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(If you missed Part 1 - you can find it here)

If you believe the hype spun by many debt settlement firms, debt settlement sounds like an incredible solution for those consumers with too much consumer debt. Many advertise the ability to stop collection calls, avoid bankruptcy, and settle your debts for pennies on the dollar. Sounds good, right?

Well, although there are very few if any sources of independent data tracking the success rate of debt settlement efforts - it’s widely believed that most consumers fail in their efforts. If you believe the media and the FTC - it’s because all debt settlement companies are scam artists out to steal money.

While there are many in the debt settlement industry that do more harm than good - there are some that add quite a bit of value to the process.

I believe there are 2 main reasons most consumers fail with debt settlement, whether trying it on their own or with the help of a debt settlement company.

1. Not a candidate for debt settlement. The solution attracts just about everyone looking to eliminate debt and avoid bankruptcy. Problem is, many aren’t good candidates for this solution. Good debt settlement companies will disqualify a large percentage of the people that contact them. Some consumers are better served by consumer credit counseling or bankruptcy.
2. Wrong Expectations. Many debt settlement companies sugar-coat the process. Unfortunately, that leaves consumers unprepared for some of the potential hiccups along the road. They wind up giving-up due to pressures from debt collectors, creditors, self-doubt, etc.

The goal of this part of the 3 part series (which may wind up being expanded to 4 parts) is to address the “expectation” problem. It is important for you, and your clients, to understand some of the pitfalls and obstacles associated with debt settlement.

Credit Damage

Walking away after having successfully completed debt settlement without damaging your credit is virtually impossible. In almost all cases, in order to negotiate your debts with your creditors, you will have to stop making the required minimum monthly payment. During the process you will accrue late payments for that particular tradeline and when the account is settled for less that what is owed - it will be notated as such on your credit report.

Given that the alternative for most is bankruptcy, which will have a greater negative impact, this typically isn’t much of a concern.

Tax Consequences

If you have more than $600 in cancelled debts, you will need to report the amount to the IRS as income. Fortunately, the IRS allows you to write-off this income up to the amount you by which you were insolvent at the time. In most cases, someone who is looking to settle their debts owes more than they have and is considered insolvent.

In the off chance a consumer does wind up paying taxes on the cancelled debt, they still wind up paying less than if they had paid the debt off in full.

Collection Calls

Due to the fact that payments are no longer being made to creditors, creditor and collection calls are inevitable. Debt Settlement is not intended to be a “stop collection calls” solution and those companies that make such claims are relying on antiquated strategies that do more harm than good (e.g. cease and desist letters). There are strategies consumers can utilize to help protect their privacy and peace of mind.

Lawsuits

Any time a creditor stops receiving payments there is always the risk of them leveraging legal options to collect on a debt. Although statistically unlikely, the risk of a lawsuit increases the longer it takes to resolve the problem. Some debt settlement companies advertise options to settle your debts over a 3-5 year time frame. If you cut-off communication to your creditors and stop making payments for 3-5 years, there is a strong likelihood that you will be sued. Your goal should be to settle your debts as quickly as possible - as a rule of thumb - in less than 2 years.

Access to Credit

Once you’ve missed several payments and your account has been charged-off - you will no longer have access to any available credit associated with that credit line. You may find that accounts you have in good standing get closed by the credit grantor since they monitor your payment history with other accounts. You should enter debt settlement with an understanding that you will have little or no access to credit during the process.

So, why the heck would someone choose debt settlement?

Despite some of the drawbacks, there are plenty of benefits to debt settlement - especially compared to the alternatives. Those will be covered in Part 3….

As always, I’m happy to answer any questions about debt settlement for you or your clients as best I can…

More and more Loan Originators I speak with are asking about debt settlement. Past and prospective clients are asking for help with consumer debt. They are worried they may soon be unable to make the minimum payments (or may have already fallen behind), they can’t consolidate debt like they had in the past using home equity, and they want to avoid bankruptcy.

What do you tell your clients?

Can you point them in the right direction when they need help managing or eliminating their unsecured consumer debt?

Can you tell them the difference between bankruptcy vs. debt settlement vs. consumer credit counseling?

If you consider yourself a mortgage planner or advisor to your clients, it’s important you understand what options they have available to them in managing and eliminating their debt.

Basics of Debt Settlement

Debt settlement is a legitimate option for consumers struggling with consumer debt who are looking for an alternative to Chapter 13 Bankruptcy.

The basic premise of debt settlement involves redirecting required monthly payments intended for creditors into a separate settlement account. Existing assets/savings can also be used. Once enough money has been saved, the negotiations begin. While specific results will vary, the goal is to settle a consumer’s debts for 50% or less of what they owe.

We’ll take a very simple look at the numbers (not taking into penalties, additional interest, fees, etc).

Let’s assume you owe $35,000 in credit card debt. Your minimum monthly payment is $700.

You can’t afford it.

You’ve stopped paying your creditors and start to put $500 a month aside for purposes of settling.

You have $6,000 you can pull from a ROTH IRA without penalties.

In 16 months, you’ve saved $8,000 (not including the $6k from the ROTH IRA).

You successfully settle for 40% of the original $35,000 saving yourself $21,000.

Sounds simple, right?

Unfortunately, many consumers who hire a third party debt settlement company are either not good candidates for debt settlement — or hire the wrong company.

Like in many industries that cater to financially desperate people - there are a lot of bad apples. In September, the FTC held a workshop to discuss the grossly unregulated industry. News reports of debt settlement firms being shut down or fined are not uncommon.

Bankruptcy winds up being inevitable for some. They owe more at the end due to interest costs and penalties than they did at the beginning of the process.

Some consumers tackle debt settlement on their own - but underestimate the process, risks, or the length of time it may take. Some are wildly successful.

In the next post, I’ll begin to cover some of the pitfalls associated with debt settlement. I’ll follow that up with some of the benefits. I’ll wrap it up with what I would look for in a debt settlement company.

In the meantime, feel free to contact me with any specific questions or if you need a referral to a reputable debt settlement firm. I hesitate to say this, but I know some will ask - yes - some will even compensate you for your efforts.

Tom Ward, of Majestic Consulting, is someone I admire. I’ve always been impressed with how he’s able to view loan origination from a consumer’s perspective, break down the various reasons people choose a loan officer, and then create tools to help originators capture more business.

He recently emailed me about a new product that he’s just rolled out in the last few weeks and I thought it made sense to mention it here in case any of the Lenderama readers could benefit.

As a consumer, I tend to be drawn to those people in a particular profession that position themselves as experts. If they are publicly writing or talking about what is happening in that industry, I’m more inclined to seek out their assistance.

If you were to ask me to name some Loan Officers off the top of my head, I’d probably mention people like Robert Ashby, Dan Green, Tom Vanderwell, Mike Mueller, Rhonda Porter, Brian Brady… – all of whom I see regularly utilizing the web to publish their thoughts through the use of text, audio, and video. I haven’t personally obtained a loan from any of these Loan Officers but am confident they are knowledgeable and professional – based on what they’ve written or recorded.

Tom’s created something to help other Loan Officers achieve a similar result with their prospective client base.

Product

Tell-A-Gram Marketing System

What is it?

It’s a monthly marketing system that helps distribute timely and pertinent educational material to your clients and referral partners.

How does it work?

Every month you are provided with an intro-script and a recorded presentation.

You simply:

Record your intro -> send a link to whomever you’d like to market to -> prospect hears you introduce the topic -> prospect is taken to a presentation that covers various real estate and mortgage-related topics.

The topics covered are timely and meant to capture the attention of your prospects and referral partners.

Why I like it?

It’s VERY inexpensive. Both in the cost of the service and as a means of marketing (e.g. email/online vs. traditional offline marketing). There are no contracts or long-term commitments required either.

It also allows you to use audio and video presentations to build relationships. With more and more business being conducted electronically as opposed to belly-to-belly, this helps build a relationship by allowing others to hear and see you consistently over time.

It helps position you as an expert. You’re not sending recipe cards or lawn care tips. You are providing very timely and professionally presented material to educate the client about what you do – mortgages!

You also get the power point presentation and audio script for the educational presentation that can be used for in-person meetings, office presentations, or seminars. This alone more than pays for the service in my opinion.

What does it not do?

This product does not act as a CRM or distribute the presentations – you will need to do that on your own. It also does not appear to provide any tracking of clicks. There are other third-party email marketing providers that can help with the mass distribution and click tracking if that is what you need.

Check it Out For Yourself

There’s a lot I’m not covering in this short review so you can get more information by going directly to MyTellAGram.com.

I was recently asked by a Loan Officer, “Why do some credit reports contain information from accounts that belong to a completely different individual? And why is that information different than what the client sees when they order their own credit report?”

For some of you, this might be common knowledge, however, there seems to be some confusion out there on how credit reports are compiled.

First, it’s important to understand that there is a distinct difference in the way the information is compiled for a credit report ordered by a consumer versus the credit report a Loan Officer orders.

When a consumer orders their own report, the Bureaus make every effort to ensure that the person ordering the report is who they say they are (must have provide a lot of detailed information about themselves) — and that the report only contains information that directly applies to that person.

Could you imagine if you could find detailed account information for other people by simply ordering your own credit report? Or if you, as a consumer, could order someone else’s report with a partial SS# and or address?

Talk about an Identity Theft goldmine!

So, when a consumer orders a credit report, the name, SS#, address, and other identifying information must match exactly with any account info listed on that report.

When a Loan Officer orders a credit report, they or their company has signed an agreement with their provider to only use Credit Reports for permissible purposes, to abide by other restrictions, and to comply with the FCRA. Simply put, they are trusted by the Bureaus with this sensitive information and are given some flexibility in terms of the availability of that information.

They are also ordering the report to evaluate whether or not they would like to lend an individual money or extend a line of credit. The Bureaus, as a result, want to provide as much relevant information as possible to the potential lender to ensure nothing is left out of the decision process.

They certainly do not want to be held liable for excluding an important piece of information that may have changed a lender’s decision (e.g. late payment on an account that was entered with a misspelling of the individual’s name).

In an effort to provide as much information as possible, the Bureaus allow for partial matching of information. In many cases, if the SS# matches exactly, they will ignore all other information such as name, address, etc. If all but 2 of the SS#’s match, the name almost matches, and there is a regional commonality, the information will also be included.

What winds up happening is you have people with similar SS#’s and names living in the same part of the country that begin to share information on their credit reports.

Victoria Smith’s info winds up on Vickie Smith’s report… 

This can have a devastating impact on one’s credit score and ability to obtain financing in the short-term (until the inaccurate information can be corrected - which isn’t always an easy task!).