There has been a lot of coverage in the news regarding debt settlement recently. Many of these reports have covered very unscrupulous actions by debt settlement companies. CareOne Services, Inc. has never been mentioned in these reports because our approach is different and we are making great strides towards a new debt settlement model that truly serves the best interest of the consumer.

We are publishing a series of white papers that address the key points of the facts surrounding the proposed legislation and regulation and the impact it will have on consumers.

Here are some of the key issues surrounding debt settlement.

Do Consumers Need Debt Settlement?

Yes. This is explained in more detail in the link provided at the end of this post, however, in short, the reality is that many consumers are unable to pay their debt in full, yet either do not qualify or do not want to file bankruptcy. According to Creditcards.com, the average American with a credit file is carrying more than $16,000 in credit card debt. Debt Settlement rounds out the options for consumers who are in need. To understand where debt settlement fits it is important to understand the full spectrum of debt relief options:

  • Credit Counseling
    • Many debt relief companies offer to review a consumer's finances, develop a budget and look for opportunities to change how a consumer spends their money in order to balance their debt payments against their household expenses. CareOne providers offer this service free of charge though some debt relief providers may charge for this analysis. 
  • Debt Management
    • A Debt Management Plan offers a path where the consumer can pay back 100% of their debt. Debt Management plans set up a repayment schedule between the consumer and the creditor that offers benefits such as lower interest rates and removal of late fees and penalties in order to help the consumer pay more towards their principal balance within a set time period. Consumers pay debt management providers a monthly service fee as part of their monthly payment. Debt management plans are valuable to thousands of consumers but for some, a debt management plan requires a payment that is just too high for them to manage with their other expenses.  
  • Debt Settlement
    • Debt Settlement offers a service which allows consumers to repay a portion of their debt to the creditor for those who can not afford the payments under a Debt Management plan and either do not qualify or wish to avoid bankruptcy. Many debt settlement companies require large up-front fees which drain the consumers' escrow funds that are set aside for settlement negotiation with a creditor. If a consumer decides to cancel their account with the debt settlement company, many times any fees paid into escrow to cover the up-front fee are non-refundable. This has been the focus of many of the news stories recently, as the consumer has paid for a service that was never delivered. 
  • Bankruptcy
    • As a last resort, consumers can file bankruptcy with the assistance of an attorney. This is the last resort for a consumer that is in trouble as the long-term impact to their financial profile can be severe.

How Can Consumers be Protected from Abusive Debt Settlement Companies? 

Legislation is the key. To address the increasing number of bad players in the industry, the National Conference of Commissioners on Uniform State Laws (NCCUSL) created a uniform format in 2008 to protect consumers from settlement companies.  

Currently, 16 states have pending debt settlement legislation. About half of these states are using the uniform format that was created by NCCUSL. The remaining states are pursuing legislation led by their Attorneys General. Since consumer complaints flow into the Attorney General's office, these elected officials are taking action against many bad debt settlement companies.  

Both the NCCUSL model and the Attorneys General model are positive steps for consumers. They are focused on protecting consumers who select debt settlement service. The key challenge now is to find a model that protects consumers but allows reputable companies to offer debt settlement products in these states.  

As states consider debt settlement legislation, most of the discussion focuses on three areas: success fees, disclosures and consumer protection from non-performance. 

CareOne's Position on Debt Settlement Legislation 

Success fees

CareOne supports a model where the consumer pays a percentage of the amount that is saved for the consumer when a settlement is reached; this is called a success fee model. For example, if the consumer had a $10,000 balance with the creditor and a settlement is negotiated for $6,000, the consumer would pay a reasonable percentage to the settlement provider based on the $4,000 they saved only after the settlement has been achieved. As mentioned previously, today, most debt settlement companies receive a substantial portion of their fees either upfront or in the first half of the program.

Many debt settlement companies argue that they will go out of business if they are not paid in advance of helping consumers be successful. Starting in August of 2009, CareOne began piloting a success fee model in 9 states and early tests have shown that this model can be successful both for the consumer and the provider. The company believes that the model it employed in this pilot represents a consumer-focused service that is beneficial to those in need. As a result, CareOne has played an active role in supporting and explaining the benefits of debt settlement legislation that includes a success fee model.

Suitability

Debt relief providers should enroll consumers in the program or plan that is right for their specific situation. Each consumer's situation is unique and therefore must have an unbiased evaluation to determine which, if any, service is appropriate to address his or her needs. Recommendations can range from credit counseling, debt management plan, debt settlement, and bankruptcy.

Too often, when a consumer seeks debt relief services and calls a debt settlement company, they are offered no options other than a debt settlement service. Laws and regulations should guard against companies enrolling consumers in plans that are not right for them merely because that is the only service the company offers. Companies should be required to disclose that other debt relief options may be more appropriate for the consumer and to document the suitability of the service sold to the consumer.

CareOne's experience in dealing with millions of consumers show that roughly one-third of those who contact CareOne need nothing more than budgeting assistance to help them better manage their financial situation. This service, along with all other educational offerings at CareOne, is provided at no charge. Approximately 40 percent are candidates for a DMP (enrollment rates range between 25-30 percent), approximately 20 percent are candidates for debt settlement plans, and roughly 5 percent of callers are candidates for bankruptcy.

Best practices will ensure that consumers are not "shoehorned" into programs that are not right for them.

Disclosures

Disclosures are a vital part of an agreement between consumers and a debt settlement agency. It is important that consumers are told that creditors will not stop trying to collect debts while on a settlement program, and may even try to file suit for repayment. In addition, the consumer's credit rating can be eroded while on a settlement program. Additionally, many consumers are unaware that at the end of settlement, any debt that is forgiven over $600 can have a tax consequence. Reputable debt settlement companies will tell consumers these facts up front, but to ensure consumer's rights are protected these disclosures should standardized and also be built into any legislation.

Consumer Protection from Non-Performance

One of the programs that CareOne has developed is a service guarantee. We promise that when consumers enroll in our debt settlement program, they have up to 180 days to determine if it is right for them. If it is not, we will refund any fees paid, no questions asked. We believe a service guarantee program should be included in any debt settlement legislation, and we currently offer it in states where it is allowed.  

Understanding Debt Settlement Legislation

CareOne Services, Inc. is setting a very high bar for consumer protection and is actively working to help change the industry.

To help consumers understand the issues surrounding this hot topic, CareOne has introduced a new four-part series on leadership in debt settlement. The first part -Leadership in Debt Settlement: Why Consumers Need Debt Settlement, explains why the service is important and if it is the best fit for a consumer in need of assistance. The second part Leadership in Debt Settlement: Best Practices in Debt Settlement, explains the core areas to discuss regarding Debt Settlement legislation in order to protect consumer rights and what their experience has been with their own pilot using these principles. 

To view the first two parts in the series click here

Stay tuned for the upcoming parts to the Debt Settlement Series: 

  • Leadership in Debt Settlement: States Leading the Way
  • Leadership in Debt Settlement: Challenges Ahead 

If a consumer feels that they have been wronged by a debt settlement provider, they should go to the Better Business Bureau, at BBB.org, enter their zip code and find out how to get in touch with the local BBB to let them know their experience. Consumers can also file a complaint with the state Attorney General's office consumer protection division.

Mike Croxson

Mike Croxson is the President and Chief Operating Officer for CareOne Services, Inc. He is also a contributing writer to the Straight Talk on Debt blog. He has played an active role in leading change in debt legislation and regulation across the country working to provide better consumer protection in national and state law. From his experience he shares what is happening in the industry and gives you the real story on where things are headed and how it affects consumers