There’s nothing new about debt settlement. Since lending began, creditors have been willing to accept whatever they could get in situations where it looked like there was a real chance they’d get nothing if they didn’t negotiate. The modern practice of debt settlement is no different.
In the US, debt settlement has always been a common way to resolve commercial litigation. At some point, settling a lawsuit is cheaper than continuing to pay attorneys to pursue a judgment. Debt settlement did not become popular with consumers until consumer debt became widespread. Before 1930, individual debt was rare; typically, it involved farmers financing the seed and farming implements needed to bring in a crop, and then paying off the loan after selling the harvest. A few big city stores offered proprietary “shopping cards,” but only to their best customers, and balances usually were not carried long.
The First Credit Cards Lead to Debt Settlement
In the late 1930s, the first consumer credit card, Diner’s Club, appeared, and debt became fashionable. Bankruptcy attorneys soon followed, practiced in the ways of commercial litigation and debt settlement. Then, as now, debt settlement became a tool wielded by the nearly bankrupt to resolve outstanding debt; however, it wasn’t a powerful tool. Laws had not been enacted yet to protect unsophisticated consumers from savvy creditors who used every advantage to coerce repayment.
As the number of credit card users increased, so did the number of consumer bankruptcies, despite the abusive collection practices of credit card companies. As a result, Congress stepped in with legislation that protected consumers, including the Consumer Credit Protection Act, the Truth in Lending Act, the Fair Credit Reporting Act, and the Fair Credit Billing Act. Forced to act on a level playing field, creditors became more receptive to debt settlement offers. Still, until the economic downturn of the late 1980s, debt settlement remained a little-known strategy practiced only by bankruptcy attorneys.
Debt Settlement Becomes a Boom Industry
Bank deregulation loosened lending requirements in the 1990s. When the economy took off in the last half of that decade, sending real estate prices through the roof, people leveraged their home equity to go further in debt. When that bubble burst, and there were more bankrupt consumers than there were attorneys, debt settlement companies sprang up seemingly overnight. At the peak, there were thousands of debt settlement companies in the US.
When the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult for consumers to file for Chapter 7 bankruptcy, consumers had less leverage with creditors, and debt settlement companies resorted to aggressive marketing tactics to lure more consumers into their programs, while helping fewer of them. Motivated by upfront fees that were collected whether debts were ever settled or not, debt settlement companies promised huge savings to consumers but often delivered very little. The result has been that debt settlement has earned a bad reputation, although it can be a helpful and effective debt relief strategy.
The FTC Telemarketing Sales Rule: New Age in Debt Settlement Services
Lobbying efforts by major credit card companies to restrain debt settlement companies were successful when the Federal Trade Commission (FTC), acting ostensibly in consumers’ best interests, revised the Telemarketing Sales Rule in 2010 to prevent for-profit debt relief companies that use telemarketing sales strategies from charging upfront fees for their services. Because many debt settlement companies use the telephone to communicate with prospective clients, and cannot do significant business otherwise, they are affected by the rule’s restrictions. Since debt settlement is a lengthy process, many for-profit companies cannot afford to offer debt settlement to clients if they must wait to be paid until the settlement process is completed.
Many non-profit credit counseling companies have not opted to fill the void, since many are built around a business model that relies on payments from the credit issuers and are loathe to “bite the hand that feeds them” by helping consumers pay less of the debt they owe. Attorneys, however, are also exempt from the regulations and will probably offer debt settlement services more often now, in addition to their bankruptcy services.
The current status of the debt settlement industry is that the FTC has, to an extent, slightly condensed one of consumers’ prime debt relief solutions in their efforts to protect consumers. However, many for-profit debt settlement companies are re-organizing as non-profits to pitch the same solutions to consumers. The new business model may not be as lucrative, so there presently are fewer providers, but consumers still have access to effective professional debt settlement services. With a little research, consumers can find sound, legitimate companies that can use this powerful debt relief solution to help them get out of unmanageable debt.