those hurdles now. They are in a better position to do better moving forward but they success will be limited if the number of credit counseling groups remains the same.
There will need to be a sizable amount of contraction in the number of agencies to create a handful of national groups that can survive. I predict 2012 will be the year of the credit counseling merger.
I think Howard Dvorkin of Consolidated Credit Counseling was right on track with his predictions he offered at my debt relief industry meeting in 2011. You can watch his presentation here.
Another major milestone in credit counseling 2011 was the transparency initiative pushed forward by Cambridge Credit Counseling. As we move forward, openness and transparency will be the hallmark of the best credit counseling groups and in fact all debt relief providers.
Speaking of credit counseling, in 2012 they need to get behind the CFPB and stop pushing back about being regulated by the CFPB. It’s disgusting to watch a supposed consumer first industry protest about being regulated by a consumer first financial services body like the CFPB.
I see the CFPB playing a bigger role in 2012 now that they finally have a Director appointed. I fully expect to see actions in the debt relief space to be taken against companies that try to skirt the laws.
But Success in 2012 Will Hinge On These 2.5 Points
I’m counting getting local as a half a point since I’ve already covered that. Still it remains a key to success in 2012.
Otherwise, the primary focus must be on customer service and happy clients. This includes refunds for customers that have a valid issue and complaint. You can stop the complaint from moving forward if you simply make cheerful refunds. It’s not rocket science, it’s commonsense logic. Don’t believe me about the value of refunds and happy clients? Read this New Year suit by the New Mexico Attorney General against Credit Answers. It all started over a simple refund.
The years 2008-2010 were basically the years of screwing consumers in debt relief. High advanced fees with little results littered the landscape and gave the entire industry a black eye.
Moving forward, the way to stop additional legislation and regulation of the debt relief industry is not by spending millions lobbying, it’s by just doing a better job and having really happy and satisfied customers. It is foolish to try to deter restrictive legislation instead of dealing with the underlying issue that causes the legislation. We don’t need to spend money medicating the symptoms, we need to heal the underlying illness.
Happy customers don’t complain. If people are not complaining then regulators don’t need to get involved. If regulators don’t get involved there is no need for additional legislation.
The second critical point is the industry needs to nip bad actors in the bud and move to expose and stop them before they damage the reputation for all. I would suggest the best way to do this is by encouraging people to fill out a consumer complaint on this site or by having debt relief insiders send me information.
From those consumer complaints I filter them out and bring the worst offenders to the attention of people that can take action. By writing about the bad actors we can shine a light on their activities. As one insider told me recently, “I hated working there but the rule was don’t doing anything that would cause the company to appear on the GetOutOfDebt.org site. We were told that all the time.”
Openness, exposure, and a spotlight on bad acts serves as an effective deterrent, but only debt relief insiders have the power to initiate that process. If you don’t you simply let bad actors get a foothold which results in unhappy consumers that lead to complaints to regulators, and, well, you know.
So in summary: regroup for smaller, focus local, slave over having really happy customers, and don’t let the bad guys grow.
If you do this you will have a much better chance of surviving until consumers need you again after the economy rebounds and people load up on credit again. I’m confident that coming. It always does.
And that’s my 2012 outlook. Feel free to comment below.
Bonus
While this is not a forecast, it is some helpful tips.
With all the changes that have gone on in the debt relief industry over the past year it is a perfect time for you to set aside some time to do the following.
- Read every promotional page on your website and fine tune any messages you are putting out there. Make sure they are not making unrealistic promises, promising any specific level of performance, or asking for advanced fees.
- Read through your client agreement and look for any adjustments that may need to be made. Ask your lawyer to review the agreement as well.
- While you are working on the agreement, look for any sections that can be eliminated or written in plain language to make it easier for consumers to understand. The CFPB is focused on making sure agreements are clear and easy to read.
- Give sales staff a refresher course on not making any claims about improving credit to avoid any CROA (Credit Repair Organization Act) issues.
- Give sales staff a refresher in avoiding any statements on performance, reductions, timelines to being debt free, or any other specific claims that are not well supported by facts in accordance with the FTC TSR. Not sure what I’m talking about, read this. The TSR contains specific direction on how these issues may be represented and measured.
- Review all advertising messages and online ad campaigns to review your messages for compliance as described above.
- Most importantly, review your compliance with the state laws and regulations of the states you offer services in. As a start, you can use the free online tools offered here. If you have any questions or concerns about individual state laws, consider contacting the law firms of Loeb & Loeb (here or here) or Venable (here and here) which specialize in these issues.
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Steve, great article with solid advice for companies looking to survive 2012. I suspect that many of the remaining debt settlement firms will experience severe financial pressure this year as the number of “grand-fathered” clients (i.e., advance-fees) dwindle to zero. It’s been 14 months since D-Day (10/27/2010) on the FTC ruling, so the forward revenue must be getting pretty thin at some of these companies.