IAPDA Sales Module 1: Introduction to Debt Specialist

Introduction to Debt Relief

• The IAPDA Sales Module is a training program that covers debt relief solutions, including debt settlement, credit counseling, debt consolidation loans, and bankruptcy.
• The program aims to educate Certified Debt Specialists on how to advise clients on debt relief options.

Debt Relief Solutions

• There are four primary concerns for consumers seeking debt relief:
  • Monthly payment
  • Time to debt freedom
  • Total cost
  • Credit rating impact
• Consumers need to evaluate each debt relief option relative to their prioritization of these factors.

Debt Consolidation Loans

• Debt consolidation loans combine multiple debts into one loan with a single monthly payment.
• Lenders often offer lower interest rates (around 8-9%) and may require a second mortgage.
• Problems with debt consolidation loans include:
  • Not addressing the underlying cause of debt (overspending)
  • Often carrying hidden fees
  • Risking loss of collateral (e.g., house)

Consumer Credit Counseling/Debt Management Plans

• Consumer credit counseling works best for people who can pay their debts in full or a significant portion.
• Credit counselors negotiate with creditors to lower interest rates and fees, and create a repayment plan.
• Benefits include:
  • Lowering interest rates
  • Simplifying payments
  • Avoiding late payments and collection calls
• Drawbacks include:
  • Requiring timely payments
  • Not significantly reducing monthly payments
  • Affecting credit rating during enrollment

Bankruptcy

• Bankruptcy is a last resort option that can eliminate or repay debts under federal court protection.
• Types of bankruptcy include:
  • Chapter 7 (liquidation): selling non-exempt assets to pay creditors
  • Chapter 13 (reorganization): creating a 5-year payment plan to repay debts
• Requirements for bankruptcy include:
  • Passing a means test
  • Completing credit counseling and debtor education courses
• Bankruptcy can have negative consequences, such as:
  • Social stigma
  • Harm to credit score
  • Public disclosure of assets and liabilities### Bankruptcy and Debt Relief
• In Chapter 13 bankruptcy, individuals do not receive an immediate discharge of debts; they must complete all required payments under the plan before their bankruptcy is discharged.
• During the bankruptcy case, individuals are protected from lawsuits, garnishments, and other creditor actions.
• Bankruptcy costs have increased due to the new bankruptcy law, which requires attorneys to spend more time on each case and personally verify and vouch for all financial information provided by their clients.

Debt Settlement

• Debt settlement is a process of working to resolve debts for less than what is owed.
• A debt settlement firm acts as the consumer's advocate, working to lower principal balances and resolve debts.
• Debt settlement firms do not make monthly payments to creditors but rather negotiate directly with the consumer's creditors.
• Fees are charged to consumers, but only after the client has had a successful resolution and received results.
• Debt settlement is optimal for individuals or families who are in financial hardship or struggling with large debt burdens and are looking for an alternative to bankruptcy.

Pros and Cons of Debt Settlement

• Pros:
  • Potential to reduce total principal owed
  • One low monthly program payment
  • Can resolve all enrolled debt within 2-4 years
  • No conflict of interest exists with creditors
• Cons:
  • Negative impact on credit scores
  • Creditors or collectors may contact consumers during the settlement period
  • Fees and interest will accumulate during the settlement period
  • Creditors can take legal action against consumers for unpaid accounts during the settlement period

Credit and Debt History

• The concept of credit has evolved over time, from the barter system to the use of currency and eventually, the widespread use of credit.
• Credit has become a standard in today's society, with almost every member of the community using credit in one way or another.
• The use of credit has increased the flexibility of the economic system, but it also has its drawbacks, such as the stress and hardship that can result from financial difficulties.

The Credit Card Industry

• Total US consumer credit card and non-credit card debt, excluding mortgage debt, has reached $2.564 trillion.
• Revolving debt accounts for $961.3 billion and non-revolving debt accounts for $1.603 trillion.
• There are 173 million individual credit card holders, or an average of $845 per cardholder.
• The top 15 issuers of general-purpose credit cards, based on outstanding balances, are:
  • Chase - $183.32 billion
  • Bank of America - $166.32 billion
  • Citi - $106.74 billion
  • American Express - $88.02 billion
  • Capital One - $60.08 billion

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009

• The Act establishes fair and transparent credit practices regarding open-end consumer credit plans.
• Key provisions include:
  • Issuers must disclose the period of time and total interest it will take to pay off the card balance if only minimum monthly payments are made.
  • If the interest rate increases because the minimum payment is not received within 60 days after the due date, the rate must go back to the original lower rate if the consumer makes on-time minimum payments for 6 months.
  • No over-the-limit fees may be charged unless the consumer has asked for the account to be set up to allow transactions that will exceed the credit limit.
  • Prohibits credit card issuers from setting early deadlines for payments.
  • Payments must be received by 5:00pm at a location set by the issuer.### Credit Card Legislation
• Effective August 20, 2009:
  • Send statements to consumers 21 days before the due date of any payments
  • Provide 45 days' written notice of any increases in the interest rate or other significant changes to the terms of a credit card account
  • Inform consumers of their right to keep the current terms by closing their credit card account
• Effective February 22, 2010:
  • Prohibits arbitrary interest rate increases and universal default on existing balances
  • Prohibits issuers from charging over-limit fees unless the cardholder elects to allow the issuer to complete over-limit transactions
  • Requires payments in excess of the minimum to be applied first to the credit card balance with the highest rate of interest
  • Prohibits issuers from setting early morning deadlines for credit card payments
  • Prohibits interest charges on debt paid on time (double-cycle billing ban)
  • Requires issuers extending credit to young consumers under the age of 21 to obtain an application that contains the signature of a parent, guardian, or other individual 21 years or older who will take responsibility for the debt; or proof that the applicant has an independent means of repaying any credit extended
  • Protects recipients of gift cards by requiring all gift cards to have at least a five-year life span and eliminating the practice of declining values and hidden fees for those cards not used within a reasonable period of time
• Effective August 22, 2010:
  • Requires penalty fees to be reasonable and proportional to the omission or violation
  • Requires creditors to periodically review all interest rate increases since January 2009 and reduce rates when a review indicates that a reduction is warranted

Credit Bureaus

• Credit bureaus are private firms that keep track of an individual's past payment records and present financial situation
• The information is used by lenders to determine an individual's credit reputation
• The most important factor is an individual's past record for paying debts
• A credit history file follows an individual if they move to another city
• Adverse information, such as unpaid bills, must be deleted after a period of time
• Information on a bankruptcy must be deleted after 10 years
• A credit report does not include information on race, gender, religion, sexual orientation, national origin, medical history, checking or savings accounts, personal lifestyle, political preferences, or criminal record

Types of Credit Reports

• Consumer Version: Lists all inquiries, including promotional inquiries, account numbers, and account management inquiries
• Business Version: An abbreviated version of the consumer version, does not contain promotional inquiries, account numbers, or account management inquiries

Contents of a Credit Report

• Personal Information: Full name, current and previous addresses, Social Security number, telephone number, date of birth, and current and previous employers
• Credit History: A listing of credit accounts from the last ten years, including account number, creditor's name, amount borrowed, amount owed, credit limit, date when the account was opened, updated, or closed, and timeliness of payments
• Public Records: Tax liens, bankruptcies, and court judgments
• Inquiries: A listing of creditors or authorized users who have requested a copy of the credit report

Fair Credit Reporting Act (FCRA)

• Protects consumers from being penalized for inquiries that they did not initiate or request
• Therefore, promotional and account management inquiries are excluded from the business version of credit reports

Benefits of Credit Reports

• Enables consumers to apply for credit no matter where they live
• Fosters intense marketing battles among financial services providers, leading to benefits such as no annual fees, toll-free customer service phone numbers, customer recognition and incentive programs, and purchase protection plans
• Minimizes credit losses, which are ultimately passed on to consumers who do pay their bills