If it were true that only the strongest businesses survived 2009, perhaps only the smartest will thrive in 2010.

For financial institutions, which are still navigating the real estate crisis, success in the new year may depend as much on sound strategies for negotiating bad debt as it will on the inherent strength or size of particular asset portfolios. In other words, while some institutions were deemed “too big to fail” at the outset of the economic meltdown, those still standing must make sure they are “too smart to fail” if they hope to enjoy the eventual recovery.

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While many customers are seeking loans, many banks are focused inwards, examining their loan portfolios for weaknesses.

With problem loads at record-high levels, it takes a lot of work from bank staffs to monitor borrower performance and evaluate collateral assets. What they find often determines not only the profitability of the bank, but also what the bank will do with it’s problem loans.

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On August 10, 2009, MSN Money's Luz Pulliam Weston published an advice article entitled, "Why Credit Counseling Usually Fails."  In it, Ms. Weston advises readers overwhelmed by debt to immediately make two appointments.  One appointment should be with a legitimate credit counselor affiliated with the National Foundation for Credit Counseling (NFCC).  The other appointment should be made with a bankruptcy attorney.

Ms. Weston recommends meeting with a bankruptcy attorney so that the consumer is aware of all available options.  Furthermore, as she puts it, "even if you desperately want credit counseling to work, it often -- usually, in fact -- won't."  

Of the 3.2 million people who contacted NFCC agencies last year, one-third were able to handle their finances on their own after a counseling session.  Another third were either too far gone for debt management plans to help or had problems credit counseling couldn't help.  The final third enrolled in debt-management programs (DMPs).  However, the dropout rate for consumers enrolled in DMPs averages at least 45%.

Furthermore, Ms. Weston cautions that if people are counting on credit counseling as a way to avoid bankruptcy, the deck may be stacked against them.  After all, if a debt-management program is ultimately unsuccessful, the consumer will have to file bankruptcy anyway and could have saved much time, money, and aggravation by avoiding the debt-management program entirely.

Steve Rhode, who once ran a credit counseling agency and who now runs a website offering debt advice, says, "It's calculated all backward.  A DMP is not calculated based on what's reasonable, affordable or sustainable for consumers.  It's based on what the creditor wants."  This often leaves borrowers on budgets so tight that any slight setback (an unexpected bill or a reduction at work) can throw a consumer off track.  "People will agree to anything when a DMP is put in front of them because they think it's going to help, but it's going to fail the next time they hit a bump." 

For more information:  http://articles.moneycentral.msn.com/Banking/YourCreditRating/why-credit-counseling-often-fails.aspx?page=1

Updated: 8/12/2009 

On June 26, 2009, MSNBC.com reported on the ongoing problems with ads promising 'quick and painless debt relief.'  An entire rogue industry has popped up around the 'debt settlement' business.  Ads for these debt settlement companies are ubiquitous, and nearly always use the same pitch:  "Consumers have the 'RIGHT' to have their debts reduced by 50, 60, even 70 percent," the ads say, often promising "information the credit card companies dont want you to know."

The basic strategy these firms employ is to instruct consumers to stop paying creditors.  The theory being that if the creditor receives nothing for several months, they will be happy to accept a lump sum settlement for significantly less than the total debt.  Sometimes, this strategy can be succesful.  

The problem for consumers is the excessive up-front fees, often accompanied by additional monthly fees, charged by the debt settlement companies.  "Most of the money paid during the first year goes toward the fees and most clients who agree to debt settlement give up after less than a year.  So the company will collect some monthly amount from them for one to 12 months, offer no service whatsoever, and not a penny goes toward getting them out of debt."

Consumers Union recently advised debtors not to use settlement companies.  In 2005, the Center for Responsible Lending said that such services are only appropriate for a very thin slice of consumers.  The vast majority of consumers could work out their own arrangements with lenders, it said.  Gail Hillebrand, legislative director for Consumers Union, said that settlement companies have no legitimate product, but are thriving because so many consumers are deeply in debt.  

"They are selling hope. They are selling optimism," Hillebrand said. "Scams always come back in a recession, and now they are just roaring back."

The debt settlement industry has attracted the attention of regulators and legislators around the country.  In addition to Cuomo's investigation, numerous other state attorneys general have taken action against individual firms.  

New York Attorney General Andrew Cuomo's office provides some advise for dealing with debt settlement companies:

• Be wary of debt settlement companies that falsely promise to obtain substantial lump sum debt reduction settlements.  Many claim to be able to erase as much as 75% of credit card debt, but they rarely obtain advertised reductions.
• Enrollment in debt settlement plans may not stop creditors from bringing collection lawsuits or prevent enrolled accounts from growing larger through the addition of late fees, interest and penalties.  Also, credit reports will be adversely affected. 
• Creditors are under no legal obligation to accept a settlement offer for less than the outstanding balance.
• Enrollment in a debt settlement plan premised on stopping payments to creditors will likely lead to more frequent and aggressive creditor collection efforts, often resulting in judgments, wage garnishments, and freezing of bank accounts.
• A wise first step to help resolve an outstanding account is to speak directly to the credit card issuer.  Alternatively, it may be helpful to speak to an attorney or an accredited credit card counselor who can help develop a plan of action that best works for each consumer's unique situation.

For more information: http://redtape.msnbc.com/2009/06/debt-settlement-firms-under-fire.html

Updated: June 26, 2009