Is Debt Settlement a Scam?

This is one of my favourite all time question. For years the Canadian media has been picking up random information on debt settlement companies from our American cousins. While there are tens of thousands of success stories, most of the published stories on debt settlement tend to be negative.

There’s an old saying about not believing everything that you read. I’ve learned first hand over the years that this is true. Here are a couple of examples why:

At the start of 2009 a newspaper called The Toronto Star did a story on me and my company. It was featured on the front page of the business section and was in a positive light. The story generated some good exposure for Total Debt Freedom Inc. and for debt settlement in general. However, some facts I presented to the reporter were taken out of context or maybe he choose to stretch the truth a little to make for a more appealing read. For example, I mentioned that debt can get away from just about anyone and one of our clients was a former Olympian. The final story read that that individual was an Olympic Gold Medalist which wasn’t true. Many reporters tend to be freelance so they are paid to sell a good story; so as a result, it seems stories can and do get hyped up sometimes.

A few months later a negative example appeared on the evening newscast. CTV which is a major Canadian newscast put out a three minute televised story on their “Consumer Alert” segment by reporter and financial writer Pat Foran. He talked about how debt settlement was potentially a scam, and how Marissa Ruiz (the victim) was very disappointed and that consumers should be wary. The story was packaged and presented as Canadian issue, and made viewers believe that Canadians were getting scammed left, right and center. When I researched the names in the story further, it turned out Ruiz was California resident and used an American debt settlement company that had a horrible BBB rating. The incident appeared to be that of one rotten apple in the US debt settlement industry. Apparently the reporter borrowed the story from another press release he found, and packaged it as his own. Why did Pat Foran forget to mention these facts in his broadcast?

The story then wrapped up and interestingly handed off to a company called “Credit Canada” which is a non-profit credit counselling agency in Toronto. After I reviewed the broadcast and made some notes, I emailed Pat Foran and CTV about their televised slam of debt settlement in Canada. I literally corrected 7 very significant points that were not factual. My email was virtually ignored. From a legal perspective there is no remedy available because of free speech; the media seems very immune.

Needless to say, my feelings about the media are somewhat mixed now.

Bankruptcy trustee’s and credit counsellors have all had their say about debt settlement and why they think it’s a scam. Let’s look at their arguments.

Trustee’s tend to argue that all debt settlement fees are collected up front before any work is done and no form of debt relief is ever given to the consumer. That’s not true; in fact settlement fees are collected monthly throughout a 36 month program. And most settlement companies like ours offer a service guarantee that returns any money paid that a settlement was never finalized on. If the client has enrolled for a 36 month plan then the fees are taken monthly and most clients experience their first settlement by around month 5-8. So how is a debt settlement company getting paid in full up front? We actually get paid as settlements are arranged.

A friend of mine is a trustee in Bankruptcy, and a really wonderful guy, what I learned from him is that close to 100% of people going through bankruptcy or a consumer proposal (a form of bankruptcy) are in some state of default with the trustee. What that means is, they haven’t met a major term of the requirements to be discharged from the debt, and apparently a large portion of those people never do.

Guess what else I learned? The trustee actually gets paid before the debtor is ever discharged from what they owe. Isn’t that a classic case of the pot calling the kettle black? The trustee is in fact a court appointed agent to the creditors, so even though you pay the trustee to get you debt free, he is actually looking after the creditor’s best interest first. Not yours.

Here’s an interesting fact about debt settlement and our company I shared with my trustee friend: 70-80% of the people that enrol will complete the program. The look of shock and awe on his face was priceless when I told him that. He thought the completion rate of people seeking debt settlement would be significantly less then his plans.

Non-profit Credit Counsellors are another all time favourite of mine; they are in bed with the banks, media, politicians and other non-profit companies.

My understanding of credit counselling is that more then 60% of all people enrolled will drop out of their debt relief program before it’s completed.

The first thing to understand is that “non-profit” does not mean free, every business needs to earn money to keep its doors open and pay take care of rent and payroll. All that really needs to happen to maintain a non-profit status from the government is that the company needs to meet certain requirements and can’t show a profit at the end of the year. That seems pretty simple and easy to do; all the principals of the company would need to do at the end of the year is bonus out any profits to themselves.

Credit counsellors have somehow managed to get a lot of positive, free and unexplained media exposure that debt settlement doesn’t get because of their non-profit status.

The other day when a local politician appeared on the news to discuss new credit card legislation in Canada; somehow a spokeswoman from non-profit credit counselling, again Credit Canada, was right there beside him. I wonder why I wasn’t invited to speak as a specialist on the new credit card legislation. I mean the non-profit “specialist” who appeared wasn’t even able to calculate simple math in her head, let alone contribute any real dialogue to the discussion.

On several provincial government websites that talk about debt relief options, they all seem to defer to non-profit credit counselling as the answer to all debt problems. This politician and host on TV did the same thing.

Some creditors will actually tell a financially distressed debtor to go and use a non-profit credit counselling company if they are having money issues. Here’s a big question. Why would a creditor only refer the debtor to non-profit credit counselling? You don’t need to look very far for the answer; credit counselling is really a kinder and gentler collection agency for the banks.

This relationship between credit counselling and banks has been criticized for years. Credit counsellors get more money back to the creditors over a longer period of time, plus many get what’s called a “fair share” payment from the banks. So your creditors are actually paying the credit counsellors to collect the debt.

Don’t let the “non-profit” banner fool you, credit counselling is working more for the creditors, then it is for you. Did you know that if you owed $25,000 in credit card debt, it would probably cost you about $29,000 in total over 5 years with credit counselling? With debt settlement your total cost would be around $15,000 over 3 years

The Internet and media is a prime example of unregulated free speech, so it's easy for anyone to post opinions, spread rumours, tell lies, create controversy or even build entire Web sites devoted to whatever topic is desired, usually without any consequence. Unfortunately, this means the Internet and media is a perfect medium of negative "information" about countless number of companies, organizations, and individuals. Even respected, successful, high-profile companies like Toyota, McDonald's and Wal-Mart are targets for negative communications.

Is the information factual? That's something you have to decide, but before you do, be sure you have all the facts and are certain about the accuracy and credibility of the source of any information found on the Internet and media.

It begs the question: Why are the other debt relief programs like bankruptcy and credit counselling feeling so threatened by the growth of the debt settlement industry? Are we really that much better of a debt relief option to their programs? I guess so.