The Problem with Debt Settlement

Posted by: Gene M. | Jan 12,2008


The problem isn’t for consumers, it’s for the credit card industry.  The basic word on the recent bankruptcy legislation is that it favored credit card companies by making it harder for people to file for bankruptcy and get out of debt.  Well, consumers are a crafty lot and they said, You won’t let us file for bankruptcy, we’ll find another solution.  Consumers have and that solution is debt settlement.  

The basic terms of settlement is that a debt counselor negotiates with the credit card company to lower the amount of payments and potentially lower the amount of overall debt.  It’s not nearly as drastic as bankruptcy and it helps a growing number of people get back on their feet.  The trouble for credit card companies is that they are seeing great losses due to these types of settlements.

But they’re in a bind.  They can’t negate settlements because they’d rather have some money via settlement than no payments at all.  But in an industry that is worried about a collapse like in the subprime mortgage market, all this lost revenue due to debt settlements is causing some credit card companies to fret.  The result is that there are laws on the books to prevent debt counseling in some states.  For example, in West Virginia, there’s a court order barring a Florida debt settlement firm to market within West Virginia.  

This is a bit tougher to regulate online, and the Internet is the main reason that debt settlement has become so huge in recent years.  Though there are some dubious debt settlement outfits out there – and you should research any debt settler thoroughly – there are just as many debt settlers/counselors who make good on their promises.  

The trouble is that all of these people applying for debt settlement could have a major impact on the credit card industry, similar to the foreclosures that hit the mortgage market.  I would argue that because the credit card industry is taking in such handsome profits, even with increased defaults, that this won’t necessarily occur.  One thing to keep in mind is that debt settlement might have more restrictions on it in the future, especially if credit card companies get their way.  

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