Get Out of Debt Guy - Steve Rhode

Debt Relief Options for consumers – Is the delivery system broken?

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Most of the debt relief services industry works less than 30% of the time. It could use a tune up.

Imagine if the car you are driving has a six cylinder engine, but four of them did not function. You would do something about it, right? Even if doing something meant replacing the car? Most would. Not the debt relief industry. That’s not how they roll. The industries failures leave 2/3rds or more of its customers stranded, and often far from the destination they were trying to get to, or that they were told they would be delivered to.

Here is some context:

Chapter 13 bankruptcy numbers reflect that less than one third of filers complete the court sponsored repayment plan. Some chapter 13 filers do convert later to a chapter 7, but I cannot locate a resource that estimates how many.

The data available from the credit counseling industry shows that less than one third of consumers enrolled in a debt management plan complete them. Some debt management plan providers have a 1/3rd or higher customer attrition rate in the first 12 months of a 48 to 60 month plan.

Debt settlement companies do not provide much in the way of program completion data, but I have no problem at all with stating less than a third of the people enrolled into a debt settlement services plan over the last decade actually settle all of the accounts they enrolled.

I know of notable service provider exceptions that exceed the poor performance measures above, but as an aggregate the performance is just that poor.

A good portion of why I determine the debt relief pipe line and delivery system for information and services available to consumers to be broken is the result of inflexibilities, industry practices, and the predisposition of people in a financial bind to:

Debt relief service providers, promoters, lead generators, commentators in media and elsewhere, promote a broken system daily. Why?

Money – Combined, debt relief services generate tens of millions in revenue each month. Advertisers of all flavor, lead generators, marketers (both call center and individual), vendors and companies offering services operate with revenue generating interests first and consumer interests next – if at all.

Media – The media plays to their audience and most people want to avoid bankruptcy. Most of the media reports about debt settlement over the past several years have been harsh to an extreme. Most of the settlement services industry operated, or continue to operate in a way that fuels the harsh treatment it’s been targeted for. Debt management plans offered by credit counseling agencies (CCA’s) are non confrontational. Referring to a credit counselor is a safe thing to do. It is generally accepted that people should pay back what they owe and credit counseling firms provide the ability to do that at a lower monthly rate. Problem is, the vast majority of people referred to debt counselors don’t qualify to enroll in a DMP. Of those that do enroll, 70 or more percent don’t complete the plan.

Control – Banks exercise control over virtually all credit counseling agencies because they can. Nonprofit CCA’s that stray from the herd are threatened to have bank funding cut and even lose the ability to submit repayment proposals. That threat keeps CCA’s in line. The very agencies that are repeatedly referred to as charitable organizations, whose purpose is to deliver education and information to people in a financial bind, are effectively causing harm as they are only permitted to offer an inflexible option that assures they can help less and less people in the current economy. This fact is well established on the get out of debt site.

Debt settlement services have been broken for many years. In my opinion, the vast majority of individuals and companies operating in the debt settlement industry are purely profit and revenue focused and could give a rip whether their customers will succeed in debt relief or not. There have been many changes to the settlement industry recently, but unfortunately my opinion of my own side of the industry has not changed much.

Furthering the jalopy analogy where only one or two cylinders of an engine are operating, 2/3rds or more of the millions of people in need of debt relief are hopping into, or being sold into, a journey that will find them stalled out, pulled over on the shoulder with blue smoke emanating from the vehicle, and waiting for emergency assistance.

Even though the debt settlement services side of the industry is predominantly populated by profiteers, I consider the CCA side to be the most broken and dysfunctional on the debt relief highway. Why?

CCA’s are in the best position to deliver the most – to more consumers – at an affordable rate. They have categorically failed to embrace the role they are held up to serve. A role that is in fact a directive for them, given most of them enjoy tax exempt status. The control that their financial service industry partners exhibit over them causes them to be the least efficient debt relief vehicle on the highway. Less than 20% of people they speak with can qualify for the plans they offer and less than a third of those that do qualify ever reach their destination. This causes the largest misallocation of time and financial resources for debt strapped consumers in the debt relief industry – given today’s service provider market realities.

The number one reason the debt relief industry is broken: The sales and screening process.

This one issue actually breaks down into several failures and mainly pertains to credit counseling and debt settlement.

  1. Failure to correctly seek to understand the consumer’s financial situation because of revenue goals, lack of training, overhead inefficiencies, systems management.
  2. Failure to adequately inform the consumer of all alternatives.
  3. Failure to fully detail the benefits and drawbacks of each option which may differ from one person’s situation to the next.
  4. Failure to provide clear cost and time benefits of each option.

These failures are known and quantifiable for the harm they inflict on debt relief travelers. The loss of time and financial resources that occur 2/3rds or more of the time also harm other travelers on the economic highway – people not involved in debt relief. The affects to communities, states, and the nation as a whole are compounded when millions of people are strung out on a plan for debt relief that dramatically impacts the individual ability to return to responsible spending in a time frame consistent with the depth of their financial hardship, and where 2/3rds or more were never going to reach their destination. This of course means more debt relief seekers should be directed to speak with an attorney and evaluate their options with chapter 7 bankruptcy, or be provided detailed education and analysis about settling accounts (as long as settlement can be completed in an efficient time frame and at an affordable price when performed by service providers). CCA’s and settlement companies don’t really do that. They don’t assess the situation and encourage the debt relief seeker to learn more about options they don’t provide – when the person they are speaking with is a potential customer. If they did, they would be saying something like: “Jane, you do qualify for our program, but you also may be better served by filing bankruptcy. I know you want to avoid that, but you owe it to yourself and your family to fully evaluate the option as it may provide you the quickest most cost effective relief you need right now”. How many service providers can honestly say that when they have a qualified consumer, they delay “the close” and encourage the person to seek details on remedies they don’t offer and will not get paid for?

Chapter 7 is not mentioned above because it is not broken. There were changes to bankruptcy laws in 2005 that were the result of heavy lobbying by the banking sector because banks said chapter 7 needed to be fixed. It did not need fixing, but the changes took effect anyway. Regardless, chapter 7 still works in the way it was intended. For the majority of chapter 7 filers it provides the least costly, most immediate and effective debt relief. It gives those who seek it a fresh start and is not plagued with poor performance numbers.

Until screening and suitability issues are addressed; until service providers fully embrace educating consumers about ALL options for debt relief available as relate to each person’s unique set of circumstances; until CCA’s break the chains the bind them; until more consumers realize the responsibility they have to become fully informed; the debt relief services industry will continue to create harm and conflict where wholly unnecessary.

I would really like to hear from debt relief industry participants about their ideas for how to create a better debt relief system in the comments section below. How can we as a group create an industry that is successful with 2/3rds or more of the people we come in contact with?

For those seeking information about options and the assistance available when struggling with debts – there are limited options, but no shortage of opinions and people offering to help. If you are unable to make timely payments on all of your monthly obligations while consistently putting at least some money aside for savings and emergencies, you may need some type of debt intervention. You DO have the responsibility of getting completely informed about all of your options, including debt management plans, debt settlement and bankruptcy. Until you are completely informed you have 70% (likely higher) statistical odds of hopping into a jalopy disguised as dependable transportation that ultimately prevents you from getting to where you were going.

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