There are a thousand reasons that a person can end up drowning in debt. But whether it's hefty medical bills, irresponsible credit card use, or predatory bad credit loans, it's true that your options for getting out of debt are far more limited than your options for getting into it.
We’d like to pretend that simply tightening your belt and working a side gig to pay off those personal loans and credit cards would be enough to get you out of debt, but that simply isn’t true for everyone. Some folks might be better off choosing a debt relief program with an experienced professional.
To get some additional insights into debt relief and how it works, we sat down with Michael Bovee, debt coach founder of the Consumer Recovery Network, a site that provides educational tools and assistance to people looking for debt relief options. He gave us his thoughts on the process of settling and consolidating consumer debts as well as the state of the debt relief industry in general. Enjoy!
OppLoans: Can you tell us a little bit about yourself and your background? How did you get into the business of debt relief?
Bovee: I fell into this industry by accident and became entrenched in it. I’m a debt geek, I’m fascinated by debt, and I would be doing this no matter what, even if it was just in my spare time like I did back in the day with forums and things like that. Ultimately, I got angry. A friend of mine was contacted by a debt collector back in the early ‘90s, and they cussed him out, did things they weren’t supposed to be able to do. I went to the law library on campus and found out the things they were doing to him were actually illegal. They can’t say those things!
Long story short, I helped him resolve that debt. We tried to find attorneys to help us at the time, but back then, in ‘94… there was really no consumer law body that did this kind of work. So we resolved it on our own and actually negotiated a settlement. We used some of their bad behavior to get a really good deal.
That happened in 1994. I started full-time in the industry in 1998, and I started CRN in 2004. We have a focus on education mainly. That’s our mission statement: educate and inform. Mostly as it related to triage. We’re not focused on methods like the debt snowball or whatever, we focus more on anybody that’s dealing with a triage situation. That is mostly something we achieve through publishing guides through our website and in video form through YouTube.
We do work with consumers. We are a network, so we network with attorneys, we network with credit counseling agencies, bankruptcy attorneys. Basically, we’re always trying to help people find and/or get direct assistance when they can’t go through the process on their own.
I’m an outspoken critic of my industry, because it deserves it. I’m an expert witness in court matters about the industry, and I work hard to change laws dealing with debt consolidation and debt fairness. I’m pretty heavily engaged in the industry at large.
Can you talk about the difference between debts and expenses?
A debt is something that, in today’s society, you’re paying on. You received something on forward demand, you wanted to buy something that you didn’t have the money for, and you took a loan out for all intents and purposes. That’s what a credit card is – a revolving or fixed loan. Or a mortgage, or a car payment. It’s forward demand. You didn’t have enough or chose not to pay for something in cash. Expenses are things that you do to get by each day.
How much debt are the people who use your services typically in?
Right now, on average, the people who we contact and do a full consultation with have about 22 grand in revolving credit card debt or online loans. That doesn’t speak to student loans, it doesn’t include mortgages or auto loans. That’s kind of the average, it’s down from what it was, say, 10 years ago, although I do see it creeping back up. We do run data and we see a little year over year creep in the last few years. Not by much, it’s been going down and down over the past decade and now it’s starting to go up a little bit.
Why do you think it’s going up? Does it have anything to do with the shrinking regulations that the lending industry is being subjected to?
No, that would only be consistent with the last year. The new administration has much less aggressive regulatory standards, but I think it’s more or less a symptom of people not having enough, and going through financial setbacks. I also think it has to do with the increasing cost of medical care. But what I’m talking about are people who are going through triage. That’s traditionally maybe 30% of the population.
What is your process like working with clients? When someone reaches out to you, what are the steps you take to help them?
It’s all math. Everything I’ve done all these years has been very math-centric. I do want to talk to them about their specific goals, both near and midterm. I’d define that as anything between now and three years from now, what financing and other kinds of goals do you have to both improve your life or the life of a loved one? This includes student loans!
It’s math-centric because usually people call us when something’s not going well for them financially. They’re usually limited to three mainstream options that are designed to help them manage the situation because they’re past the point of consolidating or getting lower interest rates through a loan, they’ve already tried that.
So we focus on consolidating through the nonprofits. There are about 100 nonprofits in the nation that do this. They don’t require a credit score, it’s not a loan, they have pre-arranged interest rate concessions from credit card banks, not online lenders.
They go in and have these five year plans (they’re not allowed to last longer than 60 months, the Fed won’t allow it), and they amortized their payments over some reduced interest rate and their monthly payment will be somewhere between 1.7 and 2.5% of their combined balances for up to 60 months. They have to have a dependable source of income that says this is the track you can be on and succeed on. That’s the first line of arithmetic.
We just calculate 2.1% of their balance and see if that’s an affordable payment for them. If they can, I’ll have them talk to one of those hundred agencies. They all do the same thing so it doesn’t matter who you go to, they’re all gonna give you the same quote for a monthly payment. If that’s a go, I usually stop there. I don’t want to talk about other options until they’ve either been informed about the nonprofit option, and if they can do that, we usually won’t hear from them again. If they can’t, then we’re on the phone again.
If someone tells me they can’t go that route and tell them that, well, now we’re looking at bankruptcy or settling your debts for less than what you owe. I want to go through the bankruptcy process to see whether they meet the median income to qualify for Chapter 7 in their state. This is a set number that varies from state to state and depends on the number of people in your household. But I’ll walk clients through that process.
Some states take home equity into account, and some don’t. So you have to look at that before you move into that option. Maybe they would qualify if they sold their home, is that worth it to them? If you can’t qualify for the means test, or just absolutely refuse to do Chapter 7 for some other reason, then we can move onto other options. The things is, if you can qualify for Chapter 7, it’s absolutely the smart choice. But some people just won’t do it. In that case, I talk to them about their specific creditors and what it would take to settle their debt.
This is what you’re up against. One creditor might settle for one amount, another for more or less. I go down the list of forward-looking estimates. I ask them how long it would take them to get that amount of money. Contrary to the way the rest of my industry like to pigeonhole people into things, selling them on three, four, even five-year plans, which are often disasters, I usually make sure that these payment plans don’t take longer than two years because you can be sued, and many creditors do sue!
At the end of the day, I try to push people towards Chapter 7 as hard as I can. I tell them that bankruptcy doesn’t affect them for as long as they think it will. Sure it will be on their credit report for a while but you can still get a mortgage in three years, for two years SHA. You can get a car loan for five or six percent the year after your bankruptcy and you’ll have credit card offers flooding into your mailbox just a month after your bankruptcy!
When they weigh the costs of bankruptcy as being less than $2,000, and the cost of settling their debts might be 40 percent of their total debt, or around $18,000, it just makes sense to do it and be done with it! Mathematically, which would you prefer?
Bankruptcy doesn’t kill your goals or dreams, it just puts them on pause for a relatively short time, all things considered.
You were talking about creditors who will settle for less than what someone owes. Does every creditor do this?
Every one of them. There’s honestly not a single creditor out there that doesn’t settle to some degree. I would tell you that small local credit unions have a tendency to not settle very well. They do draw the line and sometimes just refuse to settle at all. At some point later on they might take 10, 20 percent off. That’s not great, and sometimes I’ll tell people to avoid trying to settle with smaller credit unions at all. But larger USAA, NavyFed, etc, they all settle. All the major banks, they settle.
What’s the lowest amount you’ve seen a creditor settle for?
This doesn’t apply anymore but during the height of the recession, in 2008-2009 when credit card defaults were at an all-time high (300% higher than average), we were seeing some of the larger credit card issuers regularly take $0.10 on the dollar. That doesn’t happen anymore for the most part. Those same creditors are now back to the standard of 35-40%. There are times when you can do a little better than that, but in general, that’s what you’re going to see.
If you wanted to negotiate a debt settlement on your own, what would be the process there?
That’s the question with the longest answer. I’ve got a 10-part article series on our website. If you’re a DIY person, there is a process, but it would take me hours to explain it to you right now. We have a video series and an article series that will take somebody from zero to hero if they read it. We try to help where we can. We respond to everyone’s comments on the website, on YouTube, virtually every day.
We want to help people navigate that process if they want to do it on their own. Of course, we offer that as a service as well, and we charge less than anybody else in the nation. We only get paid after we put a deal together that people like. They pay the creditor first, we get paid last, and we get 15%.
There’s a lot of scams out there that claims to help people consolidate debt. How can you tell a real organization from a scammer?
There are 100 of these agencies, they’re all nonprofits and they’re all heavily regulated. You can call your state finance commission, see if they’re on the DOJ approved vendor list for bankruptcy certification. In 2005, there were some changes to the bankruptcy code, and it created a requirement for anyone filing Chapter 7 to get a certificate of completion for pre and post-bankruptcy counseling. Virtually all of those agencies offer that service, they have ever since the law changes, so if they’re not on that DOJ-approved list, it doesn’t necessarily mean it’s a scam, but that’s a good way to vet potential companies.
This is all codified into the CARD Act. Banks used to be able to jack up your interest rate because they stubbed their toe, they didn’t need a reason. But because of the CARD Act they have to wait for two months of consecutive nonpayment before they can up your interest rate. On every one of their monthly statements they send out, they also have to have a toll-free number that connects to one of these agencies. If you’re ever questioning whether or not you’re reaching one that’s legit, just open up your most recent credit card billing statement and call the toll-free number on there. That will connect you to one of these agencies.
What is the process of bankruptcy like?
I let people know that Chapter 7 is the heavyweight champion of all things debt relief. Nothing can compete with it. The national average cost of Chapter 7 bankruptcy is $1,800. It’s over in 90 days, you have absolute protection from creditors and you can move on very quickly, but you have to qualify. I go over that means test and look at assets that would otherwise be used to pay off creditors if you didn’t do Chapter 7.
I tell them Chapter 13 should be last resort option to avoid. About 70 percent who have ever filed for Chapter 13 in this country have not completed it. The overarching reason as to why is the inflexible nature of the plan. It’s a forced repayment play overseen by a trustee, and you pay a set amount of money to the trustee every month. You have to give them that money, you have no wiggle room. The trustee tells you what you’re allowed to spend on groceries every month I mean it’s that real. If you have a life event, and it could be a flat tire, a hot water tank blowing, an unexpected medical expense, you’re out. You get kicked out of the plan and you’re back to where you started.
I try to help people understand the difference between Chapter 7 and 13, and see if they can qualify for 7, but I don’t go into any kind of lengthy explanation beyond that. Everything is so state-specific when it comes to bankruptcy, I refer them out to connect with NACBA, the largest association of consumer bankruptcy attorneys in the country. They have a great feature on their website where you can search for an attorney by zip code and about 80% of their lawyers don’t charge for an initial consult. If you’re considering this you need to talk to someone in your state, we can only scratch the surface in terms of the information we can give you for your specific situation.
Michael Bovee (@debtbytes) is the founder of the Consumer Recovery Network. he has been involved in the credit and debt industry for over 20 years and has participated as an expert panelist in federal consumer protection rulemaking, collaborated on state law changes governing debt consolidation, has worked as an expert witness in court matters related to the debt relief industry, and is a regular contributor to several personal finance websites.
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