Debt Settlement Rises as Operations Become Automated

The debt settlement and credit counseling industry was soaring just a few short years ago. Consumers were paying close attention to the outstanding debts on their credit reports in the height of the housing boom/bubble. As a result, operations popped up overnight promising quick fixes to large debts.

That all came to a screeching halt in 2008 when federal regulators started taking a hard look at the debt settlement industry’s business practices. At particular issue were the up-front fees charged to consumers by the companies to enroll in their programs and the often complete ruination of credit reports necessary to complete the process.

The Federal Trade Commission (FTC) announced a number of high-profile settlements with debt relief operations and issued new rules for the industry in 2010. But the public relations damage was done.

Steve Rhode, a blogger focused on exposing debt relief scams, noted in a post last year that over the 12 months from April 1, 2010 to March 31, 2011, online searches for the term “debt settlement” declined 66 percent.  The term “credit counseling,” caught in the crossfire, also declined by about a third.

The debt settlement industry reorganized to combat the disaster. The Association of Settlement Companies (TASC), the industry’s main trade group, rebranded and relaunched in Aril 2011 as the American Fair Credit Council with a renewed focus on consumers and compliance with new regulations.

Even during the “glory days” of the debt settlement industry, ARM firms were reluctant (at best) to work with debt relief organizations. Some resented the debt settlement wall that was erected between the collector and the debtor; some collection agencies felt that debt relief firms were disreputable scam artists. But it was mostly about money.

While the debt settlement industry bubble was growing, so was the housing bubble. These were Halcyon Days for debt collectors. With so many people suddenly caring about old debts, and so much money available to consumers in home equity, payments in full were through the roof. So why should a debt collector bother with navigating the debt settlement channel when the result would be a fraction of the amount owed?

That, of course, all changed at the end of the last decade.

Along with the rapid and fairly thorough scouring of the debt settlement industry and a monumental shift in the economic landscape, new technology solutions have lead to a renaissance for debt settlement.

There is a robust and very competitive market for solutions that automate the communication between debt settlement companies and creditors, collection agencies, and debt buyers. And there are also solutions that allow consumers to negotiate settlement terms themselves based on preset criteria, cutting out third party debt relief firms altogether.

The traditional method of dealing with debt settlement accounts – endless calls to and from a consumer’s representative, and then to and from the client creditor – is being slowly phased out. This has led to increased acceptance of the debt settlement channel in the ARM industry.

In a recent survey conducted by insideARM, 53 percent of ARM company respondents indicated that they are using debt settlement to drive collections. More interestingly, 29 percent of the participants that reported not using debt settlement indicated their objections were related to third party disclosure and security concerns, compared to just 16 percent that objected to settlement rates that were too low.

By one measure, there is about $2.4 billion in outstanding credit balances entering the debt settlement system each month. The ARM industry is now recognizing that in order to get a percentage of that money, it has to come to peace with the debt settlement channel.

Patrick Lunsford

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