The Center for Responsible Lending just released a paper on debt settlement. Take a look at the information they published and add your comment below if you think their research is on the mark or way off base.
It appears CRL relied upon data published by the American Fair Credit Council in making their determinations on effectiveness. CRL even thanks the American Fair Credit Council, and particularly Robert Linderman and Greg Regan, for generously sharing their time to help the Center for Responsible Lending (CRL) better understand the data and findings included in AFCC’s study of debt settlement outcomes.
The CRL report found two primary issues about debt settlement.
- Consumers must settle at least two-thirds of their debts to improve their financial position through debt settlement. Using conservative assumptions, on average, consumers must settle at least two-thirds (four of six) of their debts to be in a better financial position than they were at the time of enrollment in the debt settlement program. Consumers who incur tax liability or other costs, are unable to complete all installment payments on their settlements, or are sued by one or more of their creditors may not benefit even if they settle nearly all of their debts.
- It is difficult (if not impossible) for consumers to predict their likelihood of completion ahead of time. Consumers are unable to fully evaluate the risk factors that affect the number of debts that can be settled (if any). Thus, an individual considering a debt settlement program cannot accurately gauge whether debt settlement services will leave her debt-free, result in some benefit while still leaving some debts unsettled, or leave her worse off than she was at the time she began the debt settlement program.
CRL stated “Only three years have passed since the advance fee ban took effect, and debt settlement companies have not yet publicly disclosed the completion rates, or partial completion rates, of consumers enrolled over this period. The data released to date do not reveal whether debt settlement companies that comply with the advance fee ban are settling a sufficient percentage of debts to allow a substantial share of enrolled consumers to realize a positive change in financial position. In addition, even if many consumers do experience a positive outcome, it is difficult or impossible for consumers to predict whether they will be successful.”
Their recommendations also stated state regulations should include the following reforms:
- Require screening before enrolling consumers. As discussed in this paper, there is a substantial risk that consumers may not complete debt settlement programs due to factors both in and beyond their control. As a result, states should require debt settlement providers to conduct a personalized evaluation of a prospective client that concludes that the debt settlement program is likely to provide a net benefit and is affordable, given the prospective client’s current income, expenses, assets, and liabilities. The written analysis should also review whether the creditors are likely to settle, and whether the consumer’s particular circumstances, such as whether her income is protected from garnishment or lawsuits (as is the case with Social Security income) make debt settlement an unsuitable option.
- Include a “not worse off” provision. To encourage debt settlement companies to not enroll people who have a significant chance of ending up worse off, states should enact provisions that provide consumers with some form of refund or concession if they end up worse off after enrolling in a debt settlement program.
- Establish meaningful limitations on fees. Debt settlement fees should be calculated based on the amount of savings achieved comparing the settlement amount with the amount of the debt at enrollment. The fee limit should be set at a rate that ensures that the majority of clients will achieve a substantial reduction in debt load (taking fees into account) compared with the debt balance at enrollment. For example, states such as Connecticut, Illinois and Maine limit fees to 10-15% of savings to achieve this result.
Fees should be owed only after the settlement is negotiated and fully paid and released or, in the case of installment settlements, payable in pro-rata shares that correspond to the size of the installment payments. This reform would better align the interests of consumers with the interests of debt settlement companies, leading to programs that consumers have a greater chance of completing.
- Require detailed data reporting. States should require debt settlement companies to report on the outcomes achieved for their clients, indicating at a minimum for each consumer the number and amount of enrolled debts and—for each such debt—the date and amount of settlement (if any), the structure of each settlement (and whether term settlements are completed), the fees charged, and whether any of these debts is the subject of a creditor lawsuit.
- Ensure broad coverage of the law. States should ensure that their debt settlement laws include all debt settlement providers, including attorneys and others whose activities are not covered by the FTC rule.
You can see my opinion about the report, here.
Read the Rest Below
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The CRL report even names a number of debt settlement companies whose sites they visited in the research for this report. These companies included Trident Debt Solutions, Persels and Associates, Debtmerica, Prestige Financial Solutions, DMB Financial, National Debt Relief, Accredited Debt Relief, Proactive Debt, Vantage Acceptance, Go Full Circle, PFS, Pacific Debt, Freedom Debt Relief, US Financial Options, ClearOne Advantage, America Debt Resolutions, Yellow Brick Financial.
You can read the full report here.
Their press release announcing this new paper said:
“Debt settlement[1] programs too often are not the solution they are marketed to be, according to new CRL research. Debt settlement companies promote their programs as a way for debt-strapped consumers to become debt-free while paying a fraction of what they owe their creditors. However, CRL’s new research report, A Roll of the Dice: Debt Settlement Still a Risky Strategy for Debt-Burdened Households, shows that debt settlement program participants may be left in a worse financial position than where they started and, furthermore, have no way to assess their likelihood of success before enrolling in a debt settlement program.
CRL’s research is based on data published in February 2013 by the American Fair Credit Council (AFCC), the trade association for debt settlement firms. AFCC concluded that consumers always benefit from debt settlement because the client only pays a fee if a debt is settled. However, the AFCC report did not address the proportion of clients that settle only some (or none) of their debts, nor did it consider the impact on clients of debts that remain unsettled. CRL’s study investigated both of these issues.
CRL’s analysis found that a client must settle at least two-thirds of her debts enrolled in a debt settlement program to improve her financial position; this finding is based on assumptions that are highly favorable to debt settlement companies and will not apply in many cases. Using less favorable assumptions, CRL estimates that a client must settle 80% or more of all debts to benefit.
Past investigations of debt settlement firms revealed dismal settlement rates, with only a minority of consumers completing their programs. Federal rule changes in 2010 restricted debt settlement companies from charging up-front fees before settling any debts, with the goal of curbing some of the worst abuses. However, debt settlement companies have not yet publicly released completion rates (or even partial completion rates) of consumers enrolled in the three years since the rule took effect.
In addition to risks from uncertain settlement rates, consumers who enroll in a debt settlement program must default on their debts, exposing them to financial penalties, escalated collection efforts, lawsuits, and credit score declines. In many cases these can outweigh the financial benefits gained from any settled debts. As a result, consumers considering enrolling in a debt settlement program are rolling the dice on whether it will be a good deal for them or leave them worse off.
CRL’s policy recommendations include urging states that do not authorize debt settlement to refrain from doing so, at least until the data demonstrate a dramatic improvement on the consumer outcomes in recent years. CRL advises states that already authorize debt settlement to (1) require screening to better assess the consumer’s likelihood of success upfront; (2) provide consumers with some form of refund or concession if they end up worse off after enrollment; (3) establish meaningful limitations on fees; (4) require detailed data reporting; and (5) ensure broad coverage of the law over all debt settlement providers. In addition, states and federal regulators should continue to ensure compliance with existing laws and monitor for abuses that can harm consumers.
1. For-profit debt settlement companies claim to offer an alternative mechanism for reducing unsecured consumer debt, most frequently debt from credit cards. “Be debt free in 36 months!!” and “We can reduce your debt load by up to 50 percent!!” are common claims in the industry. Debt settlement companies offer to negotiate reductions in debt balances with a consumer’s creditors in exchange for a fee. To do so, however, debt settlement companies require consumers to first default on their debts. Settlement agreements are often structured so that the consumer pays her creditor over a series of installments, although a lump sum settlement payment may also be an option. Once the consumer enters a settlement agreement with her creditor and makes a first payment on a particular debt under the settlement, the debt-settlement company is able to collect the full fee associated with that particular debt. Often, debt settlement companies calculate their fee as a percentage of the debt at the time of enrollment, rather than as a percentage of the savings achieved as a result of the settlement. Debt settlement clients typically need to remain in the program for three to four years in order to settle most or all of their debts.”
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I think one thing missing from that chart, to add perspective, is the consumer’s average position after 36 months of doing nothing but servicing that debt with minimum payments. To be fair it should probably show a period far beyond three years because these debts tend to be serviced perpetually.
In regards to the recommendations, I think better screening regulations could be a good idea if they are designed right.
The not worse off provision is forcing a service guarantee. Don’t know that I agree. There are no guarantees for the outcome of a bankruptcy case – where fees are always upfront.
Fees based off savings sounds like a good idea. Again I think this should be a business model decision of the proprietor. Smaller fees across everyone versus higher fees against savings.
Transparency through data reporting sounds like an excellent idea to me.
Closing the attorney loophole also an excellent idea.