I recently had the pleasure of participating in an episode of Financially Fit TV, where I got to ask Jenny Realo of CareOne Services about who can benefit from various debt settlement options. Jenny included everything under the “debt management” umbrella and broke it down like this (see my question at the 5:00 mark in the video):
Various Non-DIY Options for Getting Out of Debt
- Credit Counseling – Where the consumer pays off their debts on their own, they just get financial advice to help them sort out their budget and get their finances in line to stop incurring debt and start paying it off. The risk here is that consumers might pay for information in counseling sessions, that they can get for free. Another risk is that it won’t work for the consumer because they need more support through the process.
- Debt Management – Where the debt relief company actually takes the consumers money and pays off their debts for them. I guess the advantage here is more accountability. The risk here is that, again, consumers would be paying for a service that they can do for free by themselves. Another risk is high fees being charged by the debt company.
- Debt Settlement – Where the debt relief company actually calls the creditors on the consumer’s behalf and negotiates a settlement of their credit card debt for less than what they owe. This is done because the consumer’s personal financial situation is in a bad spot. The risks involved here are plenty. To get into the position to settle your debts, you really need to be significantly behind on your payment. Thus, the debt company might encourage you to not pay, which ruins your credit, but allows you to settle your debt. The risk of overpaying fees is also high here.
- Bankruptcy – If settlement isn’t feasible for whatever reason, then the last straw is to declare bankruptcy.
Basically, most legit debt management companies will honestly try to find the best solution to their customer’s needs. Some people want and/or need a helping hand throughout the debt reduction process. And that’s where these different companies come into play. Just be sure you understand the rules, are working with a good company, and they are following the new FTC regulations described in the video and in the infographic below. Also, don’t forget to fix whatever financial situation got you into this debt in the first place. Living free from debt ultimately comes from learning to live within your means.
Some More Thoughts on the Debt Industry
Here on the blog I don’t talk a lot about the debt relief service industry (debt settlement, bankruptcy, etc.) There are a few of reasons for that.
First, I tend to lean towards the idea that you should just pay off your debts yourself and not try to “settle” out, or put it off. If I borrow money to pay for something, I expect to have to pay that debt off. I don’t want a bailout. But obviously the world isn’t this black and white, which is why I asked the question. I know long-term unemployment and major medical problems can quickly change the conversation. Plus, we’re all adults here; you guys can make your own financial decisions.
Second, I’m not that knowledgeable on the subject. I can talk to you about do-it-yourself debt reduction for hours. It’s simple and straightforward. But I really don’t know the ins and outs of settlement, consolidation, etc. More specifically, I really don’t have a firm grasp on why they are needed (i.e. who to target the message at, if at all). Hopefully the video above gives you a little more insight than I could.
Finally, the debt relief industry is rife with companies who seemingly take advantage of the supposedly uneducated consumer. The idea seems to be to quickly move the consumer to the most expensive, highest margin services, even when they aren’t needed. Or worse, making a bunch of empty promises, taking excessive fees from upfront deposits, and heading for the hills. When enough consumers complain about they way the industry is being run, the government feels like they need to get involved. Thus, the new FTC regulations.
FTC Semi-Failed Crackdown on Bad Debt Companies
In the video, we also discuss the new regulations for the debt relief industry. The FTC took it upon themselves last year to create some more regulation around the debt industry. The infographic below depicts those new changes and what they mean for consumers, including how they failed to cover 85% of the industry. You can also listen to the full episode above to hear more about the changes and how they might impact you now or in the future.
What are your thoughts on the debt industry? Is this a legitimate consumer need? Will the new FTC regulations help the industry?