What’s In A Name? U.S. Organization For Bankruptcy Alternatives (Misleading Name/Misleading Benefits?)

01 Dec What’s In A Name? U.S. Organization For Bankruptcy Alternatives (Misleading Name/Misleading Benefits?)

I became aware of an organization named the United States Organization for Bankruptcy Alternatives,  a debt negotiation industry organization, which purports to offer a different road for the financially distressed.    The Association urges debt negotiators who are not part of an industry association to join with them to have their voices heard (strength in numbers?).

My initial reaction to the website owned by the organization is that the Association attempts to look like an official governmental agency–pictures of a courthouse prominently displayed, the name of the Association includes “UNITED STATES”, photos of flags flying, blue skies overhead…..

I also looked at the vendors recommended by the Association.   The vendors include companies who target distressed consumers by their FICO (credit) score and others who run debt management companies.

On the Consumers link, the Association states the mission statement that they are “dedicated to advocating for fair legislation that will help provide consumers with a high level of protection.  As each state considers or introduces legislation our team participates by actively educating and cooperating with state officials, regulators, and legislators.”  To emphasis the point, they repeat the paragraph again, worded slightly differently…

I read their sample newsletter from March 2008, in which one article discusses a pending bill and the changes they were successful in making.   To quote the author:  “

Unfortunately, one section that remained unchanged is the allowable fee section, which states:

(2) If an individual assents to an agreement that contemplates that creditors will settle debts for less than the principal amount of the debt, a provider may charge

(A) subject to Section 19(d), a fee for consultation, obtaining a credit report, setting up an account, and the like, in an amount not exceeding the lesser of $400 and four percent of the debt in the plan at the inception of the plan; and

(B) a monthly service fee, not to exceed $10 times the number of creditors remaining in a plan at the time the fee is assessed, but not more than $50 in any month.

Just to put that in perspective:  suppose a debtor comes in with $60,000 in credit card debt.  The initial consultation/fee could be $400 plus $2400, or $2800 to the debtor.  Then, $50 per month service fee.

Section 23(f) (not complained about by the Association) provides that if the provider is able to reduce the debt for the consumer, the provider may charge 30% of the excess of the principal amount of the debt over the amount paid the credit less any earlier fees……hmmmm…..

So, Debt #1 is for $10,000.   Provider charges $2800 initially.   Provider is able to settle the debt for $5000.    Debtor now owes provider 30% of reduction of principal less the $2400….an additional $600.00.

Debt #2 is for $10,000.   Provider has already refunded the initial fee in Debt #1, so doesn’t have to credit again.   Debtor now owes provider 30% of that debt…or another $3000.

So far, settling two debts has earned the provider about $5800 and a 1099 for taxable debt forgiveness for the consumer (the money paid to the debt negotiator is not deductible); ruined credit (see my earlier article on what effects debt management can have on a debtor’s credit).  Who is really benefiting here?

Strength in numbers, indeed.   I don’t like the “air’ of governmental authority and approval and perhaps I am just a small town attorney, but I can’t figure out why this debt negotiation or debt management (if one of the suggested vendors is used)(and other consumer attorneys agree; Georgia consumer attorney, Jonathan Ginsberg reviews debt management v. bankruptcy in a blog on this site) is better than bankruptcy — other than it is making a lot of money for the members of the United States Association for Bankruptcy Alternatives.

Before entering into an agreement with any “debt negotiator” or any other program, North Carolina attorney Susanne Robicsek suggests that you consult with an experienced bankruptcy attorney.  I agree.

Please  consider consulting with an attorney about what your options are under the protections of the U.S. Bankruptcy Code.  I note that nowhere on the Association website does that advice present itself.

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.
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