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Debt Management Plans and Chapter 13 Plans: Non Identical Twins Or Distant Cousins?

posted by David Lander

The drop in the percentage of U.S. consumer bankruptcy filings that are chapter 13 cases (commented upon in Credit Slips recently by Bob Lawless) is mirrored by the reduction in the percentage of overindebted consumers who are “qualifying” for Debt Management Plans. There have always been striking and largely unexamined parallels between chapter 13 plans and Debt Management Plans. For years the drop off rates for each were within a few percentage points of one another and such demographic data as was publicly available showed remarkable similarities between chapter 13 debtors and participants in Debt Management Plans.  Debt Management Plans ("DMP's) are plans by which consumer borrowers repay their unsecured credit card debt; they are voluntary and in such plans creditors grant concessions on rates, term and installments. The official version of the DMP’s are administered by accredited consumer credit counseling agencies. To qualify for the concessions the consumer must fit within pre set criteria established by creditors.

Historically creditors had determined that this method of repayment/collection was a good deal for them, but in recent years creditors had been reducing their concessions and their involvement in the consumer credit counseling industry in general. Although there has been severe and justified criticism of the overuse of the DMP, some consumers and consumer advocates have found that the concessions within a DMP are valuable to a certain subset of overindebted consumers for whom a DMP may be a better alternative than bankruptcy. DMP’s  are not valuable, and are often damaging to consumers for whom bankruptcy is clearly a better alternative. These are different products from those offered by the severely criticized Debt Settlement industry.

Recent information regarding DMP’s is a bit confusing. Although there have been reports that creditors have reduced or eliminated concessions and have made qualifying more difficult, other more recent reports indicate that creditors and agencies are co operating in launching a new DMP which they assert will be more valuable to more of the consumers who are defaulting on credit card debt but who cannot not make the payments required under traditional DMP’s. In 2008, banking industry representatives and some consumer advocates developed a plan that would have allowed significant reductions in principal on credit card debt and long stretches for  repayment for a “test group” of consumers. That Plan required  OCC approval which was not forthcoming. CreditCards.com is one place to follow some of these developments. The DMP world is populated by many consumers who are very similar to bankruptcy debtors and studying the bankruptcy world without studying the DMP world may lead to an incomplete analysis.

Comments

The obstacles to each, but more to DMPs is obtaining reliable data rather than piece meal sampling. The lack of reliable bankruptcy data contributed to the BAPCPA and even though attempts to improve have occured they still suffer reliability. As far as DMP data, where is it?? There is no central data base so each provider maintains their own data bases. Therefore, from the past, unrealible data causes inconsistent analysis. Bad data means bad decisions.

Although I agree in the main with Raymond Bell's comment about the importance of data to informed policy decisions, I have to quibble with one point. It depends on we mean by piecemeal sampling.

Random sampling is not a problem. It is biased samples that present the problem. With even a small random sample, one can make very powerful statements about a much larger population. This is a statistical point that is often misunderstood.

Take an example about which many people like to complain -- political polling. A pollster can take a sample of just a few hundred voters to predict the outcome of an election in which thousands or millions can vote. Despite the popular wisdom, political polling generally does pretty well in predicting outcomes. (We tend to remember the failures and forget the success, which is a whole other issue.) When political polling fails it's often because the sample was nonrandom in some way such as the infamous Reader's Digest poll that only picked up wealthy voters or a poll that fails to get likely voters.

Random samples of people in financial distress have the potential to tell us a lot about debt management plans or bankruptcy. (Full disclosure -- I do random samples of people in bankruptcy.)

the research into the DMP world, random sampling or otherwise may not be so daunting and you may think. A very small number of credit card lenders would catch nearly 90% of the folks and i speculate that a very small number of the largest providers would likewise catch 80 or 90 % of the consumers/plans. Adjustments must be made for those in the DMP world who migrate to the bankruptcy world. Consumer Federation was given access in a non identifiable way over the past couple of years in an Amex funded effort so there are precedents.

david

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