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Michael T Killian the former award winning guide of About.com's Credit/Debt Management site writes about many of the same concerns that are listed on our Caution page, and often credited Jim Young, CEO of Accelerated, Inc. as a source.
His article below is an informative guide for learning how specialized debt management works.
Are You In Need Of Specialized Debt Management?
In the 8 years that I served as the Credit/Debt Management guide at About.com I answered literally hundreds of questions from readers seeking advice about whether or not to use a debt management service and what to look for in such a service. Until December of 2000 I too was under the impression (as are so many other financial writers) that CCCS, “Non Profit” firms and NFCC member firms were the standard for the industry and that EVERYONE with a debt problem was best served by these groups. For the purposes of this discussion we will call these firms Traditional Debt Management Firms. In December of 2000 I ran across a company in Boca Raton, Florida, Accelerated, Inc that I appropriately label Specialized Debt Management. The owner of the firm, Jim Young, opened my eyes about Debt Management Programs (DMP). He let me see issues that I had no idea even existed.
Non Profit Cannot Improve Interest Rates
The first issue that Jim brought to my attention was that reduced interest rates consumers receive from their creditors are EXACTLY the same whether the client uses a For Profit (FP) or a Non Profit (NP) firm. For example, if a client owes Chase Bank $10,000, Chase requires 2% of the balance or $200 per month as a minimum payment in the DMP and they offer 6% for the debt management interest rate. This is what a client of a debt management firm would get whether the proposal submitted to Chase came from a FP or a NP firm. It was also brought to my attention that this “universal umbrella” of NP as it relates to credit counseling and debt management was not all it was cracked up to be.
Non Profit Myths Built Upon Extinct “Fair Share” Concepts
After some research I found out that some of the firms with the worst records in the business were in fact NP, making very large amounts of money and about as “Non Profit” as Donald Trump. Mr. Young explained to me that for many years credit counseling and debt management firms received what is known as a “Fair Share” distribution from the creditors. This in no way affected what the clients paid or how much was credited to their accounts but it was in fact quite significant in the debt management firms earnings. For example, in the past debt management firms could deduct 12% of a client’s payment going to American Express for Fair Share. So if a clients payment to AMEX through the program was $100 the firm could deduct $12 and send AMEX $88. The clients account at AMEX, however, was credited the whole $100. Thus the debt management firm received some serious earnings.
Creditors only paid “Fair Share” to NP groups that could then be written off as a “contribution” to a NP organization. There is absolutely nothing wrong with this concept and it did not affect what the clients accounts were credited. But the “Fair Share Distributions” from the major creditors have since been dramatically reduced and it is clearly not as much of an issue as it once was.
Capitalizing On The Myth
Then Mr. Young opened my eyes to another fact. In the early to mid 90’s debt management firms began springing up all over the country. Many started using their Non Profit status as a marketing tool, allowing prospective clients to believe that they were some form of public service. This led the consumer to believe clients would get their services for less because they were Non Profit or operating as a “Benevolent Charity”.
As was stated above the truth is that interest reductions and minimum payments are EXACTLY the same regardless of the counseling agency. The only difference would be in the fees charged (and services provided). There were large variations in the area of fees. Not all but many firms (both For Profit and Non Profit) retained the client’s first payment as a set up fee. Though consumer advocates frown upon this practice, some firms still performed well. It is a practice that could be done when all creditors re-aged past due accounts to a current status after the proposals were accepted. Some creditors like Citibank and Discover no longer re-age delinquent accounts so retaining the client’s first payment has become a problem.
As the years went on I looked into NFCC membership. It seems that NFCC member firms are all CCCS offices. Some of them have different names like The Green Path, Money Management International which is now the parent company over CCCS and Clear Point Credit Solutions. So although I am not absolutely sure that they are the only member it seems that the NFCC really may just have only one member because every NFCC member firm I have researched seems to be connected to CCCS or in fact are CCCS. If this is true it seems a bit convenient to have financial advisors all over the country saying “Make Sure They Are An NFCC Member”.
In my experience as a Credit/Debt Management guide I still believe that NFCC member firms/CCCS do in fact perform very well for consumers that have debt problems. They do offer fine educational materials free of charge and have many years of experience at helping consumers get out of debt.
Reader Feedback On Traditional Policy
Over the years many consumers have written and explained how these “Traditional” services are in actual practice. Let me share what they have told me from their own personal experiences.
After an initial CCCS or “Traditional” consultation if it is determined that a consumer is in need of a debt management plan or “DMP” and is qualified for it, another appointment is scheduled. A very reasonable set up fee of approximately $40 is charged if the client intends to enroll. Of the $40 fee $12 is used to obtain a copy of the clients credit report.
Based on reports from consumers that wrote to me it appears that the rationale for the credit report is to reveal ALL ACCOUNTS that the consumer has because these firms require clients to close and or INCLUDE all revolving accounts in the DMP. In the past many CCCS offices did not enroll clients that were current on their accounts and would not enroll clients unless they were at least 30 days delinquent. I have received reports that some CCCS offices still do not enroll clients in DMP’S that are current on their accounts telling them that no hardship exists.
The reason for the delay is that disbursements to creditors are only made twice a month instead of daily. This causes a problem in billing cycles if the client is current because he or she may have 8 accounts in the program with various due dates. If a client was current on all accounts when he or she enrolled in the program and steps were not taken to adjust due dates prior to enrollment, this would cause some accounts to be late if payments were not disbursed in accordance with the clients due dates. This also relieves the debt management firm of any liability as it relates to the clients credit because the client was already behind when they enrolled.
4. Many CCCS offices also engage in a “Credit Card Cutting” ceremony of sorts where the client is required to bring in all credit cards and cut them up. I find this to be a bit of an undignified process to subject someone to. It has also been reported that their client agreement includes a section requiring DMP clients to DESTROY ALL CREDIT CARDS and close all open lines of credit and they must also agree that they will not apply for any new lines of credit while enrolled in the program. I agree that when someone has a debt problem they may also have a spending problem so agreeing to abstain from incurring any additional debt may be a good policy for many who have reached the point of severe delinquency and credit deterioration. However this may not be the only option for a consumer that may have incurred some debt due to situations out of his or her control that needs help while still requiring some lines of credit for work, business and emergencies.
The Good, The Bad, The Ugly
In fairness I will state that in my years of advising consumers on debt problems I have heard many positive reports about these traditional Credit Counseling firms and have never heard any reports of anyone being misled or being taken in a fraudulent manner, as is the case with many other firms.
However I have received many reports from consumers stating that they could not utilize such a program due to the lack of flexibility for their needs. I have also received reports about billing cycle problems related to creditor disbursements as a result of not taking steps to coordinate due dates and the resulting problems from not disbursing payments to creditors daily. Also, I am aware of complaints about face to face in-office appointments without the option of handling it over the phone. The most common complaints I have heard about these traditional debt management programs is the lack of flexibility and a feeling of being "put on probation" while in the program.
Summary of Traditional Services
Here then is a summary (good and bad) of traditional debt management services:
When reviewing the results of the traditional program above it is clear that this would be a very beneficial program for someone overloaded with debt, possibly delinquent on the payments and who has demonstrated a lack of control over spending and who has deteriorating credit worthiness. A consumer like this would benefit from a program that prevents him from falling further into debt and also offers some "supervision" preventing further misuse of credit while helping this consumer to get out of debt much faster.
But where does the consumer that has good credit, needs to maintain lines of credit to function, is current on his accounts and wants to maintain his credit go for help?
Specialized Debt Management Service
The consumer that has good credit, needs to maintain lines of credit to function, is current on his accounts and wants to maintain his credit needs a Specialized Debt Management Service. And there are not just a few of these people. There are literally millions of Americans that fall into this category…. nurses, teachers, doctors, lawyers, police and fire officials, city officials, mid level managers, and the list goes on.
For answers on how a specialized debt management program is handled I asked Jim Young of Accelerated, Inc.
Mike: Jim, what type clients do you deal with?
We service all types of clients like any other firm however many of our clients are Doctors, Lawyers, small business owners and professionals that have found themselves in a position where they owe very large balances at interest rates of from 19.9% to as high as 31% and are current on their accounts. While they are in fact maintaining their minimum payments, there is no way that they will ever be able to pay off these accounts at the rates they have and since January of 2006 when new minimum payment guidelines went into effect some are even having difficulty maintaining those minimums. Most of them have these high rates due to the “universal default” clauses in their card member agreements, not because they have been late. These types of clients will often times be discouraged from debt management by some of the old fashioned firms and are told that they don’t need a DMP because they are current and no “hardship” exists when in fact they are in very serious financial trouble.
Mike: Wouldn’t these folks be considered well off?
Although they have impressive incomes and are current on the accounts most have played the balance transfer game and the second mortgage game, which turns unsecured debt into secured debt and have run out of options for paying off these accounts in any reasonable time period. Make no mistake, these people ARE experiencing a HARDSHIP, they need help and there are millions of them in this country ranging from young adults to those in their 50’s and 60’s who have incurred high balances sending children off to college. There are endless scenarios we could tell you about that involve people with good credit in all age groups and income levels that need specialized, custom tailored debt management services.
Mike: What can you do for these folks that traditional organizations cannot?
First let’s understand that when it comes to what can be done with interest rates, minimum payment requirements, bringing delinquent accounts current and which accounts can and cannot be handled in the program, THE CREDITORS ARE THE BOSS it’s that simple. However all major creditors understand that consumers should be allowed to keep 1 or 2 accounts out of the program for business, travel and emergencies. These would include Chase, Citibank, Bank One, Bank of America, Discover and virtually all of the major credit card issuers.
We are an approved debt management source with all of these banks and many of them review our policies each year when they conduct a due diligence review of approved agencies. No bank has ever told us that we are required to force clients to close all lines of credit. However when a client does leave an account out of the program it needs to be with a separate bank than whatever bank or banks that they did include in the program. In other words if a client had 3 accounts with one bank they would have to include all 3 accounts with that particular bank in the program. They could then keep an account from a separate bank out of the program for business.
Mike: So I am clear on this, all credit cards do not have to be surrendered?
Creditors understand that if a card member travels on a weekly basis for a job or business the client would have to have a credit card for car rentals, business, travel and essentials that one must have a credit card for. Quite simply, each individual bank is only really concerned with their own policies and how THEY are going to get paid back what is owed them. If a client has 3 accounts with creditor “A” all at interest rates of 24% to 29.9% then all 3 of those accounts would have to be either excluded or included in the program. Now let’s say that the client has another account with creditor “B” at an introductory rate of 2.9% that is at that rate for 6 more months. Let’s also assume that creditor “B” offered 9.9% for the DMP. We would not want to include creditor “B” for at least 6 months because the 2.9% would go to 9.9% as soon as the DMP proposal was accepted. It would be in the client’s best interest to handle creditor “B” on his or her own until the introductory rate expired and then add the account to the DMP at that time. If the client were forced to close the account with creditor “B” immediately his rate would also increase just by closing the account.
As I said the creditors themselves understand that DMP clients may need at least one account to continue functioning properly with a job or business obligations and individual creditors are really not concerned with what a DMP client is doing with other creditors as long as their particular requirements are being met. In the past many firms required DMP clients to include all accounts because it would result in more “Fair Share” for their firm and they would claim that the creditors required it. This is not true.
Mike: What steps generally need to be taken to minimize any damage to credit as a result of the DMP?
Contrary to popular MYTH’S that are continuously reported by so called “financial experts” all over the country, debt management does not ruin your credit and is by design a means of preserving your credit. Some creditors like Discover and Household Bank will report “Credit Counseling” or “DMP” on a client’s credit report. That entry on the report will only remain there until the client is finished with the program. The entry itself is put there to prevent clients from obtaining additional REVOLVING accounts while they are enrolled in the program. The entry itself DOES NOT DROP THE CREDIT SCORE. After a client has been enrolled in the program for a significant period like 12 months and we can show a positive transaction history, we can actually use that history to get them approved for other types of credit like mortgages, 2nd mortgages and car loans.
In the past 12 years we have provided literally thousands of letters to mortgage lenders that have served to get our clients approved for mortgages while they are still enrolled in the debt management program.
Mike: What steps are taken at your firm to minimize credit damage for DMP clients?
Once it is determined that a client is going to enroll in the DMP and is concerned about his or her credit rating there are many steps to be taken that require quite a bit of additional attention and work.
Jointly with the client, we determine which accounts are to be included that would be in the best interest of the client. This issue involves a lot more than just requiring them to “include everything” that would be easy. Our counselors first analyze the client’s budget and then address any special circumstances such as the possible need to keep 1 or 2 accounts out of the program for business, travel and emergencies. If the client is maxed out on all of their existing accounts it may be necessary for them to obtain another credit card for this purpose before they get started. This can be crucial for someone that really needs 1 credit card to function because if one or more of their creditors report that they are in a DMP they may not be able to get a card once the DMP is underway”. (note : check with the companies at the following 2 links for best credit card offers) debtsmart.com cardratings.com
Once it is determined which accounts are to be included, the accounts need to be closed by the client prior to the submission of proposals. This is so the accounts will show as “Closed By Consumer” on their credit report not “Closed By Credit Grantor”. When a DMP client has 10 accounts in the program and they all show “Closed By Credit Grantor” that would throw up a huge red flag to any prospective creditor in the future that checked their report. If proposals are just sent out to the creditors without first taking this step all accounts will show “Closed By Credit Grantor”.
Due dates need to be adjusted in many cases before the submission of proposals to prevent any late charges after the client starts making their single payment through the program for all of their accounts. If clients are current on their accounts when they enter the program as most of our clients are, the creditors allow one due date change per year. This can be a bit tricky but we know how to instruct our clients to properly rearrange due dates before they get started to prevent late charges and protect them from being reported late. We disburse payments DAILY not twice a month and we do it electronically to ensure that billing cycle problems do not occur. If billing cycle problems do occur we can get them adjusted once proposals are accepted but handling it ahead of time is the best practice.
If the client really needs to be sure to maintain their credit due to a situation where they may be applying for something like a mortgage within a specific period of time some accounts may have to be excluded. An example would be American Express accounts. American Express participates in the DMP however they do not have their own debt management department that processes proposals. American Express farms out their DMP’S to NCO in Ohio. NCO is a collection agency and sometimes accounts will be reported as being in collections rather than the DMP. For this reason some clients that are intent on preserving their credit may have to leave their American Express accounts out of the program.
Some creditors require an additional form along with the standard DMP proposal. It is called an Income/Expense Analysis. If these are not completed properly it can result in rejected proposals that in turn can result in late charges.
Since January of 2006 the required minimum payments on accounts through the DMP are now lower than what consumers are required to pay directly to creditors on their own if they have high rates. This is due to the fact that creditors were required to raise minimum payments on revolving accounts under Federal guidelines. This has now created a very sticky and complicated situation when clients begin their DMP because if the proposals are not accepted when the client makes their first payment through the agency, the payment made may be less than what was required to the creditors from the client directly. For this reason proper coordination of due dates, when the proposals are submitted and other factors must be addressed up front to make the clients transition from direct payments to the creditors and their payments through the DMP a smooth one.
There are many additional steps that must be taken when servicing DMP clients with special needs especially the more sophisticated ones. We have proven that as long as the creditors requirements are met these types of clients can get the service that they need while minimizing damage to their credit and maintaining their dignity”. Handling DMP clients with special needs requires a tremendous amount of additional pre program planning, time and work. This is why most firms do not want to get involved with these issues. We do get involved and that is why we have an 81% retention rate. Nobody has ever left our program for any other reason than inability to maintain the payments, completing the program or paying off accounts in full.
SPECIAL NOTE: In the 5 years that I have been referring consumers to Accelerated, no one has ever written back with any comments that are contrary to what you have seen in this article. So if anyone is in need of a “specialized debt management” service, review what this firm can do at Accelerated, Inc. I also recommend folks read their CAUTION page and read their BBB Report
Michael T Killian
Call 1-800-810-5250 for more info.