Available data suggests that at least two-thirds of debts must be settled in order to achieve a net positive outcome from debt settlement. Even more debts must be settled for the consumer to achieve real savings if they end up being liable for taxes on the debt reduction.
In the end, many consumers never realize that kind of experience. Rather, they end up worse off financially. According to the American Fair Credit Council, an industry trade association, consumers must typically be enrolled in debt settlement for three to four years in order to complete the program. During this time, debt balances grow an average 20 percent while consumers wait for settlements to be reached. Additionally, their credit scores are negatively affected, financial instability increased, and the likelihood of creditor lawsuits loom near.
According to Leslie Parrish, co-author of the report and deputy research director at CRL, “When a consumer stops making payments on a debt, not only is she/he vulnerable to fees and an increased interest rate, the reporting of this delinquency to credit bureaus can impact credit scores for years.”
In general, the higher a consumer’s credit score is, the lower the cost of credit they will incur. Conversely, the lower one’s credit score, the higher the cost of credit and interest will be. Whether applying for a credit card, auto loan or a mortgage, bad credit histories make future credit and borrowing more expensive.
In 2010, the Federal Trade Commission issued regulation that barred debt settlement companies from charging fees until they reached settlements with the client’s creditors. While this regulation has stopped some of the most egregious industry practices, CRL’s report finds that significant financial risks remain for debt settlement clients.
Today, the Consumer Financial Protection Bureau shares regulatory oversight of debt settlement with the FTC. Thus far, CFPB has taken multiple enforcement actions against several debt-settlement companies and one payment processor.
CRL also sees a role for states to establish meaningful limits of debt settlement fees. One recommendation is to limit the fees that can be charged and to calculate such fees on the basis of the amount of savings achieved for the consumer. This approach would make whatever savings derived relative to the amount originally owed at the time the consumer enrolled their debt.
State and federal regulators could also require better screening of prospective customers to lower the risk of a bad outcome. Factors such as the amount of debt to be enrolled, creditors and the consumer’s financial circumstances would be taken into account.
Additional recommendations can be found in the report located at: https://rspnsb.li/1x5lPOe.
“What’s clear is that more action is necessary to protect consumers,” said Ellen Harnick, co-author of the report and senior policy counsel at CRL.
(Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org)
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