The goal of debt settlement is to get both parties—the debtor and the creditor—to make fundamental changes. For the debtor, prior to a contract with a debt settlement company, there is often so much debt that payments have become erratic. Instead of getting on a regular schedule, a debtor may feel forced to simply pay whichever creditor makes the most noise, or to make an unplanned payment in response to a threat of a lawsuit. When those unplanned payments are made, it affects the debtor’s ability to pay other payments that had been scheduled, and oftentimes the result is chaos. The debtor feels the need to be flexible—but in fact, the only way to get out of debt is to shift that burden of flexibility to the creditor’s side.
While the debtor gets on a fixed schedule and the debt settlement companies impose more discipline onto the debtor, the goal of debt settlement is to obtain as much flexibility as possible from the creditors, preferably with a settlement offer.
Why Creditors Are More Flexible with Credit Card Debt Settlement
Credit card companies have been more flexible in recent years in allowing revised payment schedules or settlements. It is not simply because they are trying to be the “good guys.” It is in response to several pieces of legislation, a lengthy recession and a sluggish recovery.
The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 changed the nature of how credit card companies operate, eliminating their ability to charge fees and raise interest rates at will. According to the Federal Reserve Board, the new law constrains when the card companies can increase interest rates. For example, in the past it was possible for your interest rate to be raised if you were only a day late; the new law states that if you are more than 60 days late, your rate can go up.
The law also places a cap on annual fees. The result is good for the consumer, but the credit card companies, which prior to the CARD Act took in billions of dollars in hidden fees, have had to re-evaluate their business models. Credit requirements are tighter, and credit lines have been cut.
The credit card companies are now forced to deal with all the delinquent accounts they accumulated during their free reign, and they are responding with greater flexibility and an increased willingness to agree to settlement. This trend has not been lost on debt settlement companies, which have close relationships with the card companies and have a solid understanding of just how much of a settlement each creditor will agree to.
Charge-offs and Settlements from Debt Settlement Companies
According to statistics published by the Federal Reserve, charge-off rates for credit card companies are at an all-time high. The third and fourth quarters of 2009 and the first two quarters of 2010 saw charge-off rates in excess of 10%, compared with pre-recession 2006 rates of 3-4%.
Faced with a choice between a charge-off (for which the bank receives nothing), and a settlement (for which the bank receives a percentage of the debt), the natural choice for the bank is to agree to a settlement. With rates that high, it follows that greater flexibility can be expected and that debt settlement companies will have greater success in achieving good results for their clients.
There is of course, no guarantee of success. There are many variables, and success is dependent on the consumer adhering to a program that may require some sacrifices. However, a June, 2010 USA Today report shows anecdotal evidence of several consumers who successfully completed a program with a debt settlement company.
The Association of Settlement Companies also issued a 2009 survey, showing that 34% of consumers settled at least 75% of debts. An additional study from the Cox School of Business at Southern Methodist University reports that debt settlement companies “generate tremendous value to its clients,” indicating that 57% of clients have offers to settle at least 70% of their debts, and 30% of clients have settlement offers for at least 90% of their debts.
With the help and guidance of a competent debt settlement company, a consumer stands a very good chance of obtaining generous settlements, gaining greater flexibility from more creditors, and getting back on the right track.