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The Truth About The Success Rates, Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, Bankruptcy, and Debt Consolidation Loans

This is a story that I’ve been working on for a few weeks. I’ve been asking people and groups for feedback and information to write this, but I’ve run into a wall.

I have received some feedback from groups and people that don’t wish to be publicly identified to protect themselves, but what I have learned has been highly disappointing or just downright shocking.

The debt solution industry consists of debt settlement groups, and credit counseling organizations do a horrible job regarding transparency about success rates. And my definition of a successful resolution is a consumer that fully resolves their debt situation through the hands-on intervention of the entity providing the services.

For example, a successful DMP is when a consumer contacts a credit counseling group and enrolls in the Debt Management Program (DMP). The consumer then fully pays off their debt through the DMP.

In a debt settlement solution, a successful outcome is one in which the consumer can fully resolve their debt situation and resolve all of the debt they enrolled in through settlement, thus eliminating their original debt problem.

With bankruptcy, a successful outcome is one in which the consumer could obtain legal relief from their debts with either a fully completed chapter 13 repayment plan or a chapter 7 discharge.

I am disappointed that groups that the public trusts, like National Foundation for Credit Counseling (NFCC) and Consumer Credit Counseling Services (CCCS), were not more forthcoming in providing DMP success rate data.

In communications with NFCC, I was left with a distinct feeling that they did not want to disclose their member agencies’ success rates or completion rates even though they collect massive amounts of data from those agencies.

“Not to be cynical, but it sounds like you either don’t want to release it or it is not a figure that is calculated and monitored regularly to check agency performance.” Me to NFCC.

Their response. None.

It would seem that in the interest of the consumer clients, the success rate of the DMP from individual member agencies would be a metric that NFCC paid some attention to protect consumers from poor-performing CCCS offices. It is not.

The only debt management or credit counseling group that provided me with a completion rate or success rate of their DMP plan was Cambridge Credit Counseling. Cambridge has lived through some difficult days in the past, but I have to tip my hat to them on this issue. They were willing to be quoted immediately and very forthcoming in data, something that NFCC was not able or willing to do. But yet, NFCC is held out as the white knight and protector of consumers in the credit counseling world. I would urge any journalist that wants to examine this subject to press NFCC hard for an honest and transparent answer on completion rates for a DMP.

Bankruptcy data was available, but the hard statistic to obtain was the disposition of chapter 13 cases. Some bankruptcy attorneys were willing to provide me with their experiences on chapter 13 cases. Still, I could not get an official number from the American Bankruptcy Institute (ABI). Likewise, I could not get a timely official response from the Executive Office of the United States Trustee (EOUST).

I admit that this post may generate some contention and disagreement from members of the various camps I discuss, but I fully welcome open disclosure and public comments on this post to help set the record straight.

Let’s look at what I learned.

Credit Counseling and Debt Management Plan Performance

The success rate for a debt management plan is in the 20% completion rate range or less. Cambridge Credit Counseling was willing to be quoted at a 27% completion/success rate for their DMPs. NFCC was not willing to provide a completion rate. As I said to them, the cynic in me says why not provide the facts unless you don’t want people to know.

In my research, I found a report from the National Consumer Law Center, “The Life and Debt Cycle” that said.

Because of inconsistent and reduced concessions, it appears that only consumers with considerable disposable income left over each month can get out of debt through DMPs. It isn’t easy to find conclusive data on the effectiveness of DMPs. Most agencies do not release information on their retention rates. However, a 1999 NFCC memo cited by Consumer Reports found that just 21% of their clients completed DMPs while about the same percentage left to self-administer debt payments. In 2001, the National Foundation for Credit Counseling reported completion rates of about 26%, with about 20% going for self-administration. The high failure rate in DMPs is undoubtedly influenced by the limited concessions that creditors offer to consumers who enter credit counseling. If consumers cannot significantly lower the amount that they owe, they are more likely to fail to complete a three to five-year DMP.

I suspect that in these difficult economic times, the completion rate for DMPs across all credit counseling agencies will be below 20% with ever-tightening family budgets and less extra money for repayment.

For example, Pioneer Credit Counseling on their 2008 990 return (source) said:

One of the primary reasons for such a low completion rate is that DMPs are not calculated on what the consumer can afford, such as in a chapter 13 bankruptcy plan, but on what the creditor wants. Again, the same National Consumer Law Center report summed the issue up better than I could.

The problem is that DMPs, as currently constituted, are only useful for some consumers. Creditors call the shots when it comes to concessions offered through DMPs. They rarely reduce the amount of principal that consumers owe them, never as part of a DMP. Agencies have only three concessions to offer that creditors will allow. First, creditors can “re-age” a consumer’s credit card account who enters a DMP. Most creditors will re-age an account once a year or twice in five years, the maximum federal financial service regulators allowed.

Data from Cambridge Credit Counseling, one of the few credit counseling groups brave enough to public their performance data, shows an above-average completion result. According to their data, 46 percent of consumers enrolled in Q2 2006 completed their debt management program. – Source

Debt Settlement Plan Performance

The Association of Settlement Companies (TASC) published a report on the debt settlement industry and provided it to the Federal Trade Commission.

The report cites a 45% to 50% completion rate of debt settlement plans which I find doubtful. This does not consider the total number of people that begin to pay debt settlement companies in monthly payment plans and then either fail to accumulate enough money to settle or bail on the debt settlement program before all or some of their debts are settled.

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In a later statement, TASC says that only 34% of people in debt settlement programs settle debts. And that statement isn’t even saying that 34% settle all debts. – Source. That number is much, much lower. With the moving estimates given by the debt settlement trade association from 50% to 45% to 34%, you can only conclude that the actual percentage of people that can settle debts is probably 24% or less.

An interesting fact in the statement issued by TASC is that 6% to 10% of debt settlement clients are sued by their creditors while in a debt settlement program. So I’d also count that as a failure, and I am confident in assuming the number is twice as high as that.

Insider wisdom is that approximately 10% of all debt settlement clients settle some debts while about only 1% settle all their debts.

The actual number of settlements may be lower than that as consumers with daily economic pressures find it challenging to save enough money to settle their debts or persist through ongoing collection calls and creditors. Yet, at the same time, they attempt to save that money.

Debt settlement programs are also expensive. Consumers are paying 17% of their total debt, monthly maintenance fees, default rates on their obligations and penalty fees, or fees up to $5,000 or more for debt settlement services. As a result, debt settlement, for most people, is a sucker play.

There is also sufficient evidence to question whether most debt settlement companies want to settle their debt.

This quote comes from a former bank Vice President in charge of collections:

I have had numerous DSCs (debt settlement companies) admit they have no intention of settling debt, and in fact, it is counterproductive to their purpose to do so; their main purpose is to enroll consumers, collect fees, and provide such poor customer service and results that most consumers drop from the program and thereby leave the DSC with thousands of dollars in unearned benefit. – Source

The Attorney General of Illinois says this about debt settlement companies.

“What we have learned is that 65 percent of people who initially enroll with debt settlement companies drop out before any communication (with creditors) has been made. Before any of their debt has been settled at all,” says Madigan, whose office has seven lawsuits pending against debt settlement companies. “Those people don’t get a refund. They don’t give you your up-front fees back, they don’t give you your ongoing fees back. You still owe them whatever you signed up for based on that contract.” – Source

The Illinois Attorney General, in further investigation, stated to the Federal Trade Commission that:

In a statistical review they have done in connection with debt settlement cases, they have found that debt settlement companies have helped less than 10% of consumers resolve any debts at all, and no consumers had had all of their debts resolved through a debt settlement program.Source

Here is what the Better Business Bureaus had to say about debt settlement to the Federal Trade Commission.

If clients did the math, they’d find that assuming the program worked as represented, they’d likely pay the settlement company approximately 40% of the savings balance on the debts settled. When one considers that the debts’ balances swell with interest and other fees, the amount of the savings is even more negligible. Finally, in many cases, the amount of debt forgiven is taxable income, thus subjecting the client to yet another surprise which further lessens the savings. Consider the damage to the credit rating and the potential for lawsuits, etc., and there is no real benefit.

The debt settlement business is insidious. Very few people have settled debts, and most wind up in a much worse financial shape than when they entered the program. We repeatedly see cases where people are forced to file bankruptcy to rid themselves of the lawsuits and debt. – Source

Here is what Chase Bank had to say about debt settlement in a recent court case.

In recent years, fraudulent debt settlement schemes have flourished throughout the country, spread by the Internet and other mass-marketing routes. Promoters of these schemes generally claim that, for an up-front fee, they will eliminate or substantially reduce a consumer’s debt obligations to creditors without any further material payment to the consumer’s creditors. These schemes, however, have no valid basis in either law or fact. They fail to provide any of the promised relief to the consumers who fall victim to them, ultimately resulting in consumers who are deeper in debt with severely damaged credit scores. These schemes have become so varied and prevalent that the federal Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation now warn consumers about such schemes on their websites and through a formally-issued Alert to other regulators and banks.

Not all debt settlement programs are equal; some publish their performance rates, and like credit counseling, those groups are in the minority.

A segment of DIY debt settlement companies that teach consumers how to settle their debt and are selective about who they take on appear to have the best performance results. For example, Consumer Recovery Network says that 75 percent of their clients settle some debt. – Source

Debt Relief a la carte says 94.2 percent “of all enrolled accounts have been settled or entered into a payment arrangement.” – Source

And the data shows us something else interesting as well. People spend an average of 285 days in the Consumer Recovery Network program and only 78 days in the Debt Relief a la carte solution. Moreover, they focus on different target groups of consumers.

Bankruptcy Performance

Having gone bankrupt myself in 1990 and lived with that all these years, I have been under the impression that bankruptcy is not a pleasant solution. But what surprised me the most from my research is that while bankruptcy costs money, it is generally much less expensive than debt settlement services and that most people resolve their debt when turning to bankruptcy as a solution.

Chapter 13 bankruptcies, the payment plan approach, is reported as having a high failure rate like debt management plans or debt settlement, but what is not frequently mentioned is that many of those failed chapter 13 plans are converted to chapter 7 bankruptcy cases, and the debts are fully discharged that way.

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Based on feedback from bankruptcy attorneys and looking at the total number of bankruptcy cases filed by chapter, nearly 90% of bankruptcy filers can repay what they can afford or discharge their debt through bankruptcy.

Bankruptcy is also a legal solution that forces creditors to play by defined rules. It also terminates collection calls and collection activity and stops pending lawsuits. Neither credit counseling nor debt settlement solutions can make this claim.

Conclusion

It is very disappointing that the perceived “good guys” of consumer solutions, the credit counseling industry are not open and transparent about the sad and poorly effective results of debt management programs. This is also troubling since almost every journalist and creditor are steering people toward credit counseling as a solution to problem debt, believing it is a magic solution.

Based on current data, it would appear that rather than help consumers in trouble, they are directing them towards an ineffective solution. And I have not even covered that the credit counseling industry reports that only 7% to 8% of the people who contact a credit counseling group could afford a DMP. So, yes, the rest get budgeting help, advice, or are referred for, guess what, bankruptcy.

David Jones, the Association of Independent Consumer Credit Counseling Agencies president, said, “The agencies affiliated with the AICCCA used to be able to help 20-25% of the people who came to them to avoid bankruptcy. Jones explained that they find they can only help about 7-8%.”

As a solution to resolving problem debt, a DMP appears among the most charitably promoted but least successful of approaches.

And what troubled me most about this was that I founded and ran a non-profit credit counseling group for some years. I’d never seen a comparison of the different approaches while running the debt counseling group. Still, in the end, I was significantly disillusioned with the credit counseling industry and would end up closing the non-profit I started.

If I had been specifically aware of the effectiveness of each solution, it would have changed my outlook on the services delivered to consumers. But that’s easy to say now. When drinking the Kool-Aid, it is hard to believe that the solution you are offering may be among the least effective.

There is simply no open forum or discussion on all debt resolution services and completion or success rates for consumers to make fully informed and educated decisions. The data is fragmented, secret, and hard to put together, especially if you are living through the stress and pain of problem debt. If I were running a credit counseling group now, I would ensure that clients signed an informed consent statement indicating they knew the chances of successfully eliminating their debt. I realize that would lower the number of people enrolled in credit counseling, but at the end of the day, people have to come first.

Debt settlement is another problematic approach. Debt settlement companies do a horrible job disclosing the tax consequences of settling debt and the chance of being sued in a settlement program. They also are not forthcoming about the completion rate of people that enroll versus those that fully settle all their debt through the debt settlement approach.

But from experience in assisting debtors with lump-sum debt settlements when they have the cash on hand to settle all their debts, the success rate is in the 70% range.

But I don’t think this is all a modern problem. As far back as 1955, these arrangements had poor success rates. “D.F. Bush, the leading chain office operator in the field, which operates 31 debt-adjustment offices in 13 states and Washington, D.C., told me that only 10 percent of his clients ever complete their payments to creditors.” – Source

Bankruptcy came out as the quickest and most effective solution to resolving problem debt. I’ve lived through it. I know it is painful. But with the power of law behind it and the total number of discharges to filings behind it, bankruptcy would seem to be the most cost-effective way for debtors to deal with their debt in the shortest amount of time and receive the most comprehensive outcome.

And let me say, right here, that I invite comments I know there will be disbelievers to what I have said here. Not believing it does not make it so.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

I urge any company that wants to dispute these findings to provide on-the-record, public, open, and fully transparent data regarding completion rates for people to review regarding their company performance.

Follow-Up

Be sure to read Fewer Than Ten Percent Get Out of Debt With Credit Counseling or Debt Settlement Companies to learn more about success rates of credit counseling and debt settlement.

Update June 22, 2012 – Unsecured Debt Consolidation Loan Performance

I realize I left out of this 2009 piece the success rates of yet another debt elimination technique, the unsecured debt consolidation loan. Lending Club, a peer-to-peer lending network, does an excellent job of publicizing its performance data so I can include it.

According to Lending Club, 69.34 percent of their loans are for debt consolidation. At the time of this update, they are lending about $50,000,000 a month.

The interest rate for borrowers is dependent on their credit score. Rates vary by grading.

If the consumer reacts quickly enough to their financial situation before their credit score erodes, an unsecured debt consolidation loan from Lending Club has proven to be an effective tool for eliminating debt below market rates.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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