Do Debt Settlement Companies Fail US Consumers?

Do they Clear Credit Card Debt or Make Money Problems Worse?

May 6, 2009 Asa Ghaffar

US consumers struggling with credit card debt are increasingly turning to debt settlement companies. Do their charges actually make money problems worse?

Escalating levels of credit card debt have placed a strain on family finances. Private debt settlement companies have entered the consumer debt market promising to ease money problems and write off debt. Their popularity has risen because they appear to be a plausible alternative to filing for bankruptcy. According to an article in the New York Times by David Streitfeld, there are now 2,000 debt settlement companies operating in the US currently.

Key American Credit Card Debt Statistics

US credit card debt reached $972.73 billion at the end of 2008; this represents an increase of 1.12% compared to 2007- Nilson Report, April 2009.
The average amount of credit card debt at the end of 2008 was $10,679 per household- Nilson Report, April 2009.
The average open credit card balance was $1,157 at the end of 2008. This figure has risen by 11 per cent in the last two years- Experian Marketing Insight Snapshot, 2009.
In the last 12 months, 34 million Americans made late payments on credit card debt. A further 18 million people missed making repayments completely- National Foundation for Credit Counseling, 2009.

What do Debt Settlement Companies Aim to Offer?

A consumer no longer makes a monthly repayment to the credit card provider, money is instead paid to a debt settlement company. They aim to write-off debt in order that a consumer can pay as little as 40 cents of every dollar owed. It is regularly 'sold' to customers as a viable alternative to filing for bankruptcy.

Why do Some Debt Settlement Companies Fail Customers?

Debt settlement companies charge 15 per cent of the amount owed as a fee. Customers have found that, rather than receiving a debt write off, their money problems are exacerbated. This is due to plans being front-loaded so management fees are paid in preference to creditors.
US consumers that fail to make monthly repayments on credit card debt experience increased debt collection activity. The front-loading of plans annoys creditors as they receive only a tiny fraction of the money they are owed.
The use of debt settlement companies causes a personal credit score to deteriorate, especially if a consumer hadn't previously missed or made late payments.

Tackling credit card debt with the help of debt settlement companies may appear to be the ideal solution. In practice it incurs further charges, increases collection activity and can even further exacerbate money problems. Consumers seeking a debt write-off may wish to consider filing for bankruptcy as they will then receive court protection from creditors.

Readers that found this article useful may also wish to write-off debt with chapter 7 bankruptcy or manage debts with chapter 13 bankruptcy.

Sources

Streitfeld, David. (April 19, 2009). "Debt Settlers Offer Promises but Little Help." New York Times.

US Census Bureau

Nilson Report, April 2009

Experian Marketing Insight Snapshot, March 2009

National Foundation for Credit Counseling, 2009

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

The copyright of the article Do Debt Settlement Companies Fail US Consumers? in Personal Budgeting/Finance is owned by Asa Ghaffar. Permission to republish Do Debt Settlement Companies Fail US Consumers? in print or online must be granted by the author in writing.