A year ago, Sarah Leineke had 150 clients. Now, she has more than 450.
Jack Craven’s firm has seen his work increase by more than 25 percent this year.
“Last month was the biggest month we ever had,” said Craven, president of Debt Settlement USA in Scottsdale. The national company, which operates in 29 states, signed up more than 1,200 clients and was forced to turn away many others because it couldn’t handle the demand.
Many industries in Phoenix are struggling as the economy dips further into recession and the real estate crash hammers the market. But sectors that rely on the misfortune of consumers, or those who make poor financial decisions, are thriving.
Like collection agencies or law firms that specialize in bankruptcies, many businesses in the debt-settlement and credit counseling industries are capitalizing on the tough times.
Leineke, president and owner of Nationwide Debt Settlement, a for-profit business based in Phoenix, never advises clients to file for bankruptcy protection. For example, she is trying to work out a settlement for one client who has $212,000 in unsecured debt.
While such services are helping consumers pay their bills, bankruptcies continue to rise in Phoenix.
Metro Phoenix logged 1,552 bankruptcy filings in October, up 108 percent from October 2007, according to the U.S. Bankruptcy Court, District of Arizona. Nationally, the number of consumer bankruptcies hit 106,266 last month — the first time the total has eclipsed 100,000 since laws enacted in October 2005 made it tougher to file.
Corporate Collections International’s business has increased, but it is having a tougher time collecting debts because of increasing bankruptcies, said owner Todd Haley.
Leineke knows the debt-settlement industry doesn’t have a good reputation, largely because of predatory practices by some firms, which charge up-front fees and do little to help the consumer in the long run. That’s why she encourages customers to research companies before selecting one — check with the Better Business Bureau and find out their affiliations, such as the International Association of Debt Arbitrators, the Association of Settlement Companies and U.S. Organizations for Bankruptcy Alternatives.
“The more affiliations a debt-settlement company has, the more reputable they’re going to be,” said Leineke.
Her company charges clients 10 percent of their total debt, which can be paid over several months, and negotiates with banks and credit card companies to cut debts in half. Business is so good, Nationwide may expand to California.
Leineke said the most distress is among recent retirees, who spent their retirement packages or saw their 401(k) savings plummet with the stock market.
“They’re living off these credit cards, and they can’t pay them back,” Leineke said. “People who are calling are in dire need of help.”
Phoenix-based nonprofit Take Charge America has seen a 55 percent increase in calls in the past six months, but many consumers can’t qualify for its debt-management program. Borrowers in the 60- to 120-day late range must be able to pay off the entire principal over five years.
In October, only 38 percent of callers qualified for TCA’s program. In 2007, 47 percent qualified.
“We’re in a very different market than we were 90 days ago,” said John Fisher, president and CEO of Take Charge, which operates in every state. “Because there are so many different financial stressors, we’re seeing fewer consumers qualifying for plans.”
TCA charges a sign-up fee of $60 plus a monthly fee of about $40, which includes counseling.
Fisher said creditors have been more responsive to delinquent borrowers, trying to find compromise.
“The historical model of hard collections is not going to work in the environment today,” he said.
The environment, however, is creating plenty of work for the industry.
Debt Settlement has built its employee base from 70 two years ago to 180. Craven said most of its new business is generated from divorces, job losses and medical bills.
The company has settled more than $160 million in balances. It charges consumers a $29 application fee plus 14 percent of the unsecured balance, and negotiates to bring down 40 percent to 60 percent of their total debt. It’s on track to handle more than 9,000 settlements this year. Last year, it handled between 7,000 and 8,000.
All of its clients are heading into charge-off status.
“They’re just unable to pay their bills,” Craven said. “They’re not unwilling.”
He said consumer credit counseling, which has been sponsored by banks for years, is not the answer.
“They will never get out of debt,” he said of consumers taking this path. “They wind up paying the same amount.”
Gail Burns, who launched Credit Repair Assistance Services LLC in July in northeast Phoenix, said many counseling and debt-settlement services don’t have experience working in the credit and mortgage environment, so they don’t offer concrete advice to effect change.
Burns, who worked for 15 years as a loan consultant in the mortgage industry and penned “The Credit Repair Guide,” said her business slowed down in late summer as consumer spending tightened.
“Everybody is afraid to spend money,” she said.
Burns charges a $99 evaluation fee and a $125 consultation fee, and implements a tailored restructuring plan for $200 to $600, depending on the situation.
