I checked today and see that Mr. Dougal is not a member of the California Bar. Their website is artfully worded (big surprise) to blur the issue, while touting his law firm experience elsewhere. Mr. Cruz, in the other hand, is shown on the Contego site to be a Member of the California Bar. Since I do not know what duties Mr. Dougal performs for the Contego Firm, I have no idea whether he is holding himself out to be a member of the Bar. Please consider bringing this matter up with the State Bar authorities.

Thanks for sharing this. I have been a victim of a scam by a debt settlement company a couple years back. There are many companies out there waiting to gulp down the hard earned money of debt burdened individuals.

I was not aware of my rights until one of my friends referred me to debtconsolidationcare.com The members there helped me to learn many things about debts.

David, I thank you once again for your efforts in keeping the scams at bay and for keeping the common people informed.

God bless you.

What kind of Free Advice are you offering Tom? Tips on how to do the negotiating himself? On getting his upfront fees back?

I went to your website and could not find a word about how much you actually charge. To be honest, that always makes me a bit suspicious — especially for a service that traditionally has always seemed over-priced. I’m also curious about just how your fees are paid — what money pot does it come out of?

Your situation is NOTHING TO BE ASHAMED OF.

Debt settlement DOES WORK. However, the settlement firm must have your best interest in mind. taking fees upfront does not help your situation.
I own a debt settlement firm and will give you all the FREE ADVICE you want….

Pretty easy math given the situation. If your plan calls for 50% offers and it takes 3 years to save for this…..

how much faster would you be done if ALL YOUR MONEY were going to the debts?

We are a service fee based firm. We only get paid AFTER your debts are settled…

I do not want to get in the middle of your current agreement with these folks, but will be willing to talk to you and give you the ENTIRE TRUTH ABOUT THIS INDUSTRY.

800-DEBT-303

Or do a Google search for my name

“TOM BATES DEBT”

Bankruptcy is exempt. Forgiven debt is not “income” if it was forgiven in bankruptcy. But otherwise, debt forgiveness, short sale of a home, deed in lieu of foreclosure… doesn’t matter. It’s taxable income.

I urge readers to also read your new posting at The ZipDebt Blog, “The History of Debt Settlement Fees” (July 25, 2008). I’ve discussed it in a new Update in the body of this post, but the entire posting is worth a read by anyone who wants to understand this industry and its fee structure.

I’d also like to touch on a few points raised in your post.

1. You write, “Also like NetDebt and similar services, Capoccia had his debt reduction clients first stop making all payments to their creditors (to increase the pressure to settle for less than the full amount due), thus immediately ruining the credit status the client was trying to salvage.”

The simple fact is that banks will only settle for significant discounts as a loss-reduction procedure. An account that is approaching 180 days delinquency is fast becoming a candidate for “charge-off,” where the creditor takes a 100% loss on their books and then attempts to recover through the collection process. Settlement, in effect, becomes a “write-down” rather than a full write-off of the balance. So it’s usually not possible to obtain a reasonable settlement until that deadline looms. As to the point about credit damage, consumers considering debt settlement should clearly understand that it provides an alternative to a five-year Chapter 13 bankruptcy. Anyone “trying to salvage” their credit status simply has no business being in a debt settlement program in the first place! I realize that this may not square with how settlement programs are presented to the consumer, but simply put, debt settlement and bankruptcy are roughly equivalent in damage to credit. Therefore, settlement only makes sense if the client is already headed for a credit meltdown anyway.

2. Regarding the issue of taxes owed on forgiven balances, it is true that consumers will receive 1099-C forms from the creditor for any canceled balance of $600 or greater. However, there is a provision known as the “insolvency rule,” whereby a debtor is permitted to exclude the 1099-C figure from ordinary income up to the amount by which they were insolvent at the time of settlement. Many, if not most, debt settlement clients have a negative net worth and therefore meet the insolvency definition. So the exposure on tax liability is not quite as bad as some industry critics claim.

3. I found the online chat exchange with the company’s sales rep to be quite interesting. You asked, “If a creditor refuses to negotiate and instead sues, do your lawyers handle the case as part of the fee?” The rep replied with, “No. Our attorneys will do everything they can to prevent that from happening. You would be refunded the money that was set aside for that particular account.”

This is interesting, because I’m not aware of any settlement company that establishes separately funded accounts for each individual debt. In other words, funds are pooled into a single escrow account. So there is no way to determine whether or not funds were set aside for any particular account.

4. You indicated that the service agreement includes language that the law firm sends out notices of representation to all of the client’s creditors. This, quite simply, is like waving a bright red flag in front of a charging bull! Whether or not the settlement firm is also a law firm, the major creditors simply do not recognize third-party debt settlement as a legitimate business model. Nowadays, early notification to original creditors is a fast track to escalated collection attack, arbitration filings, and lawsuits. So not only does the client have to pay 15% up front, they are making matters MUCH worse on themselves in the process.

5. Regarding the attorney model for debt settlement, the theory is that the client will have an attorney to turn to in their home state if they do get sued by a creditor. This, in my opinion, is nothing more than a “fig leaf” designed to give the consumer the illusion of security. Many firms do not actually have attorneys in all of the states in which they accept clients. And even if they do, that security is an illusion, simply because the service agreements typically contain clauses that clearly state the firm does not provide representation in legal matters. At most, an attorney might assist the debtor in preparing an answer to a lawsuit, merely for the purpose of postponing a judgment and stalling for time to raise funds. But the normal outcome of such a negotiation is either a high-percentage settlement (70-85%), or a stipulation for judgment with the full balance to be repaid over some period of years at the nominal judgment rate of interest for that state.

6. Some of the agreement language you cited discusses program duration in terms of 54 months. A 54-month debt settlement program is totally absurd! It will require another blog post to describe the evolution debt settlement program duration, but the original idea was 36 months max. Even that duration is no longer practical, due to the greatly increased incidence of litigation by the secondary debt purchasing industry. Today, a consumer should aim to settle the accounts in 12-18 months to keep the risk of litigation within manageable limits. If the client’s resources are so thin that they will need 54 months to get everything settled, then Chapter 13 bankruptcy is likely to be a better option (assuming they do not qualify for Chapter 7).