In recent blog posts, I’ve written about the massive problems faced by the debt settlement industry, with various state Attorneys General and the Federal Trade Commission moving toward new rules and regulations that would severely impact debt settlement firms at large. Now, after new developments that occurred in April and May, it may be fair to ask the question, “Will debt settlement still exist in 2011?”
The short answer to that question is YES – the banks will still be settling debts next year, and the year after that, and probably for as long as there is any type of debt. People have “settled” debts for thousands of years. There is no law or rule that can change basic financial arithmetic, and the long-established financial concept of “present value of money” is what drives creditors to settle in the first place. So the banks will still be settling debts to reduce their losses, or to recover against losses already declared.
It may, however, be a fair statement to say that the debt settlement *industry* may no longer exist next year. In April 2010, there was a hearing in the U.S. Senate that was utterly devastating to the industry as a whole. Undercover investigators working on behalf of the Government Accountability Office (GAO) made phone calls to a number of prominent debt settlement companies. The callers posed as consumers seeking relief for their debt troubles. Some of the claims made by the sales reps were totally outrageous, such as statements that the program is government sponsored, or that the success rate is 100%. Since the list of target companies included several firms that are members of one or both of the industry’s trade associations, the usual protests of “We’re the good guys in the industry,” fell totally flat. The individual who represented the industry at the Senate hearing looked like a deer frozen in the headlamp of an onrushing freight train.
Within a matter of days of that public hearing, a bill was introduced by Senator Chuck Schumer called the “Debt Settlement Consumer Protection Act of 2010.” The bill represents total destruction for the debt settlement industry. No third-party firm could possibly survive the severe restriction on fees contained within this bill. For example, “enrollment fees” would be limited to $50 up front, with NO monthly service fees permitted. Goodbye 15% fees on the front end. Goodbye to $39-59 monthly “maintenance fees.” The only other permitted fee is 5% of the *savings* achieved during the negotiation, and that fee could only be collected *after* the negotiation had successfully been concluded. No full service company can possibly operate under this severely restrictive fee model in today’s business environment, so the bill is tantamount to a ban on the industry itself.
For about a week or two, everyone held their breath to see if the bill would be passed without modification. The initial attempt did not go through, but not because of any sort of opposition within Congress. Instead, it didn’t pass this time simply because it has not actually been considered yet. It merely did not make it as part of a “rider” to the massive consumer financial protection bill currently winding its tortured path through Congress. When a vote for “cloture” meant that no further amendments to the main consumer bill would be considered, the debt settlement industry cheered in unison. But the party was short-lived. Within a matter of days, a fresh bill was introduced, known as H.R. 5387, worded exactly the same as the Schumer bill. This bill will have to stand on its own merits and be debated as any other, but virtually no one in Congress cares about this industry, so some form of this bill will probably pass before we see the end of 2010.
When a Federal law is finally passed that regulates the debt settlement industry, what it means is that the majority of existing companies will simply fold up shop and move on to some other still unregulated sector of the marketplace. All of the “cowboys” who jumped into debt settlement after they could no longer sell toxic mortgage products will abandon the field. That is a very good thing for consumers, on the whole. But there is also a serious cost to the consumer. Many people will be misled into thinking that it’s no longer possible to settle debts with the credit card banks. And if the bill passes with the current fee caps in place, it will have the effect of pushing third-party debt settlement into the arms of the consumer credit counseling industry. Frankly, those agencies are simply not equipped to negotiate and settle debts effectively, nor will their masters (i.e., then major credit card banks who are their primary source of income) allow them to negotiate the lowest possible settlements. The consumer who enrolls into a “debt settlement program” via one of these non-profit CCC agencies will soon find that their idea of a settlement and the agency’s idea are two very different figures.
I will continue to monitor and report on these industry developments via the ZipDebt Blog. It’s going to be a very interesting remainder of the year. Stay tuned! 🙂