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.
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.
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.
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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I would like to say a few things about Jared Strauss that you may find helpful. I pride myself in being astute at personal finances, often helping others for free. So it was a surprise and humbling experience when I found myself in need of advice. I have spent many hours researching my options from debt consolidation to bankruptcy and everything in between, including do nothing.
During my journey to find a viable solution, I spoke with Jared a few months ago. We have spoken twice since and each time I come away with a better understanding of my options and new angles to pursue as my financial ‘picture’ becomes clearer. I probably won’t end up needing Jared’s services, because my job situation has improved, but I would have certainly used his services if warranted.
I found Jared to be easy to speak with, knowledgeable about how creditors operate and concerned with my plight to find the best solutions possible, both short term and long term. I would gladly recommend him to anyone who finds themselves in financial troubles and few options to address them.
What separates Jared from others in this industry is that his approach of settling all debt together in a short time frame differs from the mainstream debt settlement. He does vetting of his potential clients to make sure they can follow through with their commitments, so that likely adds to his high success rates. His results fly in the face of the industry’s dismal success rates.
Credit counseling get grants from creditors, so the credit counselor almost pushes you to jpoin the debt management program, even if is not the best choice for you
I think completion rates are meaningless considering the people needing these services probably don’t have the best follow-through rate with anything finance-related. It’s not the agency’s responsibility for a customer to get out of debt or complete a program – which is probably why they aren’t very forthcoming. It would be easy to misconstrue those numbers.
That’s one of the dumber statements I ever seen. I’m generally very politically correct but this comment takes the cake.
So is your position that companies should knowingly sell debt relief services for thousands of dollars they know will not achieve the claims they portray? Or that consumers don’t need to know what the chances of actually eliminating their debt might be using a solution that’s sold to them?
What’s next, rip all the fuel milage predictions from cars for sale or stop making hospitals report on the success or failure of treatments?
If you feel that success rates are meaningless than how about a bold disclaimer that says “The chances of you eliminating your debt using this method are unknown, unproven, unmeasured and untested. You should expect failure and you deserve it. Idiot.”
How is it easy to misconstrue a measurement of how many people eliminated the debt they hired a company to eliminate?
I work in customer service for a Debt Settlement firm. 61.34% of our clients settle some debt. 37.54% settle all their debt and graduate. The program works and is a winner.
Too bad your company did not provide open and transparent data to the FTC when they were asking for it.
And do you see any issue with the fact that over 60% of your clients do not settle all their debt and 39% don’t settle any?
Well that certainly sheds some light on a major problem in this industry. Sales people seem to think that 40% of their clients not getting a single settlement is a “winner.”
The first step of the treatment is to admit you have a problem. Repeat after me slowly… When more than half the people I take money from don’t get the result that I have promised them, my program does not work like the sales training video told me it did.
Remember to say it with a smile.
Off this topic, but something I have wondered about for a while, Damon. If you are not the same Damon Day who has a website damonday.com, then I apologize for the mistaken identity.
However, if you are the same Damon Day who has the website damonday.com, then my question is: why the discrepancy in the picture you use on your website vs the picture you use when you post comments on Steve’s website? I see a picture of an older man posted in these comments, and on your website, there is a picture of a man in his twenties.
Just wondering . . . I can’t be the only person who has noticed the different pictures.
Sorry for the confusion. Yes, I am the guy on DamonDay.com. The pictures on my website are the real me. This picture is the actor from the Dos Equis commercials. I changed it one day as a joke and it grew on me so I left it. 🙂 See link to the video.
One of the lines in the video. “His personality is so magnetic, he is unable to carry credit cards.” 🙂
http://www.youtube.com/watch?v=Ga0L1s7xUdM
Damon, LOL, thanks for the clarification. I really don’t care what age you are, but seeing the different pictures was a bit confusing.
Before the ban on upfront fees, most (not all) Debt Management companies AND Debt Settlement companies who offered a Debt Management plan kept the first months payment as commissions which led to lower qualifying guidelines for higher volume…. indisputable fact.
Most programs run 36-48 months so we haven’t seen a full cycle since the upfront ban took effect. There were only a handful of companies that did not charge upfront fees prior to the ban so as an industry, it may be too soon to ask for the data again but I’m of the opinion that not charging upfront fees combined with stricter qualifying guidelines would yield completely different results in a post TSR world.
Many DMP companies did keep the first month calculated payment several years ago (where they could). That practice stopped by those most known for it years before any advance fee ban for debt settlement. There have been a few idiots try to revive the practice, but nothing out of hand like in the past.
While data regarding success and failure rates for settlement when no upfront fees are charged will not be comprehensive until passage of the 3 or 4 years you suggest, I don’t mind making some predictions:
The data will be the same or worse. Why? Fees. Whether charging 15 to 25 percent of debt load upfront, or as much as 45% of savings after each settlement is completed, its the same problem. Worse really. Settlement percentages suffer (and therefore consumers suffer less savings) due to the motivation to collect the first fee, then the next fee, then the next. When fees are paid at the level most companies charge, the debt help seeking consumer is at the same place 24 months in, as they were (for the most part) when fees were charged up front.
Without the stricter qualifying guidelines suggested by Mr. Angelo, the data will be worse. Anyone want to point to companies who have publicized their strict enrollment qualifying guidelines they enacted at the same time that same company stopped taking upfront fees? Anyone? Bueller?
DMP:
There was a recent comment on this site by a consumer who said:
“I went into the
DMP. It took off the pressure, reduced my monthly payments and reset my
interest rates. Thankfully my salary rose again with additional
promotions. Is it hard to make the payments…YES. Will I be
one of the 7 or 8% that actually succeed in a DMP YES..”
I am not sure where he got his estimate of 7 or 8 percent completing a DMP, but how terrible is that if he is right? Anyone want to say he is wrong about DMP failures? If it were not for this guys salary increase, he may have been part of his 92% failure estimate.
I enrolled in MMI DMP in 2010. I am two and 1/2 years into the 5 year plan. My payments are more than my mortgage, which I am under water on. I strategically went into debt while unemployed/under employed. I did not want to walk out of my home and short sale etc. like many people are doing. It is in a great neighborhood, schools etc. I look at my DMP payment as a college tuition note if you will, my average interest is 8%. That thought plan keeps me sane. When I was out of work I decided to take a very secure job “low down on the ladder” and it took 4 years to work my way back up, I am actually well past my salary when I lost my job. And now it is taking me 5 years to get out of debt. I live on cash, don’t eat out, keep my old car running etc. But I knew going in what I was going to do. Before I took that 1st credit card cash withdrawal to pay my mortgage I knew how much salary I needed to reach to make it. As soon as the scales started tipping and I was missing payments and interests rates started climbing….I went into the DMP. It took off the pressure, reduced my monthly payments and reset my interest rates. Thankfully my salary rose again with additional promotions. Is it hard to make the payments…YES. Will I be one of the 7 or 8% that actually succeed in a DMP YES.. Could I have thrown in the towel and moved in with my mother YES but I decided to bet on myself and keep my son in a school that was working wonders for him. The DMP does seem like it is working for me. Yes I could have done some of this work myself, negotiating with the creditors, etc etc but I don’t mind paying $25 a month for that service. I think it is a crime how people feel entitled to chapter 13 or 7 if it was not health related or some kind of major catastrophe. I could have switched gears quicker when I first lost my job and tightened the belt faster but I think many people have that problem so I don’t beat myself up too much for it. We don’t have cable, cell phones, buy used clothes, yard sale. But in the end I will be able to say I paid off my debt. And at 8% interest I’m not going to cry that much.
Steve,
This was excellent information. When I finished college (1986) I enrolled int he CCCS to aid in my budgeting as I looked for full time employment. I worked in temp positions, first. My $50.00 payments were based on my weekly pay periods. Total monthly payments were $200.00. I also worked with Sallie Mae to Consolidate all of my student loans, I chose to end my relationship with CCCS when I found that the majority of the payments were going to CCCS not my creditors. I began to pay them $200.00 directly and paid off my credit cards in faster time.
Recently, Pioneer Credit held one my student loans which had not bee consolidated. I worked hard to keep my part of the agreement which was $68.00 per month for a $6,000.00 defaulted loan (which floated in never, never land for a period of 17 years). Previously, I contested the loan because I had not enrolled in any programs and was on bed rest due to complications with my second pregnancy. The promisary note signature was not my signature. But I did not have the money to contest the legality of the loan. So I entered into an agreement to pay it off. The loan was placed with a special unit with Pioneer Credit, which meant I could only reach them during certain business hours. I would make my monthly payment, call the next month to make a payment and find the the previous payment was not received. I paid with a pre-paid credit card from Wal-Mart. I would check the card and sure enough the money was still sitting there. Pioneer would asked repeatedly, “to avoid this from happening again, set up an automatic draft from your checking account and we will withdraw the money from your account. This way you do not have to worry”. Of course I declined that offer, because in the past I authorized access to my checking account and had to closed the account to prevent further abuse by the creditor, who when my check was deposited would withdraw the entire check, leaving me with nothing to pay my rent, utilities or to get gas. It took my bank manager to share with me what they were doing. When I contacted the creditor about this behavior, the only words they could you were “you owe the debt anyway and since you are lying about what you can pay we can take what we see is available!” When I closed the account I never heard from that creditor again. Okay back to Pioneer Credit.their customer services was so bad that I had no choice but to secure a loan to pay this debt off, even though I really could not afford another loan. With all of the fees charged and after 2 years of paying $68.00 per month. The pay off for the loan was the same amount of the loan. The monthly payments I made barely covered their fees. I was furious when I found this out and demanded to speak with the Head of the Business. I ended up speaking to a Manager who some how calculated a pay off of $3,800.00 which I paid and used the rest of the loan to pay on other bills.
I have paid out $500 to a debt consolidation program which claimed to assist with Student Loan negoitations. I got absolutely nothing from that program. Recently, I applied for assistance with a debt consolidation loan, but received a call from Fast Track Debt Relief. The attorney? on the call stated “that with my debt he could get me a settlement of $266.00 for everything minus my student loans. If I agreed to the terms, I could meet with a paralegal with their company and sign the paper work in a Panera Bread, McDonalds, etc…” I told him that I needed to get all of my numbers together and do some research on the company. When I got home I search the website and found your site which has been more then helpful to me.
Based upon your response to my question, I am interested in pay off options or bankruptcy.
The reality is when it comes to private student loans there are no real long-term solutions. People find they need to clear out their other debt, typically with bankruptcy, to make room for the student loan payments.
If they are government backed or subsidized student loans then some really good options do exist for those.
Did Pioneer Credit Counseling say they had a specific program to assist with the student loans? It sounds like they were just making the payment.
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Very impressive article sir, and thanks for sharing your thoughts with us, its very informative to read from you and hoping to read some more valuable articles and posts from you in future.
This cruiser is what hsppens when you mix a classicall-styled bicycle whith a vibrant color palletHermosa Beach.
bike
I know of to do this is with first, a pro-rate plan and then a debt snowball. You need to take care of Food, Utilities, A place to live and transportation before worrying about anything else.
Credit Counseling
I know of to do this is with first, a pro-rate plan and then a debt snowball. You need to take care of Food, Utilities, A place to live and transportation before worrying about anything else.
Debt Solutions
I signed a contract with Money Management International (a nonprofit credit counseling service) two weeks ago. My experiences with them have been nothing but frustrating and troubling, so far. They were not specific and clear about their process of collecting and disbursing funds. I was very anxious about making sure they paid my creditors on time. The one thing I always did right was never miss a payment, and it’s something I wanted to make sure THEY got right, too. After all, what am I paying fees for if they’re just going to royally screw things up more? Today, January 20th, was the due date for one of my credit cards. Money Management said they sent the payment. Discover card says they haven’t received it. Money Management ALSO says that Discover Card made a counter-offer on the proposal, but Discover says they declined the proposal…. I have one other card who’s payment is due on the 1st of every month. I was told that my payment to the counseling service on the 13th of every month was sufficient to get the payment to the other card on time. NOW, I’m being told they haven’t even sent my other card the proposal because they have to wait for “the right time” or else Citi Card won’t work with them. It took 20 minutes for them to be able to competently explain with that magic “right time” was all about. According to Money Management, they won’t send the proposal until the 24th of this month, and then they have to wait for a response before they can send a payment. So my payment to Citi Card is also going to be late.
Right now I’m very frustrated and angry because today I was told information that I wasn’t told about the numerous times I talked to Money Management. They told me that they always disburse payments on the 20th. I would have thought twice about signing the contract or worked out a different pay date if I had known that THEIR payment disbursement date was the same as my creditors due date. And I feel like I’m paying fees for nothing but extra stress and frustration. My contract with them was already more expensive than the minimum payments I was making. And while I’d really like to be debt-free in 5 years, I don’t know if I can handle the impossible task of keeping them in check to make sure they’re doing their job.
My only recommendation to anyone is SPEND your money wisely and don’t get into debt. These people are a waste of time and money, so far as I can tell at this point.
I signed a contract with Money Management International (a nonprofit credit counseling service) two weeks ago. My experiences with them have been nothing but frustrating and troubling, so far. They were not specific and clear about their process of collecting and disbursing funds. I was very anxious about making sure they paid my creditors on time. The one thing I always did right was never miss a payment, and it’s something I wanted to make sure THEY got right, too. After all, what am I paying fees for if they’re just going to royally screw things up more? Today, January 20th, was the due date for one of my credit cards. Money Management said they sent the payment. Discover card says they haven’t received it. Money Management ALSO says that Discover Card made a counter-offer on the proposal, but Discover says they declined the proposal…. I have one other card who’s payment is due on the 1st of every month. I was told that my payment to the counseling service on the 13th of every month was sufficient to get the payment to the other card on time. NOW, I’m being told they haven’t even sent my other card the proposal because they have to wait for “the right time” or else Citi Card won’t work with them. It took 20 minutes for them to be able to competently explain with that magic “right time” was all about. According to Money Management, they won’t send the proposal until the 24th of this month, and then they have to wait for a response before they can send a payment. So my payment to Citi Card is also going to be late.
Right now I’m very frustrated and angry because today I was told information that I wasn’t told about the numerous times I talked to Money Management. They told me that they always disburse payments on the 20th. I would have thought twice about signing the contract or worked out a different pay date if I had known that THEIR payment disbursement date was the same as my creditors due date. And I feel like I’m paying fees for nothing but extra stress and frustration. My contract with them was already more expensive than the minimum payments I was making. And while I’d really like to be debt-free in 5 years, I don’t know if I can handle the impossible task of keeping them in check to make sure they’re doing their job.
My only recommendation to anyone is SPEND your money wisely and don’t get into debt. These people are a waste of time and money, so far as I can tell at this point.
Try 877 208 6770 this company is very transparent and legal in all dealings…They have agreat rapport with laeding credit card lenders..try you will be DEbt Free in no time
I’ve always told people it had to be true. Thanks for shedding light on this.
This might help.
Are You Really Ready to Get Out of Debt? Can You Handle the Truth?
Steve
Steve, Thank you so much for your honesty. I have scanned the internet for some valid advice concerning credit counseling services vs. Bankruptcy. Unfortunately, I was a victim of a CCS (scam). I am being sued by a credit card company while still paying the agency to prevent this. At this point, I am going for the bankruptcy option. One of the reasons I do not want to claim bankruptcy is the fact that others will learn of this but what the hey ho…I have made every effort I can to prevent this….Thanks again….
Steve, Thank you so much for your honesty. I have scanned the internet for some valid advice concerning credit counseling services vs. Bankruptcy. Unfortunately, I was a victim of a CCS (scam). I am being sued by a credit card company while still paying the agency to prevent this. At this point, I am going for the bankruptcy option. One of the reasons I do not want to claim bankruptcy is the fact that others will learn of this but what the hey ho…I have made every effort I can to prevent this….Thanks again….
This might help.
Are You Really Ready to Get Out of Debt? Can You Handle the Truth?
Steve
See this we agree on. But, I see in some instances you are saying “Debt Settlement; clients need lump some asap”…. Of course this helps success rate to probably 99%, but truth is most people don’t have it and a skilled company can put a appropriate plan to get them out within a reasonable time 24-35 months.
I think you use the deceptive marketing angle and twist it with the actual process of debt settlement. What I mean is, Yes you are right. Consumers are being mislead by a lot of companies on the process. ALSO, you need to realize how many of these consumers are being explained properly, have clear agreements, and then “wait, their not paid monthly?
—> We can’t dissolve contract law here. Theres 2 sides to the coin. The 1 side where the consumer was really decepted into thinking that DS was something else. The other side wheere the consumer was explained everything but still didn’t get it.
The performance-no up front will clean it up. Companies need to make sure consumers are explained because settling 1 of 5-10 debts is not profitable. they need to make sure it is explained so they can settle 80%+ of their debts.
However, this attorney model I believe needs to go away UNLESS, in my opinion, they are being offered full legal representation. at this point, i wouldn’t want to see regulations taking away the ability for a client to receive legal representation.
If you have an alternative point of view or facts related to any story you’d like to share, please feel free to add them in the comments to help foster a discussion on the topic.
BTW, for the record I am not against debt settlement and as I’ve said before I’ve used debt settlement successfully for consumers in the past when they’ve had the cash on hand to immediately settle.
I am also not for selling consumers a solution that is not appropriate for them based on their situation. But I wouldn’t be for bankruptcy either in a situation when a consumer has just one missed payment and has the ability to continue paying with monthly income, nor would I be for credit counseling when a consumer can’t afford the minimum monthly payment and there is no expectation they would be able to make the payment over the life of the four year plan.
We’ve just lived through a long period of debt settlement misselling and that’s the part that needs to be cleaned up.
Very informative Brian and objective coming from a bankruptcy attorney ;). In either case, your article is about to be somewhat outdated as many Debt Settlement Companies are not charging up-front fees… of course, your fellow colleagues at LHDR will probably still charge up-front fees…. (Or should we use your bias and group the ATTORNEY’s as Debt Settlement Companies? 😉
Very convenient to group Debt Settlement people & Attorneys in the same group. Of course it helps your cause, but you know what? There isn’t any of the consequences of bankruptcy on your site? Must of forgot that. Now you can reply to this post and minimality the consequences. (let me make people reading this aware.. I fully understand the need for bankruptcy and its purpose in cleaning out the system of bad debt and assisting people who got over the head or extreme hardship. But I need to point these people out who don’t show both sides of the coin)
Also, if your web guy has any skills this site puts “NOFOLLOW Tags” so putting your article here will only steal the traffic from Mr Rhodes.. you won’t get link credit 😉
The reality is you are completely subjective…. And that isn’t a bad thing, except you present yourself as a “journalist.”
If anyone is familiar with SEO, you will notice who biased Mr. Rhode’s is against debt settlement. Example, the title of his article’s for debt settlement companies are “DEBT SETTLEMENT COMPANY NAME, SCAM-COMPLAINT-PRAISE”
If you know anything about google, this will first show up on google as “DEBT SETTLEMENT COMPANY NAME SCAM”
Steve, I’m pretty close to using the few free time I have to use my skills on the web to debunk all the spin you have and make sure people finding your site also find the other side of the story you don’t present.
Your article “The Truth About…” is both informative and insightful, and I particularly enjoyed your comparison of debt settlement with bankruptcy.
I have linked your article in my post, “Debt Settlement is a Rip-Off,” available here: http://www.lee-legal.com/personal-finance/debt-settlement-ripoff
Very informative Brian and objective coming from a bankruptcy attorney ;). In either case, your article is about to be somewhat outdated as many Debt Settlement Companies are not charging up-front fees… of course, your fellow colleagues at LHDR will probably still charge up-front fees…. (Or should we use your bias and group the ATTORNEY’s as Debt Settlement Companies? 😉
Very convenient to group Debt Settlement people & Attorneys in the same group. Of course it helps your cause, but you know what? There isn’t any of the consequences of bankruptcy on your site? Must of forgot that. Now you can reply to this post and minimality the consequences. (let me make people reading this aware.. I fully understand the need for bankruptcy and its purpose in cleaning out the system of bad debt and assisting people who got over the head or extreme hardship. But I need to point these people out who don’t show both sides of the coin)
Also, if your web guy has any skills this site puts “NOFOLLOW Tags” so putting your article here will only steal the traffic from Mr Rhodes.. you won’t get link credit 😉
My father is 70 years old. Very healthy, zero prescriptions. However, now he is facing 45k in credit cards with 3 banks and they increased from 10% to 20% his rates last year. He didn’t pay attention of the notices in advance for these increases, but now he is feeling the pain for those 19.999% rates. What could be the best option for him?
Fabio have your father call the creditors directly and have them close the cards and lower the rates. If they wont do that, have him not pay them for 4 months in a row, then call back, they will work with him. If they refuse to work with him have him BK.
Steve,
I want to commend you being so bold and open with your post! I feel the exact same way, hopefully one by one a change can be made. I particularly like the fact that you pointed out that so many people are being guided towards a solution which they have no idea the success rate.
We must have been on the same page since we were already gathering the numbers to post when we saw your shout for transparency. I believe that people should be given realistic expectations on ALL fronts. Regardless of the option chosen by the consumer there are circumstances that families face that may alter their course and as long as that is broken down I think consumers may still have a chance of making better choices.
Thanks Alex
Wildmind: I congratulate you on your determination to avoid bankruptcy. Although I am in fact a bankruptcy attorney, I usually cheer when clients decide they’d rather fight it out.
That said, I agree with what Steve Rhode said above completely. You can retain a bankruptcy attorney for alot less than you can do a DMP.
Furthermore, the bankruptcy would zero out your unsecured debt immediately, and allow you to begin rebuilding your credit about 4 months after filing (about the average time for a Ch. 7 bankruptcy.)
I’m not a fan of DMPs because they have a terrible failure rate, and in my opinion they kill your credit every bit as dead as a Ch.7. The one bright spot with a DMP is that their lasting effect on your credit report may be slightly shorter than that of a Ch. 7 bankruptcy. (But not nearly as much as you might think.)
All that being said, I highly recommend Dave Ramsey and his Financial Peace University. (http://www.daveramsey.com) I would advise you to look into Dave’s offerings. He hates bankruptcy and is highly successful at helping people recover from financial disasters.
God bless you. If you need assistance, you’re welcome to write back to me. I’m only licensed to practice law in Oklahoma (and I’m guessing you’re not in Oklahoma). But I’m happy to give you the benefit of my experience, if not legal advice.
Ben Callicoat
.-= fbc´s last blog ..How To Go Broke and End Up in Bankruptcy Court (or "If Tomorrow Never Comes") =-.
I thought this article was excellent. Two years ago, I went through a divorce where I ended up having to take over ALL (not half) the marital debt, because everything was in my name and the ex had no credit and could not get any to pay half the debt. He was notorious for not paying bills while we were married, and I was not going to risk my financial future on a settlement that made him responsible, allowed him to default (with no means for me to go after him) and subsequently still made me responsible to the creditors for the debts because I was the primary card holder. It sucked, but I had to think longer term than just the immediate fairness of the situation.
As a single mother of four children, now responsible for two people’s debts on my one income which isn’t a lucrative one by any means, I considered a Credit Counseling Service and bankruptcy. I was concerned about the costs of retaining a bankruptcy attorney when I was still making payments to my divorce attorney. I am committed to paying my debts, and feeding my children. I decided to go on a debt management plan through a local non-profit CCCS and this allowed me to reduce the interest payments and the monthly payments to an amount that I could afford. Two years later, I have cut everything to the bone, worked on increasing my income as best I can, paid off and whittled down some debts that weren’t included in the DMP and life is looking a lot better. Everything I spend now is on a cash only basis. I have about three more years to go. In about six months, my car will be paid off and that will provide some added relief.
I always understood that a DMP was the better way to go over Bankruptcy because of the longer term effects to credit scores and ability to get credit (I do hope to sell my home and purchase a different one eventually) down the road. Am I misinformed?
.-= thewildmind´s last blog ..Writer’s Block =-.
The reality is that the current path you are on does have a negative impact on your credit. The closure of your cards and no new credit history does lower what your score could have been.
As far as the cost, a case can easily be made that bankruptcy is overall less expensive than credit counseling, where you pay back all of your debt over a long period of time. With bankruptcy, while there is an upfront cost for the attorney, the interest rate on all cards goes to 0% and while your credit would have taken a hit it could have been easily rebuilt in the same time it will take to complete a credit counseling program. Hopefully you’ve been able to build up a good emergency fund during the time you’ve been making your DMP payments.
Steve
The reality is you are completely subjective…. And that isn’t a bad thing, except you present yourself as a “journalist.”
If anyone is familiar with SEO, you will notice who biased Mr. Rhode’s is against debt settlement. Example, the title of his article’s for debt settlement companies are “DEBT SETTLEMENT COMPANY NAME, SCAM-COMPLAINT-PRAISE”
If you know anything about google, this will first show up on google as “DEBT SETTLEMENT COMPANY NAME SCAM”
Steve, I’m pretty close to using the few free time I have to use my skills on the web to debunk all the spin you have and make sure people finding your site also find the other side of the story you don’t present.
If you have an alternative point of view or facts related to any story you’d like to share, please feel free to add them in the comments to help foster a discussion on the topic.
BTW, for the record I am not against debt settlement and as I’ve said before I’ve used debt settlement successfully for consumers in the past when they’ve had the cash on hand to immediately settle.
I am also not for selling consumers a solution that is not appropriate for them based on their situation. But I wouldn’t be for bankruptcy either in a situation when a consumer has just one missed payment and has the ability to continue paying with monthly income, nor would I be for credit counseling when a consumer can’t afford the minimum monthly payment and there is no expectation they would be able to make the payment over the life of the four year plan.
We’ve just lived through a long period of debt settlement misselling and that’s the part that needs to be cleaned up.
See this we agree on. But, I see in some instances you are saying “Debt Settlement; clients need lump some asap”…. Of course this helps success rate to probably 99%, but truth is most people don’t have it and a skilled company can put a appropriate plan to get them out within a reasonable time 24-35 months.
I think you use the deceptive marketing angle and twist it with the actual process of debt settlement. What I mean is, Yes you are right. Consumers are being mislead by a lot of companies on the process. ALSO, you need to realize how many of these consumers are being explained properly, have clear agreements, and then “wait, their not paid monthly?
—> We can’t dissolve contract law here. Theres 2 sides to the coin. The 1 side where the consumer was really decepted into thinking that DS was something else. The other side wheere the consumer was explained everything but still didn’t get it.
The performance-no up front will clean it up. Companies need to make sure consumers are explained because settling 1 of 5-10 debts is not profitable. they need to make sure it is explained so they can settle 80%+ of their debts.
However, this attorney model I believe needs to go away UNLESS, in my opinion, they are being offered full legal representation. at this point, i wouldn’t want to see regulations taking away the ability for a client to receive legal representation.
Steve,
This is a great article for starting a discussion of something that has plagued the debt relief industry for years. But, I do want to comment on a definition of “success”. You defined Debt Settlement’s success as “the elimination of all debts through debt settlement, without getting sued”; this definition seems valid. Bankruptcy has a similar clear cut definition: fully discharging debts through bankruptcy. I have argued in front of the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafting committee on the Uniform Debt-Management Services Act (UDMSA) that the definition of success for Credit Counseling and Debt Management Plans is not simply paying off all the client’s debts in a Debt Management Plan, because the plan itself is not the program, the program includes credit counseling.
The committee, because of pressure from consumer groups, toyed with the idea of adding a success rate to the disclosures, but because of comments on the success rate, my argument included, they decided that the rates would be difficult to calculate, and may not be easily comparable.
A debt management plans is just a part of credit counseling, it is a tool or a crutch for those clients that are facing financial hardship, and just one of the options that credit counselors offer every day. The object of credit counseling is educate and counsel the client on how to handle their finances, how to create a budget and live within it, and how to meet their financial obligations. A credit counselor’s job first and foremost is to offer education and options. A failure of credit counseling would be for the client not to be able to handle the debt without the need of a hardship program.
Many credit counselors view the debt management program as a crutch and the credit counseling as the rehab. The crutch (a debt management program) is needed to get the client up and mobile, the rehab (the counseling) allows the client to walk on their own. I tell my clients that if they are still paying off their debt through the debt management program in the 4-5 years most debt management programs run, then I have not done my job of educating them to handle their financial obligations on their own.
Is it not a success for a client to leave a debt management program because they have reigned in their debt and have learned through counseling to handle their debt on their own?
Is it not a success for a client to leave a debt management program to refinance their debt at a credit union because they have learned through counseling to pay their debts on time and have improved their credit score so they can be approved for a low cost personal loan?
Is it not a success for a client to leave a debt management program because they have learned through counseling how to better budget their finances and have realigned their spending priorities?
I am just suggesting that “success” in Credit Counseling and Debt Management Plans may not be as clear cut as the failure rate of the Debt Management Plan, because it discounts the primary focus of the Credit Counseling efforts.
Russell,
I hear you man. I have made similar arguments in the past to MBNA and Chase when I ran a credit counseling group. They wanted to hold collection ratios in my face and rates of return and I made the point that our services had a deeper impact. My analogy was that if a church is full of people on a Sunday and the preacher gives a great sermon, how do we measure how close to God those attendees were as a result of the lessons taught and learned? There are some things that are just immeasurable.
So what can we measure to compare results? People need a scorecard to use to compare. If we can measure the effectiveness of medical interventions, certainly we can measure the effectiveness of debt interventions. Medical interventions might result in better eating habits, more awareness of nutrition and more minutes spent in exercise. But the end measurement is going to be how many people lived and died as a result of receiving X treatment modality. More people lived, that’s a success.
The typical response to an article like this by each camp is going to be defense. The walls will be raised and the troops rallied to defend the position. It will be the rare member that will actually fall into introspection and take a good look at the realty of the landscape. You sound like you might one of those people.
Today I adopt the position that the majority of people that move towards credit counseling are not there to proactively learn money management or budgeting skills. Instead they are reacting to an immediate issue, the debt problem, or are stimulated by delinquency, looming financial disaster and collection calls.
Can credit counseling by a good a ground for learning new money skills, absolutely. But I think modern credit counseling does not operate in the best interest of the consumer that is struggling to make ends meet, has fallen behind or is facing stressful and uncertain financial times. This is simply because while budgeting skills and money management lessons are important, the immediate goal is how can be be rescued from the financial tsunami they are facing right now. And as long as debt management plans are dictated by creditors with little real reduction in monthly payments or DMPs are not contractually binding on all creditors there will be serious issues that need to be talked about and fixed. I also think credit counseling needs to be released from their golden bonds with the creditors and allowed to exist in an environment where they can be the champions of consumers, speak out loudly about bad creditor behavior and not be silently afraid of offending the very entities that provide them funding. But that’s an issue for another discussion.
There will be some success stories, but there are also some very serious deficiencies that need to be addressed and made better.
Steve
THANKS JENNIFER … I did call my creditor and explained my situation. They gave me an offer to stop the lawsuit. It does pay to stay calm and focus and talk directly to your creditors.
Two options:
1. Send written offers to the lenders starting at XX% of each debt. Do not mention any lump-sum payment at the moment. Offers should contain: suspended or lower interest rates; elimination of any recent late or other charges.
2. Contact three debt settlement firms, explain the situation and request a quote for their services. Note that most debt settlement folks are now on the Persolvo system and that can present a problem for you.
Without a clearer and more detailed picture of your situation targeted advice is difficult. I would be happy to help.
Could you please tell me what you would suggest other then bankruptcy. I’m in debt $45,000 in credit cards.
I’ve used all my savings, my tax returns, to try and pay these accounts. Unfortuanately the rates were increased, gas prices increased and now they lowered my credit card amounts to my balances owed. I checked my credit report and I pay my accounts on time, but I know I’m gong to have problems with no extra income.
I have an appointment Sept.30th for Bankrupcy.
I’ve tried calling theses creditors and they offer no help.
Instead of recommending that people file bankruptcy, why not recommend that they start a web site giving free advice and fill it full of cloaked affiliate links? 😉
Bankruptcy is a way to blow up the moldy house, sure, but ultimately the finest debt solution is to earn more money and waste less, isn’t it?
Big Hug.
Lex,
you are correct that all financial problems are cured by an increase in income, a reduction in expenses, or a combination of both. However many people in troublesome money trouble have already reduced expenses to the bone and are not in a position to increase income. This leaves the only legal debt reduction tool as bankruptcy.
As far as cloaking goes, they really are not. The links ate setup that if the underlying link changes that it can be changed in one place instead of all over the site. It was my lazy way to deal with it. If you have not had a chance to read the site terms where I openly talk about the links, you might want to if that interests you.
Thanks for the hug back. It’s appreciated.
Steve
Real life: in the past three weeks I’ve seen three new clients who were in a Debt Management Plan, but got sued before much if anything was negotiated or paid.
The first client was a pharmacist who paid $1600 a month for 10 months. Yes, $16000. And he, of course, got sued.
Same general story with the next two clients.
.-= fbc´s last blog ..Real Life, Real Bankruptcy: Can I Keep My Car? =-.
ben i think you are talking about those folks being on a debt settlement plan not a debt management plan(dmp). on a dmp plan payments are made every single month to all creditors on the plan. the amount being paid on each account is an amount that the creditor will accept and apply to the balance normally at a lower interest rate. consumers on a dmp plan do not get sued by their creditors. christopher
Thank you for the great info! We’ve been struggling and consulted the NFCC agency professionals as well as an attorney.
First, we take full responsiblity for the CC debts we’ve amassed and owe, appx $45k. Living beyond our means, disposing of disposable income willy nilly, etc. My husband was a mortgage industry lay off and unable to find work during 2008; he did, however finish his Economics degree and find employment; which is a 20% lower wage. We went to a credit counseling company, in person, and they weren’t able to reduce our monthly payments to an affordable amount. It seems as tho they were more focused on the time period to pay the creditors than what the debtors could reasonably afford. I’m sure we wouldn’t be counted as a failure on their books, or counted at all as we signed nothing, nor did they follow-up with us as our counselor said she would. We have begun the bankruptcy process. We won’t argue with your “it’s a cop-out” or “easy way out (not been easy thus far)” finger-pointing, but for us, it’s not worth arguing about anymore; it was not a decision made lightly nor desired. We tried working with the creditors directly and a couple (Citi and Chase) worked out internal hardship payments for 12 months, but the others would not (Bank of America, AmEx, other Chase). We have reduced our “living” expenses to the bare minimum of two working parents – 2 cars in Orlando, insurance, mortgage, internet, phone (we chose cell over home, it was cheaper!, no texting, no messaging, no media, just calling), we’ve sold what we don’t need to live, etc. My last gripe, CC companies have to take a little responsiblity again. Lowering limits, raising interest, and don’t get me started on fees in anticipation of “having to serve their customers” laws going into effect is exaserbating the situation.
Personally, we’ve learned our lesson and have two years to get back on our feet to ensure this never happens to us again. We aren’t moving, and we aren’t buying anything with anything other than cash; which is what we should have been better at doing for the last 10 years. More over, I applaud those of you who have never, and god willing, will never, go thru this.
It has been 3 years now since you had to go through this and facing it myself, I would like to know how you are doing now.
Many valid points in this thread, with the exception of “all CCCS and Settlement solutions are a scam”. Let me put another spin on these statistics that I believe many Debt Relief company owners would agree with.
Consumers in deep debt are in debt for a reason. Outside of severe personal injury they have neglected their financial responsibilities. It’s only natural that a large % of them will also fail out of any debt relief program for the same reasons, regardless of the quality or type of service being provided.
Consumers in debt often love to blame the service and not look at their own failings. When they don’t abide by the terms of the progam and the debt situation is not resolved they drop the program and blame the debt relief service.
Consumers hear what they want to hear.
Ask any debt relief consultant. You can consult a person all day long telling them of the risks, explaining the specific things they MUST do to be successful. But all they hear is, you’ll be debt free, you don’t have to do a thing.
They do not read the contracts, yet sign off on the terms. 3 months later they drop and blame the company for being a scam.
With that said, the # of Debt Relief services have grown exponentially over the past 5 years. Negotiation services have increased from 20 national companies in 2004, to well over 400 today. Many of these companies are new entries who came from the mortgage marketplace. With increased competition, sales pressure and the potential of lucrative returns some sales floors start to tell consumers what they want to hear.
Greedy marketers are distorting the truth.
Online; Claims of 80% reductions are common, claims to stop all collections calls, lower interest rates to 0 and more. Consumers can get and do get confused. Unfortunately, the marketing produces a lot of revenue and the practice continues. Worse still is that their onine competition loses revenue for telling the truth.. I mean who is going to respond to an ad with a 40% reduction when the ad next to them states 80% with a guarantee? Google, Yahoo and MSN will not get involved with false advertising claims.
Credit counseling fees and thus profits are being tightly regulated so they must operate on a volume model, this puts pressure on them to soften the pitch and make more sales.
So there you have it, what is the largest factor in a low success percentage for debt relief services in general? Lack of clear regulation on marketing and licensing. Too strict of regulation on fees for credit counseling/management making the profit model financially impossible. A society of debtors all too willing to accept a feel good pitch from new unscrupulous companies and decline the services from companies who tell them the hard cold truth.
Jerry,
For the record, I did not say “all CCCS and Settlement solutions are a scam”. In fact I could not find that quote on the page. Just wanted to clarify.
If we are talking about debt management solutions problems. I think many of these issues could be addressed with transparency, public reporting, regulation and to make the client the one that pays for the service, instead of the creditors with fairshare. We need to end this dual agency relationship to make sure the consumer comes first.
Steve
Well, Steve, if you wanted to know our success rates, all you had to do was ask me 😉 While we are an NFCC agency, I can’t speak for the whole NFCC-only my agency.
First, it depends on how you define success. While graduating from a DMP with no debt is one measure, we also consider it a success for a client to get to a point where they can handle their debts again on their own.
As for my agency, so far in 2009, 44% of the accounts that we closed were because a client graduated debt-free (we call it successful completion). 18% closed because they took over their accounts to pay on their own (self administration). So, together that’s 62% of our clients that either became debt-free or could handle their finances on their own after being on a DMP. 28% of our clients dropped off a DMP with no explanantion or they could not afford to continue. 10% of them filed bankruptcy.
Although we have not yet rolled out the Call to Action DMP, the reaserch we have done shows that it really should help clients with lower payments and lower interest. I have a spreadsheet comparison if you’d like to see it.
Oh, and to the commenter above: I don’t work for credit card companies. Yes, we do receive some funding from them. But, we also receive funding from numerous community grants, the United Way, HUD, the federal government and many other sources, including client fees. Our heart has alywas been and will always be with our clients.
Best wishes,
Jennifer Wallis
Jennifer,
Thanks for the comment and your willingness to share. Maybe you could help me out on these other questions I had.
1. What percentage of people that contact you by phone or web have a one-on-one counseling appointment with a credit counselor?
2. What percentage of people that contact you enroll in a DMP as the preferred solution?
3. What is the breakdown by percentage of what people do if not enroll in the DMP?
4. What are the current DMP interest rates and payment calculations for Chase, Bank of America, Amex, and Citibank? If they have multiple programs, can you at least give me the most common rates that someone should expect and fairshare for each creditor?
5. What happens to someone when they can’t afford the minimum payment of the DMP? Will creditors take less and still give them the same terms over the five years of repayment?
I really appreciate the help on this.
Steve
Sorry for the delay. American General. They are taking me to court tomorrow/Monday.
I currently am in a debt settlement program and it’s been nothing but a negative experience for me. People have to realize before any money is deposited into your account, 4 to 6 of your first payments go to the attorney and your maintenance fees. I signed up in February and I already have a creditor taking me to court! NOW, the attorney that The Credit Exchange assigned me to has “been assigned a Trustee”. The customer service number that told me this couldn’t explain what that means as I have been calling them trying to get help regarding the court case…..hmmm. By the way, I stopped at that particular creditor to discuss and she said once it goes to court, there’s no backing out. She stated she told the attorney’s customer service that they DON’T settle as soon as they found out I was in this program. If the customer service would have told me that, I would have gone to the creditor prior to the court action to discuss arrangements. Oh, by the way, now I have court costs on top of my debt to them.
Anyone reading this: Does this sound like a great way to get out of debt to you? My opinion: NO
The attorney assigned to me is in another state. I specifically asked the Credit Exchange person before I signed up if they were licensed in my state and she said yes…..but the creditor said on the original document that was sent to them stating I was in their program only showed they are licensed in another state and they don’t deal with attorneys licensed in another state.
Lies, lies, lies.
Thanks for listening/reading.
Ben,
Thank you for sharing your experience. Which creditor was it that said they won’t settle as soon as they found out you were in a debt settlement program?
Steve
Very interesting post. It confirms what I’ve been seeing from my bankruptcy practice for a long, long time.
In fact, I go so far as to tell my clients: credit counseling programs (debt management programs) are a scam. They don’t work for you; they work for the credit card companies who fund them.
Interesting stuff about why Ch. 13 failure rates are as high as they are (but also good to point out that the result is simply the debtors convert to Ch. 7, get a discharge and go about their lives.)
Brave post; well done.
.-= Ben Callicoat´s last blog ..The Secret History of the Credit Card =-.
Thanks for the incredible research on the failure rates of debt counseling and consolidation. It’s not surprising to me that they are so high.
Great post, Steve.
As a personal finance journalist I always favor transparency: How the heck am I supposed to give consumers good debt advice if I don’t what program is likely to work, and for whom?
I do applaud the NFCC for helping goad the top 10 credit card issuers to OK a somewhat easier-to-complete DMP by adding a longer payout period for the most distressed consumers. The irony is, it comes at a time when fewer consumers can afford it.
.-= Dan Ray´s last blog ..Obama proposes new consumer protection agency for credit cards, other financial services =-.
Dan,
I hear your prop for NFCC but I am concerned that when NFCC issues statements like “We applaud these creditors for recognizing the need to do more for consumers who are trying to avoid bankruptcy, and need some additional help with interest rate and fee waiver concessions so they can repay their debt”, that it indicates that NFCC isn’t suggesting bankruptcy to those that should consider it as a solution of choice.
By the way, the quote is taken from the NFCC press release on asking creditors to modify repayment terms to allow for things like emergency savings accounts. So that means that until now that NFCC has not been helping consumers with emergency savings accounts as part of a get out of debt strategy since they are conforming to creditor stipulations rather than design debt repayment plans that are best for the consumer.
The extended term DMPs, even if the Office of Comptroller of the Currency had allowed them, are more prone to failure anyway. The longer the plan, the less likely it will succeed. An ideal plan should be for three years with remaining debt forgiven not longer.
As far as I am aware, the new “Call to Action” DMPs have not been implemented. I’ll email NFCC and ask.
It is also interesting to note that the minimum payments in a DMP used to be as low as 1.5% in the late 1990s and when creditors increased them since to as high as 3%, I don’t remember NFCC being vocal about that at all. Why not? Why now?
Just some observations that make me wonder what the real story is.
Steve
Excellent post Steve. You’re right, the failure rate for most debt solutions is pretty high – and they should be clearly disclosed.
I think Elizabeth Warren’s book, The Two Income Trap, sheds a lot of light on the problem. Stagnant wages combined with increasing health care, housing, education and child care costs have left many middle class families with little wiggle room. Those are the biggies. Add to that the smaller expenses that were once luxuries, but now considered “necessities” – cable TV, high speed internet, a cell phone, meals out – and it’s pretty clear how so many of us accumulated credit card debt.
When I talk with consumers who are considering their options, I always insist they talk to a counseling agency (they have to get mandatory pre-bankruptcy counseling anyway), talk with a bankruptcy attorney, and then talk to a debt settlement company – then make an informed decision with all the facts. Sometimes they choose to go ahead and file, and sometimes they decide to try to settle. And sometimes they realize a DMP will work for them. But it’s important to know all your options.
Finally, there are so many other factors at work here – emotional, psychological, financial — that if one of those issues goes unaddressed, it’s hard to achieve long lasting success.
Bankruptcy offers relief for the time being, but it may not result in any long-lasting improvement in one’s financial health. That doesn’t mean I discourage it, but if you decide to go that route keep in mind you’ve just started your work. It’s like having a triple bypass and not learning how to change your diet or start exercising.
Come to think of it, debt and diets are a lot alike. And we Americans are pretty bad when it comes to both.
.-= Gerri´s last blog ..Credit.com’s Freebie Summer Giveaway =-.
I can only speak for myself and my bankruptcy practices. I’ve been any attorney since December 1993. Prior to opening my own practice 5 years ago, my of practice was representing creditors to collect debts. Now I focus on representing debtors.
The vast majority of my cases are Chapter 7 matters. In that time period, one of my clients was partially denied a discharge for a $4400 cash advance taken at a Las Vegas casino. They couldn’t afford my fees for the additional work to defend against the adversary proceeding. They still received a full discharge of their debts as have every other Chapter 7 client that has retained me. Rarely do I charge for than $2000 in legal fees for a Chapter 7 case.
I have never seen a DMP succeed and I’ve only seen 2 people in the last 5 years that were better in negotiations than bankruptcy. And if someone “qualifies” for a DMP, they are almost always better off in a Chapter 13 bankruptcy instead of a DMP.
Chapter 13 cases do have a high failure rate for the same reasons that DMP might fail. It can be a long commitment and circumstances can change. Expenses can increase and jobs can disappear.
I take a global approach to a client’s case. I look at their goals and where they might be in 6 months to a year. Unless there is a specific reason to place this in a Chapter 13, I try to place them in a Chapter 7. Most Chapter 7 cases last no more than 4 months and allow the debtor to get their fresh start. In 6 to 12 months, most of my clients see their credit score higher than the day that I filed their case.
Bankruptcy isn’t right for everybody, but my experience has shown me that it is almost always superior to a debt management plan.
.-= Carl H. Starrett II´s last blog ..California’s 90-Day Foreclosure Moratorium Really Isn’t =-.
Right, Steve, that’s why I suggest BK when my estimates show it taking longer than 3-5 years on their own.
I’ve been thinking that the current Chapter 13 BK law is too stringent for many people, especially if they don’t work on the emotional and beliefs side of things.
People can learn all the technical money management skills in the world, but if they don’t work on the emotions, they don’t stand much chance of success.
.-= Cindy Morus, The Money Mender´s last blog ..Unemployed? Top 5 Tax Traps! =-.
I’ve had several clients talk to National Foundation for Credit Counseling (NFCC) and Consumer Credit Counseling Services (CCCS) agencies and came back with higher payment plans than they were currently required to pay by the creditors. Maybe the interest rates were lowered, but the fact was the client could not make the minimum payments so how could they be successful at discharging their debt with higher payments.
My rule of thumb for bankruptcy is “if you can’t get out from under your debt in about 5 years, your chances aren’t very good” because the deprivation factor is too high and life may intervene in the way of a layoff or job loss, medical issue, major repair, etc.
I also hate to see people avoid bankruptcy for years and then have to do it anyway.
I would be interested in seeing more stats on the failure of Chapter 13 and why.
Thanks, Steve.
Cindy Morus
.-= Cindy Morus, The Money Mender´s last blog ..Unemployed? Top 5 Tax Traps! =-.
Cindy,
There are actually studies out that show if the payoff is more than three to five years out, people will not stay motivated. Do a search for “Hyperbolic Discounting” and see what you find.
We think alike on these issues.
I can tell you on chapter 13 failures, part of the problem is the forced deprivation through payment plans that don’t allow for saving or a bit of fun. There is little carrot, almost all stick. The plans are so tight that most are not sustainable.
Steve
that is so true. We have filed chapter 13 only because we were getting sued and wages were being taken, They are makling us pay so much money each month we have no money left for anything. they base the payment on money we don’t even see like taxes and union dues. We lost income due to an illness and have medical bills that we can’t even pay. apparently now we are paying one hundred percent of unsecured debt. I can’t see us going another 4 years.
Fist off, this is a fantastic post. I’m sure it took a great deal of time.
Outside of Bankruptcy, which I believe 80% – 90% of the people who file do not need to do so, The other so called debt solutions can be accomplished on your own.
Step one in this process is have you or are you willing to change your behavior? If not then you are only dealing with the symptom and not the underlying problem. Assuming you have addressed the problem, It’s time to attack the debt yourself.
One of the best way’s I know of to do this is with first, a pro-rate plan and then a debt snowball. You need to take care of Food, Utilities, A place to live and transportation before worrying about anything else.
What I’ve seen in a lot of situations where people in debt come to me for help is some are not always willing to make scarifies and are looking for a quick fix. Others are willing to do what it takes. Sometimes that even means selling the house. It’s an option.
In summary, stay away from companies that want to charge you money to “clean up or eliminate your debt”
Todd is right. Money problems are typically the symptom of an underlying issue and without fixing that, the money problems will be harder to resolve.
Steve
Steve,
I enjoyed reading your articcle on The Truth About The Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy. I was wondering, however, if you were able to find out how many Chapter 13 Bankruptices actually convert over to Chapter 7 Bankruptices. Is there any public or documented information of such? I am curious as to the number and the percentage of these conversions.
Tom,
I previously made an official request for that information from the courts but, well, the wheels of government move slowly. Reports back from attorneys in the field did not report big numbers for that but it does happen at times.
Steve