Debt-settlement firms aren’t all scammers, exec says

Robert Linderman wants you to know he isn’t a scammer.

Oh sure, he may be general counsel for Freedom Debt Relief, California’s largest debt-settlement company, and he may be vice president of the Assn. of Settlement Companies, an industry group.

And he readily acknowledges that there are some bad apples in the debt-settlement business, taking people’s money without doing much if anything to get them out of a financial hole.

But Linderman says most debt-settlement companies are honorable enterprises that only want to help people return to fiscal health.

“This industry has been tarnished by the acts of a few,” he told me. “We’re receiving negative publicity due to rogue elements.”

That’s one way of looking at it. Another is that debt-settlement companies make no guarantee that they can provide financial relief, and there have been a number of instances of people saying they were left high and dry even after paying thousands of dollars for assistance.

Linderman and his trade group reached out to me after I wrote recently about a Beverly Hills couple who paid $1,000 to a “credit correction” company that they said promised to help reduce about $100,000 in debt. More than half a year later, they said they were still waiting for some progress on their case.

Linderman wanted me (and in turn you) to know that this isn’t what happens to most people who contact debt-settlement companies affiliated with his association.

Be that as it may, the Better Business Bureau gives Freedom Debt Relief an “F” because of nearly 240 complaints filed by clients over the last three years and “concerns with the industry in which this business operates.”

Linderman called this a bad rap. He said Freedom and other firms in the Assn. of Settlement Companies were presented with $1.1 billion in debt from clients last year. He said that sum was settled with creditors for an average of 40 cents on the dollar.

“A debt-settlement program negotiates with creditors on your behalf,” Linderman said. “We deal with everyone.”

Riverside resident Jason Carstens will attest to that. He was offered up to me by Freedom Debt Relief as an example of a satisfied customer.

Carstens, 35, said he ran up about $12,000 in debt on four credit cards while out of work longer than expected with a back injury. “I had to feed my family,” he said. “But after a while, we were drowning in debt.”

He said he called Freedom Debt Relief at a friend’s recommendation. Within a year and a half, Carstens said, the company’s negotiators had settled his obligations for about 50 cents on the dollar.

Patty Roberts, a negotiations manager in Freedom Debt Relief’s Phoenix office, said there’s no special trick to what the company does — just experience with the terrain.

“Most of us are former debt collectors,” she said. “We know what creditors want, and we know how far we can push them.”

Typically, Roberts said, a debt-settlement company will contact a creditor with a general offer to resolve outstanding obligations. The creditor may then come back with a high offer — 70 cents on the dollar, say. The negotiator will then counter with a lower figure, often close to 40 or 50 cents on the dollar.

“The creditors know that this will still be better than if they sell the debt to a collection company for 10 cents on the dollar,” Roberts said. “So they work with us.”

Most members of the Assn. of Settlement Companies charge up to 20% of a person’s initial debt load, paid out over a year and a half, regardless of whether any progress is made in resolving the case. Freedom charges 15%.

That means Carstens’ $12,000 problem cost him $1,800 to fix, above and beyond the $6,000 he paid his creditors. A $100,000 debt would cost $15,000, even though Freedom specifies in its contract that “we cannot and do not make predictions, promises or warranties as to the outcome of our efforts.”

Linda Sherry, a spokeswoman for the advocacy group Consumer Action, said she advises people to steer clear of debt-settlement companies because of the payment structure.

“They shouldn’t be charging for services that may not get provided,” she said. “Why should they get any money if your debt isn’t settled?”

In many cases, Sherry said, consumers will be able to negotiate with creditors on their own. And even if they can’t, she said, people will often be much better off turning to a nonprofit credit counselor rather than a for-profit debt-settlement company.

A credit counseling service won’t make your debt go away. Instead, it will help restructure your obligations to make them more manageable, and will often lower the amount of interest owed. Frequently, the credit counselor’s fees are paid for by banks and other creditors.

Just make sure any counseling firm you deal with is affiliated with either the National Foundation for Credit Counseling or the Assn. of Independent Consumer Credit Counseling Agencies.

Linderman at Freedom Debt Relief says the industry welcomes increased regulation and wants to be taken seriously by state authorities as a legitimate resource for people with money woes.

Don’t judge all debt-settlement firms by the actions of an unscrupulous few, Linderman said. “We’re aware of the problem and we’re trying to solve it.”

A good place to start would be to change the business model so that people pay only if a settlement company gets results. No results, no 15% or 20% commission.

Linderman, not surprisingly, said the industry prefers the current system. And he said customers should too.

“We could mitigate consumers’ risk with a contingency model,” he said, “But we don’t think we would get as good a result from creditors, who might have more influence over the proceedings. A settlement that might have been 40 cents on the dollar under the current model might be 60 cents on the dollar under a contingency model.”

Or not. In any case, I suspect most people would be willing to pay a little more for guaranteed results. And I suspect the debt-settlement industry could make its negative publicity vanish overnight.

A win-win, as the negotiators say.

David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com.