Tougher Laws Have Improved The Debt Settlement Industry Overall

Consumer indebtedness reached a peak in 2008 and has been slowly declining ever since. At over $2 trillion, it is still hefty and poses a significant problem for the millions of consumers carrying an average of $15,000 in credit card debt. In 2010, the Federal Trade Commission (FTC) enacted new rules for debt collectors and debt relief companies active in the debt settlement industry. Over the past year those rules have changed the debt collection and settlement industries for the better. Designed to protect consumers from predatory debt settlement companies and debt collection agencies, the regulations have helped to distinguish beneficial companies from malevolent groups.

Debt settlement grew out of the explosion in consumer debt over the past three decades. Debt expansion fueled elevated consumer spending, powered by exceptionally low interest rates through an influx of foreign capital and accommodative monetary policy. Today, that bill has finally come due and consumers eagerly seek means to repay it. They are turning to debt settlement for a lack of other options including bankruptcy. Large debt balances with high interest rates eat away at disposable income, making it difficult to pay down debt successfully.

To make matters worse, bankruptcy reform legislation passed in 2005 has made it much more difficult for consumers to file for Chapter 7 bankruptcy protection, forcing them into Chapter 11 instead. Debtors have simply walked away from their homes, mortgages and defaulted on their debts because they cannot pay them back. Debt settlement has grown by leaps and bounds to meet the needs of these consumers.

The basic idea of debt settlement is to negotiate with creditors to lower the total amount owed. The reasoning is as follows: The consumer cannot repay the full amount, so it is better for the creditor to get something back rather than nothing at all. When the FTC applied the new regulations in response to an increase in the number of industry firms (up to over 1,000 in 2009) consumers benefited from increased transparency. Debt settlement has changed rapidly in a very short space of time. As consumers continue to adjust, debt settlement will probably play an even greater role.

 

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