- Multiple state and federal agencies strictly regulate the debt settlement industry.
- Protections that went into effect in 2010 increased the oversight and scrutiny of the industry, eliminating companies that utilized unethical practices to scam consumers.
- All types of debt relief programs come with negative consequences, including non-profit credit counseling and bankruptcy, and will directly or indirectly negatively impact your credit score.
- Debt settlement is a legitimate, legal, highly regulated alternative to bankruptcy or credit counseling for consumers experiencing long-term financial hardship and may provide relief for those facing high levels of unsecured consumer debt.
After years of sparse regulation and oversight that allowed a few unscrupulous companies to unlawfully take money from consumers without helping them achieve debt relief, Congress provided the necessary consumer protections to regulate the debt relief industry. By revising the Telemarketing Sales Rule (TSR), the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC), along with state Attorneys General set forth a strict set of regulations that standardize the way all financial services companies in the debt relief industry must operate.
FTC and TRS Rulings That Changed the Debt Relief Industry
In 2010, the FTC amended the Telemarketing Sales Rule (TRS) to specifically address deceptive practices used by some unethical companies in the debt relief industry. The ruling was more encompassing and included oversight of the debt settlement industry. The scope of the ruling affected both inbound and outbound calls to customers and prospective customers. It also addressed the fee structure companies can use, required disclosures, and how companies represent their services in marketing materials and telemarketing efforts.
The CFPB not only provides oversight for the debt relief services industry, but also compiles data that agencies and consumers can access. A recent study released in 2020 by the CFPB discusses the following:
“The direct regulation of debt relief services occurs on both the federal and state level, including potentially under state laws that require licensure and open the company up to state supervisory examination…The Federal Trade Commission and CFPB share authority to enforce the consumer protection laws with respect to non-bank financial institutions, including the TSR with respect to debt relief services.”
Protections at the federal level include oversight from the CFPB and FTC, through the rules set forth in the Revised Telemarketing Sales Rule (TSR).
At the state level, the state Attorneys General, lead industry oversight. Most states also provide legal protections in the form of licensing and bonding requirements for debt settlement companies, along with caps on fees and other protections for consumers.
Options for Consumers Seeking Debt Relief
Consumers in need of debt relief have three primary options to reduce their debt: credit counseling, debt settlement, or bankruptcy.
Credit counseling requires the repayment of the debt in full. Non-profit and for-profit credit counseling agencies assist with budgeting, set up a debt management plan (DMP), and work with creditors to lower the interest rate on enrolled accounts. To qualify for credit counseling, you must be able to repay the full balance owed plus some interest of the unsecured debt within 60 months. Additionally, consumers must complete an approved financial education and budgeting course to complete the program.
Consumers seeking to discharge their debt in Bankruptcy must first qualify for bankruptcy by passing a means test. A Chapter 7 liquidation bankruptcy is only available to consumers earning less than the median income in the state. For those earning above the stated median income, consumers might qualify by passing an additional income hurdle that considers both income and expenses. Another barrier to bankruptcy is owning non-exempt assets, which could require the sale of those assets before the discharge of debts under bankruptcy.
Once your debts are discharged in bankruptcy, the stain of bankruptcy can follow you forever, as you may be asked on job applications, military service applications or be required to make other attestations about filing bankruptcy in the past such as when you go to apply for a home mortgage. Bankruptcy can make it much harder to obtain lines of credit on the future or secure employment.
Debt settlement offers a legitimate form of debt relief for consumers facing a life event, which creates a genuine financial hardship. The hardship might include income loss due to a pandemic, the loss of a spouse, or lost wages or property in a natural disaster. Consumers with ongoing income, but not enough to keep up with current debts can seek relief through debt settlement.
Debt settlement companies work with consumers to build a savings plan to build up funds to be used to negotiate the repayment of debts for less than the full amount owed. After documenting the hardship experienced by the consumer, professional debt negotiators reach out to creditors and begin the process of negotiating a lump sum payment or a term settlement agreement to repay a portion of the balance owed with no further obligation .
By doing so, the creditor can recover some money, and reduce their collection costs by accepting partial payment to settle the account in full. The consumer pays much than they would have otherwise, with daily compounding interest growing the balance each month, and is able to begin recovering their score much sooner than if they were to enter a bankruptcy or spend 5 years or more completing a credit counseling program.
Consumers earning too much to qualify for bankruptcy liquidation, but too little to meet the required payoff schedule in a credit counseling program can enroll in a debt settlement program and find relief from high interest credit card debt. Debt settlement allows consumers to eliminate debt by repaying a portion of the unsecured debt balance without the cost and formalities of bankruptcy oversight and the long-term lasting impact bankruptcy leaves on your credit report.
If you are facing a legitimate financial hardship, debt settlement may be an effective way to find the relief you seek, especially if you have maintained a level of income that would allow you to repay some of the balance owed.
- What is the difference between debt settlement and a debt management plan?
Credit counseling agencies offer debt management plans or DMPs. These plans require the repayment of the full balance owed plus interest in 60 months or less in most cases. Debt settlement programs offer a payoff plan that allows consumers to pay less than the total balance owed, eliminating debt much faster with less money out of pocket.
- Will debt settlement ruin my credit?
The impact on your credit depends on your current credit score. Missed payments and maxed out credit cards are already hurting your score and could limit the harmful effects of missing additional payments due to financial hardship.
- How can I rebuild my credit after debt settlement?
Monitor your credit by viewing your credit report frequently and disputing any errors. Maintain at least one account and keep it in good standing by making monthly payments on time. Apply for new credit after you complete the debt settlement program and continue to make on-time, payments each month, keeping your balances less than 30% of your total credit limit on each account.
- What regulators oversea the debt settlement industry
The Consumer Financial Protection Bureau (CFPB), The Federal Trade Commission (FTC), and state Attorneys General have regulatory oversight of the debt relief industry.