Debt Settlement Company Overpromises

debt_consolidation

Picture that scary in-between financial moment, a kind of knife-edge living, when you have too much high-interest debt to pay off in any reasonable amount of time, but not so much debt that bankruptcy is necessary or inevitable. What do you do?

A friend of mine, who would like to be known just as D, received an offer in the mail from Americor Financial Services, promising a new $27,000 line of credit.

D pays all his debt on time, but it’s expensive. He anticipates additional expenditures in the months to come. D would like more available credit. D called Americor to learn more about that line. After offering up details over the phone on his financial situation, including how much debt he currently pays on, the representative described a plan. Begin paying Americor monthly, approximately $500 less than he currently pays, and cease paying on the rest of his high-interest credit cards.

After 4 to 6 months, the representative told him, Americor will be able to negotiate from a position of strength with his banks. The representative practically guaranteed that the banks would accept a negotiated settlement for 50 percent of what D owed.

Perhaps the most intriguing part of the Americor representative’s pitch to my friend is that Americor promised that his credit rating – which is currently strong — would only temporarily dip, for about six months. After that, it would bounce back quickly. In addition, the debts would be reported to the credit bureaus as “paid in full,” even if reduced to 50 cents on the dollar. I call BS on that part.

What about that original $27,000 line of credit promised in the mailing, my friend D asked the representative? That line, it turns out, is only available approximately 16 months after enrolling in Americor’s program, or once his outstanding debt has been reduced by 50 percent. The line of credit would cost 18 percent annually. The Americor representative assured D his credit would be good enough to obtain a better rate elsewhere, if he wanted to, at something like 8 percent.

That of course, would depend on having great credit 16 months later. Which, again, I doubt.

D told me,

“No equivocating, they promised me that the old creditors would be happy and eager to extend me new credit at the end of the process.”

Wouldn’t his score go down, D asked Americor, repeatedly? D told me, “He said it would just go down in the beginning, but that sometimes you have to take one step back before taking two steps forward.”

The Americor representative told him “people do this all the time.”

In fact, much of this pitch sounded like BS to me. To give Americor the benefit of the doubt, banks do settle for less than the full amount owed on debts that have gone delinquent, especially perhaps over 90 days. But the claims about a quick bounce back in credit score did not pass the smell test.

I reached Dwight Flenniken III, Chief Marketing Officer for Americor, on the phone. I presented to him my two main doubts. First, not paying debts for 90 days would absolutely wreck my friend’s strong credit. Second, his credit bouncing back in a year and a half just didn’t make any sense.

Credit card companies care a tremendous amount about both timely payments and full payments. They distinguish between 30-, 60-, and 90-days late on payments as increasingly severe problems. Any 90-days late payment has a lasting effect on your score. Accounts in collections and accounts not paid in full stay as negative marks on your credit for years.

Talking with Flenniken cleared up my confusion, at least as it would apply to my friend D.

The first reason is that Americor’s typical client is in a lot worse shape, credit-wise, than my friend.

“People don’t come to us until their credit is wrecked. Most of our consumers have between a 540 and 600 FICO,”

Flenniken clarified. Starting from a low FICO, Flenniken and I both agreed, a downward dip isn’t very consequential.

Since D’s credit is in the high 600s, close to Prime, his score would fall a lot further than the typical Americor client. I think the original representative painted an overly positive picture of the consequences for my friend, in terms of “one step back and then two steps forward.” Flenniken agreed D might have better options than Americor.

FICO_unused_creditThe second factor involves a little game – my word, not Flenniken’s – that Americor plays with the credit bureaus. They begin by reporting a new open line of credit with the debtor within a few months of enrollment in their program. A client like my friend, however, would not be able to actually access the line of credit until lots of conditions had been met, often not until that 16 month mark.

The thing you have to know about this trick is that 30 percent of what makes up a FICO score is what’s known as “credit utilization,” meaning the portion of your lines of credit that you’ve drawn upon.

A new $27,000 line reported on my friend’s credit from Americor – that he can’t actually access for another year – would act as a significant buoy to his credit score through improving his “credit utilization” score. That buoy could partially counterbalance the effect of delinquencies, especially for someone starting with very low credit. The fact that this new credit line is in theory only – again, not accessible for over a year – is why I consider this a bit of credit-scoring legerdemain 1 that Americor plays. They’ve kind of hacked the FICO score.

On the knife’s edge, there’s a place for struggling through, sucking it up, and knocking out one’s debts the slow, hard way. There’s also a place for a fresh start through bankruptcy, or hiring a debtor’s attorney to negotiate for you, or even working with a debt negotiation company like Americor. A debt settlement company over-promising an “easy way” out of too much debt without hurting your credit, however, is just setting you up for disappointment.

D tells me he will not be going forward with Americor Financial Services.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle

 

Please see related post:

The Power of a Debtor’s Attorney in TX

FICO Scores – Part I 

FICO Scores – Part 2 

 

 

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  1. Dare I say, ‘prestidigitation?’

The Difficulty of Debt Collections – Especially in TX

debt_collectionsIf a friend got into trouble with too much debt to the point of being sued by a bank, I would urge them to hire an attorney.

In Texas in particular, I urge that standard advice, and then double and triple it. Get thee to a lawyer!

There’s a weird thing you may not know about Texas and collecting consumer debt, like from credit cards. We think of Texas as a pro-business state. And so we might think that would put the power of laws and courts in favor of big banks at the expense of consumers and debtors.

Compared to other states, that just isn’t so. Texas is a very hard state to effectively sue and collect money in. And if the consumer hires an attorney, it gets very difficult indeed to force payment.

How do I know this? In my bad old investment days I used to work on the creditor side of things, trying to induce people to pay money they owed. Sometimes that meant pursuing debtors through the courts.

Consumer debts from Ohio, New York, Oklahoma, California? All so much easier to collect than debts from Texas. Texas was basically a nightmare for me.

But let me step back for a minute to explain different types of collections. If you haven’t been in trouble with debt owed to a bank, you might not know the differences.

Step one usually involves traditional collections efforts, which consists mostly of letters in the mail and phone calls. Besides dinging your credit through reporting the unpaid debt to the credit bureaus, a traditional collections firm constitutes a limited nuisance. Legally, the collector can’t call more than once a day. They can’t contact you at work. They can’t speak to anyone except  you about the debt. If you don’t mind the hassle, traditional collectors can be ignored. Since most consumer protection happens at the federal level, there aren’t tremendous differences between collecting; this is the same across the states.

But in step two, a creditor initiates a lawsuit against the debtor. This is a more expensive step for a lender, but it ultimately gives the lender many more tools to collect the debt.

The creditor, through its attorney, seeks a judgment approved by court and judge. With a judgment in hand, which might take between a few months and a year to obtain, the debtor has much more at risk.

A court-ordered judgment allows a creditor to collect in more ways. In most states, if you have a job, the bank can garnish your wages, meaning force your employer to send money –- up to 25 percent of your salary — to the collections attorney. In most states if you own real estate, the collector files the judgment with the county. With a judgment as a lien on property, you generally cannot sell your property or refinance your mortgage without paying on the judgment. Finally, if you have any money in a bank account, the creditor can force the bank to turn over that money.

In Texas, however, a creditor can’t effectively do most of those things. Judgment creditors can’t garnish wages at all. And property liens and bank account garnishments can be fought very effectively with an attorney.

Benjamin Trotter, an attorney in San Antonio who represents consumer debtors who have been sued, or who have a judgment against them, described to me a wide array of tactics he uses to push a bank creditor to back off from bank accounts.

“Ninety percent of the success against these lawsuits is just showing up,” said Trotter. “Because you make the other side work on this, and they have to determine the cost and benefits of how much they want to put into these cases. Particularly for these lower threshold amounts, do they want to put all the documents in order to collect on a couple of thousand?”

debt_collections_law_firmTo be more specific, creditors do not have the right to take the money from a bank account that comes from social security, insurance, or unemployment payments, nor money held jointly with another person. When attorneys like Trotter get involved, they can gum up the creditor’s process. It’s up to the creditor to figure out precisely where all the money in an account came from. That takes time and money to do. Creditors do that cost-benefit calculation and frequently back off.

When it comes to real estate liens, a debtor’s attorney can file to get liens removed from declared homesteads in Texas. (Note: This won’t work with non-homestead property.) But removing the judgment lien from the homestead can nullify one of the creditor’s most powerful tools.

By making judgment enforcement relatively toothless in Texas, the debtor’s attorney’s power is greatly enhanced. Since it’s so much harder to do all those things in Texas to collect debts, an attorney who represents a consumer debtor almost always can get a bank to negotiate a settlement.

I asked Trotter if he had advice against making rookie mistakes, say, for a debtor being sued who hadn’t yet hired an attorney?

“A lot of people will call up the bank or the bank’s collection attorney themselves,” Trotter cautioned, “So if you do reach out on your own to the bank’s lawyer, know that you are being recorded.”

If you talk to them, Trotter cautions, admit nothing.

He says, “especially when it comes to the statute of limitations, if you validate the debt, it could extend the statute of limitation, and put you on the hook of admitting you owe it.”

Instead of admitting to owing the debt, “Say something along the lines of ‘I’m not admitting that I owe this, but for the purposes of putting this behind me, I want to come to some sort of agreement,’” Trotter said.

I’d say get an attorney to do the talking for you.

In Texas, it probably will work.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle

See related post:

Ask An Ex-Banker: Medical Collections

 

 

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Like Visiting An Old Friend – Bad Debt Buying

bad_debt_buyingIn my pre-Bankers Anonymous days, one of my primary investing activities was purchasing charged-off consumer debt.

If you have no idea what that means, I recommend reading this New York Times Magazine article from last weekend.

Few people have written about this niche of the financial world.

While Jake Halpern’s account is a bit sensationalistic compared to everyday debt-buying life – most days did not involve gun-toting shakedowns and ex-cons – he captures a good amount of the stress and uncertainty about investing there.

Some day, I’ll write the book describing the highs and mostly lows of charged-off debt buying.

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