Credit/Debt Recovery

Provanta's new site

Richard Nikoley popped in to the comments recently to announce Provanta's new web site: www.provanta.com.

I really, really like it. At first, it's a novel idea to have a corporate site that is essentially a blog. It's a smart (and inexpensive) way for a company to set up their web presence that says a lot about the company. For one thing, when the home page is dedicated to frequent messages from the company to the public, you know right away that you're dealing with people who are not afraid to communicate with you and give you more information. It's a brilliant choice for a debt settlement negotiation company; when clients are handing their money over to a third party, they want to know how things are going.

And after reading most of the site, it's not just the fact that it's a blog that is impressive, it's the content of the posts. I don't know else where you're going to find this much honesty on a debt settlement negotiator's site, or on any corporate web site.

It doesn't seem like Provanta negotiates settlements radically differently from anyone else in the industry, but they do it with such integrity that I couldn't recommend another settlement negotiator. What I mean is this; the things Provanta is communicating from their blog are true across the entire debt recovery industry, but a lot of lesser debt settlement companies wouldn't be this straight with you. If you're interested in debt settlements, give Provanta's blog a read.

Credit crunch stuff

You'll be seeing the phrase "credit crunch" where ever you look for months to come. It's a phrase carefully coined to make a sudden infusion of common sense in lending look like a bad thing.

The crunch just means lenders are going to stop handing out credit to people who haven't demonstrated that they can handle it. Call it a "crunch" if you want, but it's the way the lending business should have been run all along.

It used to be, until activists stepped in and convinced the government to intervene, forcing lenders to extend credit more broadly.

This is analogous to the biofuel mess Mark Steyn writes about (and linked to by Tom Blumer of BizzyBlog). Environmentalists pressured government to require more use of biofuels, which is backfiring in a big way.

Ditto lending. When you require lenders to engage in subprime lending, don't be surprised when the whole thing backfires. Here's Caroline Baum with more on this.

Being good

John Gruber's Daring Fireball blog links to Paul Graham advising startup companies to "Be good."

Gruber's summary of Graham resonates:

His argument, more or less, if that if you use “do what’s best for the users” as your rule of thumb for any decision, you’re more likely to grow into a successful business. He even makes the case that was true for Microsoft during their years of phenomenal growth.

How I wish credit card companies would think the same way with regard to their debtors. I think that sums up the difference between me and other critics of the credit card companies. I want people to have access to credit, and I want creditors to apply Paul Graham's advice to their own industry and be successful. The business of lending isn't evil; it's the way the Bank of Americas of the world go about it. I just hate when creditors resort to coercion and fraud to make a few extra bucks.

The kind of behavior I'm talking about is what Bob Sullivan calls "Gotcha Capitalism." Except it's not really capitalism. Translate "users" in the quote above to "customers" and you've got a near-perfect description of real capitalism (the evils committed by credit card companies aren't capitalism, despite what journalists or social studies teachers say).

Internet lending

I've blogged about Prosper.com a few times in the past (here and here are a couple of examples).

My basic take on the whole thing was that the "feel-good" borrower-lender relationships being promoted would give way to traditional numbers-based lending. That is, a reliable credit score will beat out a compelling sob story every time.

And that's what seems to have happened. Prosper lenders I know started in good faith trying to help borrowers in need, and these days they just look at credit ratings and ignore the personal narratives and borrower profiles altogether.

I see Richard Nikoley is eyeing the peer-to-peer lending industry as well. He's started accounts with Prosper and Lending Club, and not surprisingly, has started out with a clear head. From his blog:

I'm not interested in people's stories, only their credit grade, debt ratios, and so on -- all the classic criteria.

I know Richard to be firmly grounded in reality, so of course he's not just going to lend to the person with the best narrative. He's going to use proven criteria. The bottom line is, the credit scoring system we have works pretty well. It's not perfect, or else there'd be no need for books by me about repairing your credit. But credit reporting and scoring are not about to be replaced by personal narratives.

Though maybe traditional creditors will give way to more peer-to-peer lenders. I'd like that. While I don't think creditors are evil for using traditional credit reporting, their treatment of their debtors is less than virtuous. I don't expect individuals lending with peer-to-peer websites to completely negate their lending agreements and change fees, terms and interest rates in violation of their signed contracts. We'll leave that sort of thing to Bank of America and the other lenders who aren't on this list.

I look forward to seeing what else Richard has to say about peer to peer lending, and yes, my curiousity is piqued about Zazingo.

Checking in

I've been way too busy for blogging lately, but I wanted to check in just to assure everyone I'm alive.

Here's a story I saw on Drudge that I think everyone should see:
Russian doomsday cult calls credit cards satanic
I didn't know Bank of America gave out credit cards in Russia.

Life after the DMP

There's a dearth of material online advising consumers about life after a Debt Management Plan. That's not a terrible thing; the fact is, living on a DMP for 2-5 years teaches you a lot about personal money management. There's not a lot educators like me can add that will top the experience of living without access to credit for the duration of a plan.

Still, I think we should try to sum up some of the things DMP graduates can expect.

First, there's your credit rating. If you had a history of making late payments going into your DMP, you may have some damage to your score that you may need to work on. The DMP itself will have no effect on your score, so if your payment history prior to credit counseling was solid, you'll now find yourself with a high credit score and without any debt.

That can be a dangerous thing. If you're fresh out of a DMP, your credit score is good, and your debts are paid off, there can be a great temptation to run out and get a new card and max it out. Don't think that you should buy yourself some big-ticket item on credit as a reward for completing your DMP. Your reward is having no debt, period. If you've spent years diligently working to pay down your debts, spend a few more months working to save for the next big purchase you need to make.

That's not to say you should use no credit- it's important to have one credit card and use it responsibly. Just for the sake of your credit, get a low-limit card and use it regularly, making sure you pay it off every month. I usually suggest using the card for gas and nothing else. Then you have a regular history of using your card with out running up so much debt in one month that you can't afford to pay it all off.

If your credit was wrecked going into the DMP, it's not likely to have gotten much better (though it certainly will not have gotten any worse). If you don't qualify for a credit card, save up enough money for a secured card. You won't need more than $500 for this purpose, and then you can get a $250 secured card. Talk to your credit union or bank about their secured credit card products.

Another thing I would ask any DMP graduate to consider is to "stay on the DMP." That is, continue to live on the same tight budget (you survived for the years you were on the plan, right?), and continue to gather your DMP payment. Except instead of sending that DMP payment toward your debts, start putting it toward your retirement. I think this is a crucial thing that credit counselors don't stress enough. When I write about needing to get out of the financial failure business and into the financial success business, that's what I mean. The typical DMP payment would roughly add up to the allowable IRA contribution limit over the course of a year. In addition to building retirement savings, you get a tax advantage that you didn't get when making DMP payments. If your total DMP payments added up to more than $4,000 per year (or whatever your IRA contribution limit is), then you'll have a little bit extra for other expenses.

If you did have a high DMP payment and you have more than the allowable IRA contribution limit, consider using some of that money to make an extra house payment. And if you're not a homeowner yet, then that should be your next savings goal. Save that extra money toward a large down payment.

Whatever you do, don't take the money you were sending to your creditors every month and waste it. Consider a 529 plan for your kids' education, or some other worthy goal. Going on a DMP and working to become debt free was a smart move. When your DMP is complete, don't suddenly get stupid.

Who weighed in on proposed credit reporting reform?

Late last year, some new rules were proposed that would make it easier for consumers to dispute bad data on their credit reports. (Here's the ConsumerAffairs.com story about the proposal.) The report that was published was technical and very long, so it's not something I'd expect everyday consumers to slog through. But people who claim to advocate for you in the sphere of credit reporting should definitely have done so. Indeed, some did.

After the report was published, there was a 60-day period for public comments. Who commented? Mostly, the organizations with the most to lose if the recommended reforms are enacted: The Mortgage Bankers Association, Independent Community Bankers of America, Wachovia, HSBC, American Bankers Association, Visa, National Retail Federation, AFSA, Zions Bancorporation, Wells Fargo, MasterCard, CDIA, and so on.

There were a few consumer advocate groups who contributed comments, too: National Consumer Law Center, Consumers Union, World Privacy Forum, etc.

But not the NFCC, as far as I can tell.

When an important regulation is being debated, one that falls squarely in what should be the NFCC's area of expertise, they sit on their hands instead of contributing to the debate. Why is that? Why would the NFCC leadership be more interested in writing threatening letters trying to bully their way into a leadership role in the homeownership counseling arena than contributing to the discussion of credit reporting reforms? Well, the NFCC leadership is under the control or people who want desperately to return to the pockets of the creditors and remain firmly ensconced there. After the NFCC member agencies spent decades fighting for control of the counseling industry, they ended up with leadership that has repeatedly taken steps to return control of the credit counseling to the creditors. And creditors don't want reforms to credit reporting that make them work harder to guarantee the integrity of consumers' credit reports. They want that burden to fall on you. So the NFCC, who knows better than anyone the need for reforms in credit reporting, doesn't say a thing, because they apparently don't want to upset their creditor overlords.

In fact, the only time they get off their butts is when their porcine snouts detect a new money trough to feast from, or a new fiefdom for them to rule. Then they spring into action threatening congressional oversight hearings.

NFCC to HPF: "Let us run the show or else"

Last week Marc Guimond dropped a mind grenade in the comments that I just got around to. Susan Keating, NFCC President, has thrown a temper tantrum about the Homeownership Preservation Foundation, complaining that the "the HPF has been extremely aggressive in their efforts to force agencies to join their NFMCP intermediary." They think the HPF is attempting to gain a monopoly over housing counseling.

If you know anything about the NFCC and the credit counseling industry, this line of argument is hilarious. As Mark put it in his comment:

Susan Keating of the NFCC is complaining about referral services and mandatory membership in an organization????

Don't believe a word of this nonsense from the NFCC. It's pathetic; sour grapes. The NFCC wants to be the only Sheriff in town. This complaint has nothing to do with serving homeowners or consumers; it's about the NFCC wanting total control of the industry. Period. And they're not content to gain the control they so desperately crave by simply being excellent; no, they're threatening to demand government oversight hearings to crush their enemies. This from the same organization that's been fending off those kinds of threats from consumer law groups and anti-bankruptcy reform activists for years.

If they wanted a seat at this table, they should have been way out in front of the housing situation the way the HPF was. The HPF was committed to this work years before the current troubles in the housing market; they didn't just suddenly decide to help homeowners because it would get them good press. If the NFCC truly put the needs of consumers and homeowners first, they would have been more directly involved in homeownership preservation much sooner, before there was government money being thrown at the problem.

The NFCC is pathetic.

A financial educator's work is never done

Yesterday, we were watching in amusement as my wife's 5-year-old niece went through the ads in the Sunday paper circling all the things she wanted. A lot of things.

Her brother pestered her, "You need to get a job to pay for that stuff!"

"I'll use a credit card," she answered.

Her grandmother piped up, "You still need to have a job to get a a credit card."

"I'll just use Mom's," she said.

I have a lot of work to do...

Why You Should Challenge Junk Debt Buyers

Often when I post about challenging collection efforts or disputing items on one's credit report, I get an angry comment along the lines of "If'n you borrowed the money, you should PAY IT BACK!!!"

I think many of these comments are from professional debt collectors, who stumble across the blog because it's titled "Credit/Debt Recovery." That title was a big mistake, but I'm over it, and it's too late to make the change.

Anyhow, I'm not sympathetic to the arguments that it's a simple matter of "PAY IT BACK!!!"

The comparison I'm about to make may seem like a stretch, but it's not, so bear with me. Via the excellent Agitator blog, here is a link to a CNN article about a man exonerated by DNA evidence years after being imprisoned for murder.

It's a far cry from credit card debt, sure, but there's a lesson in good faith that everyone should heed. The victim of the false prosecution in this case cooperated with police, thinking that they would never accuse him of murder when they learned that he was innocent. His father had raised him to obey authority, and since he hadn't committed any crime, he didn't feel like he had anything to worry about.

So this man cooperated with the police investigation, and it resulted in his serving ten years in prison for a murder he didn't commit. Even though he was innocent and had nothing to hide, he should have gotten a lawyer from the beginning and should never have answered questions without an attorney present.

Treat collectors the same way. No, I'm not saying hire a lawyer every time. What I mean is, be defensive, protect yourself, and demand proof before you repay any old debt. Don't just "PAY IT BACK" without making the collector prove the debt is valid, that you are the person who owes the debt, and they have the legal right to collect it. Be blunt, straightforward, and firm. I'm not saying you should be a jerk, but don't be nice either. Assume you're dealing with someone who is out to get you (you are) and negotiate in that spirit.

When I say be tough, I mean it. The more firm you are in demanding proof, the more likely the collector is to drop the matter. And threaten to report them to the FTC if they continue collection efforts. Being tough works with junk debt collectors; they don't have time to mess with you if you're sincerely going to put up a big fight. If the debt is legit, you owe it, and they have written proof to back it up, then they'll be sure to let you know (make them SHOW you the proof). Only then should you prepare to pay off the account. And even then, if it's a large amount, you might want to talk to a settlement negotiator. The collector didn't pay the full amount to acquire the debt, so you shouldn't have to repay the full amount.

Remember, standing firm on your rights doesn't make you a bad person. Some people will tell you to cooperate with debt collectors; "they're just doing their job." I say their job should include verifying the validity of the debts they collect, and backing that up with documentation. It's not your job to help them make their collection quotas, it's theirs. That's why I linked to that CNN article above. It's obviously an extreme example, but operating in good faith with people who are out to get you is not a course of action I can recommend.