Delinquent debt: Creditors seek, cheap, fast, reliable resolutions…

Written by J.Bankston   // July 7, 2011   // 7 Comments

Delinquent Debt

JP Morgan Chase’s decision to abandon more than a thousand collection lawsuits in five states, as reported in The Wall Street Journal, signals complications with the legal collection process that could lead to more creditors employing resolution strategies outside the court system.

You can always trust your creditors to do whatever they believe is best for their bottom line. Through litigation a creditor can use the court system to compel you to repay your debts in full. At first glance that may seem best for a creditor’s bottom line, but the legal collection model has very real deficiencies:

COST
Anyone unfortunate enough to have been sucked into the American legal system knows it’s far from cheap. Lawyers cost money – a lot of it. Filing paperwork with the court is costly as well. Creditors also know they aren’t always able to fully shift those costs to the debtor.

TIME
Debtors can delay the judgment process for months simply by filing the proper response paperwork and showing up to the hearing. Creditors sue in the hope that the debtor will ignore the summons, resulting in a default judgment. But even in the event of a default judgment, it can take months to execute and begin a garnishment or secure a lien.

RISK
The legal process is complicated, labor-intensive and rife with state-specific regulations. Nowhere is this more apparent than with the Chase story thread. No allegations were proven, and Chase has admitted to no wrongdoing, but a fair reading of what’s known suggests Chase simply got lost in the sadly comical complexity of the state bureaucracy. Too much paperwork; too many hoops. Someone fell on their face. Bad for the bottom line.

Creditors can view debt resolution as a simple, cheap, reliable alternative to litigation. A good debt resolution model should have a legal collection rate of no more than 3 to 6 percent of the accounts they enroll, meaning roughly 95 out of every 100 enrolled debts should sail through the program.

It’s cheap for the creditor: When they choose to settle, creditors don’t have to involve their expensive legal department or the court system. In fact they don’t have to spend any money at all in pursuit of the debt.

Resolutions are also faster when you don’t involve the courts. And with the advance-fee ban imposed on the debt resolution industry by the Federal Trade Commission in October 2010, companies can no longer collect fees prior to settlement.

Before the advance fee ban, creditors bristled at debt resolution companies collecting fees while the delinquent debts enrolled in the program sat idle. No more – creditors get paid sooner because fees are paid to the resolution company only after a debt is resolved.

Creditors can settle the debt for less than you owe and still make money off you:

  • They’ll collect a portion of the principle.
  • They’ll receive a tax break on the debt that they forgive.
  • In many cases, the cards have been open for years and the consumer has paid thousands of dollars in interest and fees prior to settlement.

The knock against debt resolution programs has always been litigation – credit card companies retain the right to sue, even if the debtor is enrolled in and making monthly payments into a debt resolution program.

But just because a creditor can sue, it doesn’t mean they will. Look at Chase. It all boils down to the bottom line.

The American Fair Credit Council  (AFCC) is in the process of certifying Consumer Credit Advocates for accredited debt resolution companies. It’s a good place to start if you’re buried in credit card debt and looking for answers.


7 COMMENTS

  1. By eMoney, February 23, 2017

    This is very interesting, and definitely makes sense. At the end of the day it’s all about the creditor getting their money. And the way things seem to be going it seems that the industry of debt settlement is getting closer and closer to becoming mainstream, as opposed to a taboo subject most think is a possible scam.

    Reply
    • By JBanks, February 23, 2017

      If you want to see how “mainstream” debt settlement has become, fish around the Federal Trade Commission Web site. The FTC shuts down scams and regulates legitimate enterprises; debt settlement is an industry they’ve decided to regulate. Just one more option for consumers to consider…

      Reply
  2. By Mark Chen, February 23, 2017

    Great info! It is important to keep in mind that the FTC rules on advance fees apply to settlement companies that solicit business via telemarketing. Attorneys and firms that meet face-to-face apparently can still charge fees up-front to work on settlements.

    I think a smart consumer will take advantage of the FTC rules and choose to work only with a settlement firm that does NOT take any advance fees. Why work with one that does, when more money could be going towards settling your debts more rapidly?

    Reply
    • By JBanks, February 23, 2017

      One distinction about the attorney-based advance fee models: Their INTERPRETATION of the FTC regulation is that they can charge advance fees. A growing number of state attorneys general disagree. That interpretation will be fought in court, and those firms will eventually move away from the advance fee model or stop offering debt settlement services altogether. DO NOT engage with a settlement firm that charges fees up front – their position in the industry is tenuous and their future is uncertain.

      Reply
  3. By Tax-y Lady, February 23, 2017

    In law school, one of the things we talked about regularly was access to the courts. Especially with increasingly complex regulations and state and federal laws, some folks (on both sides of issues) are opting for the “sure thing” of a settlement, even though it is less than they could potentially get if they pushed to trial or more than they could have to pay if pushed to trial. Now with budgetary constraints, courts are encouraging this even more. Trying to get to trial can take years in some civil cases.
    I think that the courts will always be a venue for complaints and actions, but I think the wave of the future (based on the past) is mediation, arbitration, or settlement agreements.

    Reply
  4. By dolrdolrbill, February 23, 2017

    It sounds like if a creditor can determine it is worth while to litigate that they would. Do you have a higher risk factor if you have assets? With the FTC involved in this industry, this option for resolving debt looks as though it is becoming more legitimate. Thanks for the information.

    Reply
  5. By Ka$h, February 23, 2017

    Great article! I also agree about going with a debt resolution company definitely has it’s perks, especially when a creditor is taking you through the litigation process. The legitimate companies are really informative on how to handle the litigation process and guide you through it, you don’t want to default! I know when I look at any kind of court documents it’s all foreign to me.

    Reply

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