Balancing Consumer Budgets: Costs and Benefits of Debt Settlement

Most people have seen or heard advertisements enticing consumers to settle their credit card debts for a fraction of what is owed. In a struggling economy, the debt-settlement business is booming. However, if some say paying at a discount and getting out of debt sounds too good to be true, lawmakers and elected officials are listening. According to USA Today, the attorney general for Oregon recently reached a settlement with Credit Solutions of America, the largest debt-settlement firm in the United States, which bars the company from operating in the state for three years.

No Relief?

While the advertisements sound especially enticing to those who have been injured, laid off or otherwise unable to find work, these borrowers should be aware of some criticisms of the debt-settlement industry, as reported by USA Today:

  • Charging upfront fees: Upon enrollment, debt settlement companies typically instruct the debtor to deposit monthly payments into a savings account, which will eventually be used to pay off a percentage of the debt, as negotiated by the company. However, the Government Accountability Office (GAO) found in a recent investigation of 20 debt-settlement companies, that in several instances, the companies kept up to four monthly payments for upfront fees before any money was even set aside to settle the credit card balances.
  • Advising credit card holders to stop paying their bills: As many credit card companies may be willing to take a higher discount for distressed accounts, debt settlement companies frequently tell consumers to stop paying their bills; however, this leads to late fees, higher interest rates and even collection calls and lawsuits. Although The Association of Settlement Companies (TASC), a trade group, says its standards prohibit members from telling clients to stop paying their bills, 17 of the 20 companies contacted by the GAO encouraged stopping payments. The GAO said that five of the companies were TASC members.

Bargaining Leverage?

Don Goldberg, a spokesman for the Consumer Credit Rights Campaign, argues that the GAO investigation was too narrow, using 20 phone calls to condemn an entire industry. Goldberg says the companies are a valuable intermediary between borrowers and lenders; removal of these companies leaves consumers to fend for themselves.

Satisfied debt settlement customers say their lenders would not work with them directly and working with the companies provided them with both a plan and the leverage to negotiate a settlement with the lender.

Proposed Legislation

The Federal Trade Commission now wants to restrict the fees debt settlement companies can charge. Senator Charles Schumer has introduced a bill to bar the companies from collecting fees until a settlement has actually been reached. Goldberg said it can take up to two or three years to negotiate a settlement in some cases, and cutting off the revenue stream will leave companies unable to fund their business.

Bankruptcy is Often the Best Solution

Credit Solutions of America maintains that the media portrayal of the debt settlement industry, and specifically its image, is wholly at odds with the consumer benefit provided. William Binzel, chief counsel for the National Foundation for Credit Counseling, a trade association for credit counselors, counters that credit counselors often end up trying to help consumers whose credit has been ruined while working with debt settlement companies. Bankruptcy may be the best option for those who believed at one time that these debt settlement companies were a good solution but now realize that their financial problems have not been resolved.