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Fall does not Mean Drop: the Debt Settlement Industry at a Crossroads

This fall, the debt settlement industry sits at a unique crossroads. As of October 27th, 2010, a new FTC rule banning debt settlement companies from accepting upfront fees ushers in not only a fresh start for consumers seeking debt relief, but also new opportunities in consumer advocacy for what remains of the debt settlement industry.

In the spirit of consumer advocacy, the new rule calls for transparent business methods and for performance to be a top priority for debt settlement companies- no fees may be collected until at least one client account is settled. This new climate helps protect consumers against malpractice concerning fees and lack of service. For the majority of debt settlement companies, such practices spiraled out of control to the point of dependency upon the advance fee model in order to stay afloat. Now, as the FTC rule prevents such practices and forces many companies to shut their doors, does this mean the end for the debt settlement industry altogether?

Though the FTC may have put a death sentence on much of the industry’s former way of life, surviving companies are poised to tread a new path of consumer advocacy. The debt settlement industry would do well to admit its mistakes and move on. Companies who are forced to close should find a reputable company who might be able to absorb their clients so that these consumers do not suffer further loss. Doing so might also allow these companies to downsize and stay open while they restructure their business models.

Another way for debt settlement companies to boost their staying power among consumers is to emphasize the importance of financial education and planning, rather than just fixing the symptom-which is debt. Without addressing the deeper causes of a debt-ridden lifestyle, debt settlement will only be a temporary fix for the consumer.

With all of this in mind, consumers need to know that debt settlement is a legitimate alternative to bankruptcy, and now is a prime time to find a reputable company. As companies shift their attention to ensure a performance that can sustain profit, consumers need to know how to spot a company that truly is FTC compliant.

Former industry malpractice was successful in part due to lack of knowledge on the consumers’ end. To avoid an old scam in new clothing, debtors in search of relief must be in the know. Some things to look out for? Potential debt settlement participants should be aware of two looming dangers on the horizon: newly formed debt settlement non-profits and attorney-based settlement.

Because non-profit credit counseling organizations are exempt from the new Rule, some debt settlement companies are scrambling to quickly obtain non-profit status. However, such status doesn’t guarantee that these businesses actually have a non-profit business model; in reality, they are just attempting to evade the spirit of the new rule to keep their business from crumbling. Consumers should be aware of newly formed non-profit debt settlement companies as debtors might end up in more heartache and debt than they is currently experiencing.

Another post 10/27 consumer threat is the attorney-based debt settlement model. Many consumers are attracted to legal help in this area because of the perceived security of legal protection. However, attorneys are also largely exempt from the new Rule and some debt settlement companies will use the guise of legal assistance to continue charging consumers upfront fees. Lawyers who practice debt settlement are not generally trained in finance and will also continue to charge outrageous fees before any credit accounts are actually settled. Further, a legitimate settlement company’s primary focus is settling your accounts. Contrast that with an attorney, who deals with other legal issues and may not have the daily opportunity to be in touch with your creditors in a way that encourages success.

The bottom line in attempting to get rid of excessive debt is that if it sounds too good to be true, then it probably is. As the debt settlement industry has the chance to bounce back with a clean slate, everyone can benefit in the long run. When debt settlement companies prioritize performance, credit accounts will actually get settled for weary consumers, and creditors will receive some dues from debtors who would have most likely filed for bankruptcy. In this economy, consumers need reliable debt settlement help now more than ever before. By effectively reducing crippling debt and promoting solid financial education and decision making, debt settlement has the potential to become a staple in consumer advocacy.

 

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