The Debt Settlement Business: Will It Exist This Way For Long?

Americans are in debt more than ever before. Credit card balances are higher, delinquent accounts are higher and credit card companies are being forced to change the way they do business.

These are all good signs for the debt settlement business as a whole — yet when you speak to people in the industry, they are nervous.

There are a number of forces that are gaining steam in Washington that are concerned about the way the settlement companies solicit consumers and negotiate lower payments on their debts. The industry is in the cross hairs of the Federal Trade Commission, state regulators, members of Congress and state legislatures.

It is not just the regulators who are cool to the debt settlement industry — Credit card companies are not fond of it, and many consumer advocates speak openly about how they dislike it.

The common complaint among all of these people and organizations speaking out against the debt settlement industry is that they say the debt settlement companies are really just taking people’s money and not trying to help them.

From a recent story in the New York Times about debt settlement:

A formidable array of forces is concerned about the way the settlement companies solicit consumers and negotiate lower payments on their debts. The industry is in the cross hairs of the Federal Trade Commission, state regulators, members of Congress and state legislatures. Credit card companies are not fond of it, and many consumer advocates practically loathe it.

The common complaint among all these groups is that too many debt settlement companies are more interested in helping themselves earn fees than aiding their beleaguered clients. Their ads promise the clients will get out of debt but, critics say, the reality is that they often become even more enmeshed.

There are many different companies that work in the industry and some of the “good ones” are worried that the “bad apples” will ruin the industry for everyone:

The settlement companies, which number about 2,000, have varying business models but generally develop programs for strapped individuals to pay off a percentage of their credit card debt and avoid bankruptcy.

Only a handful of the companies came to this convention, which was run by a trade group called the United States Organizations for Bankruptcy Alternatives. Participants stressed that that it was the people who were not there who were the problem.

“The bottom feeders are ruining our reputation,” said John Ansbach, the general counsel for EFA Processing in Frisco, Tex. “The good stories are not being told.”

Part of the problem with industry, Mr. Ansbach said, is that there are few barriers to entry. Many of the smaller firms are virtual outfits, contracting with outsourcing companies to do all the back-end work of talking to the debtors, enrolling them and negotiating settlements.

EFA itself is one of these outsourcers, handling settlement programs for dozens of corporate clients. Mr. Ansbach says EFA rejects more new clients than it takes on.

Will the debt settlement industry be forced by regulators to change the way it does business or will it be regulated completely out of business? Time will tell.