The debt relief industry doesn’t really have the greatest reputation for some reason or another. Perhaps the reason is because we secretly harbor resentment for people who get in way over their heads and look for solutions other than paying off their debt! When you can solve your debt situation yourself by begging, pleading, calling your creditors to come up with a repayment program, why would you let a debt settlement company charge exorbitant fees? If you make your case strong enough, you might even get the credit card company or the bank to forgive a portion of what you owe!
Thanks to the horrendous economy in recent years, consumer debt levels have risen to alarmingly high levels. From buying that new car you shouldn’t have, to big screen TVs that ruin the feng shui in your bedroom, to luxury clothing with 95% margins that never get worn, to nice vacations which you think you deserve, to $100 meals per person, people’s consumer debt has blown up in a bad way. Never fear though! With the government ready to bail you out with incredibly long unemployment benefits, free money for your mortgage, and credits for paying on time (shouldn’t you do that anyway?), some consumers will be alright. But for others, in come the debt relief companies to save the day! Maybe.
The Issues With Debt Relief Companies
An acquaintance of mine was actually contacted by one of these debt settlement companies. He asked for my opinion, of which I had little, so I did some research. I posed as a potential candidate for this program and called a random debt settlement company I found online. I told them I had about $50,000 in credit card debt that I could no longer pay. After a lengthy conversation, I found it interesting that they downplayed credit counseling programs in preference for debt settlement.
You see, these are two separate business offerings! A credit counseling program comes up with a plan and provides educational services for a fee i.e. why are you such a donkey for getting into $50,000 in credit card debt if you can’t pay it off, here’s what you need to do. A debt settlement company basically acts as your mercenary by trying to get your creditor to forgive some of your debt for a fee.
You’d think that debt settlement and credit counseling companies should work hand in hand to provide the best debt relief solution for a customer. Instead, it’s one big land grab and sales pitch. I mean seriously, what’s going on with this industry? If I was the average consumer, I would have definitely signed up for a debt settlement program if they could really reduce my $50,000 debt to say $15,000 and charge me less than $35,000 to do so. The creditor gets $15,000 from me rather than $0, and the debt settlement company gets paid some percent of the recovery fee as a reward. I spoke to my friend and he decided that a credit counseling program, rather than a debt settlement company was best for him since it had the least affect on his credit score. Sigh, he should just read this site or debt sites for free.
On Techcrunch, they profiled a company called Debteye. You might have seen them around the blogosphere since they also have a blog. After reading the article on Techcrunch, I decided to reach out to them and learn more about what they do, and more about the industry for my friend and the rest of you.
Q: So what does Debteye do?
A: We help consumers get out of debt without using expensive third party companies who charge outrageous fees to set up arrangements with their creditors. Our software will help customers set up payment plans and negotiate with their creditors to potentially lower their monthly payment.
Q: What are your fees?
A: Currently our software is free. Anyone who signs up will get a free lifetime account. We haven’t decided exactly how much to charge yet, but we expect that number to be anywhere from $10-$20/ month.
Q: How does your software help negotiate settlements for your customers?
A: Our software will automatically send settlement letters to the creditors at different times during the process. The creditors are also instructed to fax back offers/agreements to a specific fax # that we provide them. Clients can also call their creditors themselves to negotiate the account if the creditors are not responsive, but most collection companies respond within 72 hours.
Q: Isn’t it more effective to have service companies negotiate the debt instead of software?
A: Each creditor has their own process when it comes to lowering their interest rate or forgiving a principal balance. As a matter of fact, some creditors like Chase won’t work with debt settlement companies. We can replicate what the debt relief companies can do when it comes to negotiating with their creditors.
Q: How do you expect to change the consumer’s spending habit when it comes to getting out of debt?
A: That’s a great question. We believe that the most important piece of getting out of debt is learning how to stay out of debt after the program! We plan to encourage them by offering different tips & tools and rewarding them for good behavior. This is the next phase of development and will update you when it’s complete.
Q: What do you think the major problem is in the debt relief industry?
A: One problem is that many of them are not transparent with their fees. There are hidden monthly fees and customers are unaware of the fees associated with the program. Also, there’s no “one size fits all” debt relief product. Everyone has their own unique situation and needs to be evaluated thoroughly to see which program is right for them. There are very few companies who truly look out for the customer’s best interest.
It’s interesting to understand how everything has become so process oriented. From the interview, it appears that one can’t just pick up the phone and call American Express to relieve you of $50,000 in overdue credit card debt, for example. Instead, there is a process where you have to jump through hoops to get things done. Paperwork, paperwork, paperwork, and bureaucracy!
I know several people with underwater mortgages who cannot even get someone to listen to their case. Instead, they have to purposefully not pay their mortgage for 3 months and hurt their credit before the bank starts giving them the time of day. How inefficient!
Y Combinator-funded Debteye has a good approach with their software system. After all, no one should really pay a third party company to handle their debts. The real issue is the dang process of getting through and handling all the steps and the paper work. Everything can be done on your own without seeking a debt relief company. Getting out of debt doesn’t have to be a confusing process. The most important thing is to recognize the reasons why you are getting into debt in the first place, create a plan to get out of debt, and stay that way until you can better manage your finances.
Readers, have you had experience with debt settlement or credit counseling companies? If so, please share your experience. Why does it take several months of non-payment before banks and credit card companies are willing to discuss solutions? Why can’t they be open to discussing before things it the fan?