Currently the FTC is considering a proposal to Ban the large upfront fees that most debt settlement companies charge. USOBA – The United States Organization for Bankruptcy Alternatives, recently submitted testimony to the FTC that such a ban could put up to 84% of their member debt settlement companies out of business.
USOBA is a trade association for the Debt Negotiation Industry. They claim membership of about 200 debt settlement companies. Since most Debt settlement companies incorporate a similar advance fee structure as many USOBA member companies, I think it is a fair assumption to assume that their numbers could hold relatively true for the entire industry.
While this may seem like good news to consumers at large, it will be devastating news for consumers that are enrolled into a program that is forced to close its doors. Currently one can only speculate whether or not the FTC will pass this advance fee ban. It will likely be several months before we know for sure.
A typical debt settlement company, on average, charges consumers an excessive fee of 15% of their total debt. As if that wasn’t bad enough for consumers, most of these companies collect these fees upfront (usually within the first 18 months of a program). Even if their clients are on a 36 or 48 month program, they are still collecting all of their fees before the first half of the program is over.
That means that companies that use this type of fee structure are relying on the cash flow from new clients to support and provide services to existing clients. What happens if the FTC bans these companies from charging new clients these upfront fees? The companies cash flow goes away, and they will likely shut their doors and leave all of their existing clients with no support. Again, this is not just speculation on my part, this is from the analysis done by USOBA.
As a consumer, what can you do to insure that you are not a victim? The answer is quite simple. Do not enroll into a debt settlement program that charges you 15% of your debt and requires that you pay them all of their fees over the first half of the program. Enrolling into a program with this type of fee structure was a terrible idea for consumers even before this potential ban. Now, if you enroll into one of these types of companies for help, and the ban goes into effect, you have an 84% chance of paying your fees and then not receiving the promised services.
If you are struggling with debt, you must first speak with a qualified financial consultant to help you determine the best strategy for getting out of debt with your specific financial circumstances. If you then determine that a debt settlement approach makes the most sense and you would like to hire a professional to assist you in working with your creditors, you should only consider a company that charges their fee based on performance and is paid as the settlement agreements are reached with your creditors.
As a consumer, you never want to be in a position, where you have paid all of your fees, and have not received most or all of the promised services. It is business 101 to assume that a company is going to put more time effort and money into what makes them money. An upfront fee model means they are making their money on sales and will make the same amount of money whether the client is successful or not. A performance based fee model means the company is earning its money when it performs the services and the amount of money earned will be determined based on the success of the client. With your financial future on the line, do you want a company that focuses on selling you a program, or getting you out of debt?
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