The Debt Relief Industry

Driven by the notion of instant gratification, American consumers’ pursuit of the “good life” has placed them in over $2 trillion in debt— $800 billion of it being credit card debt. The average American household is in some $8,000.00 in debt and about 43% of American families spend more than they take in. The majority of consumer borrowing, about 63%, is represented by “non-revolving” debt such as automobile loans, or mortgages. Revolving credit, which consists mostly of credit card debt, is an increasing part of the consumer debt problem. Revolving debt currently totals around $735.30 billion—more than double the amount a decade ago. This near financial epidemic has given rise to predatory lenders and advertising bombardment from an industry that handles bankruptcy, credit consolidation, credit counseling, and debt settlement. When addressing consumer debt there are five main options for help- credit counseling, bankruptcy, consolidation loans, do-it-yourself methods, and debt settlement. Welcome to the industry of consumer debt relief.

Credit counseling, founded 50 years ago and partially funded through ‘Fair Share’ by the credit card companies themselves, offers consumers a program with a non-profit credit counseling agency designed to lower interest rates and create a repayment schedule. Credit counseling can easily be named as the better known method of absolving consumer debt. However, credit counseling is not without its drawbacks. Consumers enrolled in the program will often face problems with mortgage lenders as credit counseling is thought of as analogous to a Chapter 13 bankruptcy. Credit counseling also forces the consumer to pay back 100% of debt including interest and fees. This takes the average American over 5 years, sometimes even more, to complete. The fact that a consumer will be also be disqualified if delinquent on their accounts, does not help the industry’s already low graduation rate. Credit Counseling can work well in certain situations but for the majority the negatives outweigh the positive aspects of the program.

Other than the do-it-yourself method, the second, almost universally known, method of reducing debt is bankruptcy. Consumers who believe they have no other alternatives are usually the ones who should turn to bankruptcy. There are two types of bankruptcy, Chapter 7 and Chapter 13; both can protect some of the client’s assets as well as absolve totally, or at least the majority, of the client’s debt. The more immediate and probably harshest of the drawbacks to bankruptcy is the traumatic damage to the consumer’s credit and depending on the situation can stay on the credit report for 7-10 years. On the contrary, in public records the notice of bankruptcy can show for up to 20 years.

Consolidation loans allow a consumer to pay off their debt in full by obtaining one big loan to cover the consumer’s entire range of debt. With a consolidation loan, monthly payments are no longer a hassle to juggle. Interest rates are relatively lower than what credit cards offer and credit ratings are not affected assuming payments are not missed. However, the discipline required to prevent a consumer from falling into the same amount of debt, if not more, is almost parallel to the amount required to solely pull oneself out of debt through a do-it-yourself program. A secured consolidation loan can cause even more harm by putting the collateral at risk in the case of default. Consolidation loans are handy but for the consumer can be a very tight rope to walk—especially if paying back the consolidation company can take more than a couple years.

A Debt Settlement or Debt Reduction program strives to actually reduce the amount of debt the client owes. A good settlement company should be able to reduce the debt by 50-60% of the principal balance based off the client’s personal financial hardship. After entrance into the program, each client is set up with an account almost exactly the same in function and use as a regular savings account. These funds are later used as support when negotiating with creditors. However, due to the fact that debt settlement requires clients to deposit into a trust account rather than repay outstanding accounts to other creditors, clients will notice a dip in their credit rating. This is considered only a transitory period, as the funds in the account will be used to pay off the creditor with an attractive lump sum payment. As each account is closed and settled, the client’s credit rating should gradually come back on the upswing and be in a prime credit repair position after all debt is paid off. Overall, debt settlement offers a way to reduce a client’s debt by almost half within 2 to 3 years as well as an opportunity to eventually repair their credit. It is important to note that although Debt Settlement has a temporary negative effect to the credit score, your credit report will not show that a third party is helping you pay off the debt.