Collection Agencies Wary of Debt Settlement Firms, But See their Purpose

Collection firms have mixed views of debt settlement firms, seeing them as filling an important purpose, but also saying that collection agencies can fill the same needs without the fees that debt settlement firms charge.

“There is a place for them in the industry,” said Mark Neeb, president and CEO of The Affiliated Group, a Rochester, Minn.-based debt collection firm that employs 110 people. “There is no surprise that a lot of people today are looking for [financial] help. A lot of people don’t know where to turn.”

Consumers with debt trouble would be better off going straight to the collection agencies that are handling the accounts, argues Eric Medrano, CEO of California Recovery Systems, Inc., a Sacramento, Calif. firm with 28 full-time collectors. He points out that consumers have to pay a large upfront fee to a debt settlement firm before any money is paid to a collection firm (or directly to a creditor, if the account has yet to be turned over for collection).

“I’m grateful for the money that they bring to the table, but we could collect more if they weren’t around,” Medrano conceded, arguing that the fees paid to the debt settlement companies would be better spent to help settle the outstanding debts.

Neeb and Medrano pointed out that the debt settlement industry is unregulated. “There are no rules to limit or define what they can and cannot do,” Neeb said.

This fact is not lost on the Federal Trade Commission and even some debt settlement companies themselves. The FTC is now looking at regulation to reign in the debt settlement industry ("Debt Settlement Companies Put Under FTC Microscope," Sept. 29).

In a recent workshop held by the FTC, panelists agreed that the Treasury Department’s Comptroller of the Currency should be the national regulator, which would provide a better solution than individual state oversight.

Jack Craven, president of Debt Settlement USA, Inc. in Phoenix, Ariz., said there are indeed a number of bad operators in the business that put a reputational burden on firms like his that he said “believe in consumer protection and full disclosure.”

Debt Settlement USA has more than 19,000 customers. In the five-plus years since its founding, the privately held company has settled $165 million in debts, including $1.5 million in October.

“People that come to us don’t have the ability to pay any more. They’re not unwilling to pay, they’re just unable to pay,” Craven said. “If a collection agency has an account placed with it, it only knows about that one particular account.” The collection firm might be attempting to collect on a credit card debt, for example, but the debtor likely has other outstanding debts, all of which are brought to the debt settlement firm.

“We have the complete financial profile,” Craven said, adding that such a profile, including debts, assets and income, enables the company to better determine what a debtor can pay.

Some debt collection agencies are happy to work with reputable debt settlement firms because they aid in recovering funds that may not otherwise be collected, according to Craven. By working with debt settlement companies, collection firms can use their people on accounts that haven’t gone to debt settlement firms, Craven noted.

Craven wants to see regulation of the industry because he agrees with Neeb’s assessment that any firm can call itself a debt settlement company and may do little to help the consumer, with many making false claims.

For example, in Minnesota, “foreclosure consultants” have promised to eliminate borrowers’ mortgage debt, bringing a lawsuit from Minnesota Attorney General Lori Swanson.

So Craven wants to see auditing and licensure requirements.

“There are good companies, bad ones and ones in the middle,” Neeb said. Medrano has a much harsher view: “They’re all crooks. They’re nothing more than agents for the debtors. They take their money up front, and until they get paid, they don’t provide anything for the creditors.”

Typically, a debt settlement company will place debtors’ payments in escrow before approaching creditors — and collection agencies — with payment offers.

The FTC will be collecting comments on the debt settlement industry through Dec. 1, and will then decide how to proceed in regulating the burgeoning industry.