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 what I’ve run into, is 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 extremely disappointing or just downright shocking.
The debt solution industry, which consists of debt settlement groups and credit counseling organizations does an absolutely horrible job when it comes to 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 one in which 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 was able to fully resolve their debt situation and resolve all of the debt they enrolled through settlement, thus eliminating their original debt problem.
With bankruptcy a successful outcome is one in which the consumer was able to 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 simply did not want to disclose what the success rate or completion rate is of their member agencies 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 on a regular basis to check agency performance.” Me to NFCC.
Their response. None.
It would seem that in the interest of the consumer clients that the success rate of the DMP from individual member agencies would be a metric that NFCC paid some attention to in order to protect consumers from poor performing CCCS offices. Apparently 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. In the past Cambridge has lived through some difficult days but I really 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 being 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 but I was not able to get an official number from the American Bankruptcy Institute (ABI) and unable to 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 dissension 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 rate / success rate for thir 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 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 are able to get out of debt through DMPs. It is difficult to find conclusive data on the effectiveness of DMPs. Most agencies do not release information on their retention rates, although 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% leaving 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 in completing a three to five-year DMP.
I suspect that in these difficult economic times that the true completion rate for DMPs across all credit counseling agencies is going to be below 20% with ever tightening family budgets and less extra money for repayment.
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. 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 really have only three concessions to offer that creditors will allow. First, creditors can “re-age” a credit card account of a consumer who enters a DMP. Most creditors will re-age an account once a year or twice in five years, the maximum allowed by federal financial service regulators.
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 that enrolled in Q2 2006 completed their debt management program in full. – Source
Debt Settlement Plan Performance
The report cites a 45% to 50% completion rate of debt settlement plans which I find doubtful. This does not take into account 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 who bail on the debt settlement program before all or some of their debts are settled.
In fact in a latter statement TASC is cited as saying 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 are able to 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. I’d count that as a failure as well and I am confident is assuming the number is actually twice to three times 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 difficult to save up enough money to settle their debts, or persist through ongoing collection calls and creditors while they attempt to save that money.
Debt settlement programs are also expensive. Consumers are paying 17% of their total debt, plus monthly maintenance fees, plus default rates on their debts and penalty fees and/or fees up to $5,000 or more for debt settlement services. Debt settlement for most people is a suckers play.
There is also sufficient evidence to question if most debt settlement companies want to settle their debt at all?
This quote comes from a former bank Vice President in charge of collections:
I have had numerous DSC’s (debt settlement companies) admit they have no intention of settling debt and in fact it is counter productive to their purpose to do so; their main purpose being 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, here’s what they’d find: 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 takes into account that the balances of the debts swell with interest and other fees, the amount of the savings are 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 done to the credit rating and the potential for lawsuits, etc., and there is no real benefit.
The debt settlement business is insidious. In reality, very few people have debts that are settled and most wind up in much worse financial shape that when they entered the program. We repeatedly see cases where people are forced to file bankruptcy to rid themselves of the lawsuits and their 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, fail to provide any of the promised relief to the consumers who fall victim to them and ultimately result 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.
A segment of DIY debt settlement companies that teach consumers how to settle their own 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
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. Clearly they focus on different target groups of consumers.
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 does cost money, it is generally much less expensive that debt settlement services, and that the majority of people resolve their debt when turning to bankruptcy as a solution.
Chapter 13 bankruptcies, the payment plan approach, are 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.
Based on feedback from bankruptcy attorneys, and looking at the total number of bankruptcy cases filed by chapter, it appears that nearly 90% of bankruptcy filers are able to repay what they can afford or discharge their debt through bankruptcy.
Bankruptcy is also a legal solution which forces creditors to play by a set of defined rules. It also terminates collection calls and collection activity and stops pending lawsuits. Neither credit counseling or debt settlement solutions can make this claim.
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 towards 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 the fact that the credit counseling industry reports that only 7% to 8% of the people who contact a credit counseling group could even afford a DMP. Yes, the rest get budgeting help, advice, or referred for guess what, bankruptcy.
David Jones, the president of Association of Independent Consumer Credit Counseling Agencies 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. Now they find they can only help about 7-8%, Jones explained.”
As a solution in resolving problem debt, a DMP it appears among the most charitably promoted but least successful of approaches.
And what troubled me most about this was the fact that I founded and ran a non-profit credit counseling group for a number of years. I’d never seen a comparison of the different approaches while I was running the debt counseling group but at the end, i was significantly disillusioned with the credit counseling industry and would 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 you are drinking the Kool-Aid it is hard to believe that the solution you are delivering 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 was running a credit counseling group now I would certainly make sure that each client signed an informed consent statement indicating they knew the chances for 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 of disclosing the tax consequences of settling debt and the chance of being sued while 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 right now to settle all their debts, the success rate is in the 70% range.
But don’t think this is all a modern problem. As far back as 1955 these types of arrangements had poor success rates. “D.F. Bush, the leading chain office operator in the field, who 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 clearly 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.
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I desperately 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.
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 a very good job of making their performance data public 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 to eliminating the debt at below market rates.