. . . . . . . Debt Settlement Industry Background

The Debt Settlement Industry arose in response to the increase in revolving consumer credit debt in the United States. For a large portion of the American population, credit has become a way of life. According to the Federal Reserve Statistical Release dated February 7, 2006, American consumers dramatically increased their consumer debt obligation to over $800 billion.(a) Consumer debt levels are significantly outpacing disposable income levels while at the same time personal savings are at an all time low. Consumers making only the minimum payment on their credits cards make hardly a dent in their overall debt balance. In 2005, personal bankruptcies rose 31.6 percent to a record level of two million filing. (b)

Over the years, several programs have been developed to address the issue of inability to make the minimum monthly payments on outstanding debts, which have had varying degrees of success. Bankruptcy is the most obvious option, but the recent amendments to the federal bankruptcy law have made obtaining bankruptcy relief significantly more difficult. Chapter 7 liquidation, which offers a complete “new start,” has been placed out of reach for many debtors. Chapter 13 filings impose on the debtor a full repayment plan covering an extended period of time and the stigma and long term adverse effects of bankruptcy filing exert a major deterrent effect. Moreover, the national rate of completion for confirmed Chapter 13 plans is only 33%3.(c)

Another option involves credit counseling which is also known as debt consolidation. These services are often offered by “non-profit” consumer credit counseling companies which are in fact subsidized by the banking industry through “Fair Share” payments and other monetary support. Credit Counseling does not offer to the consumer any reduction in the principal amount of the debt owed, but only a reduction in interest and late fees over the life of an extended repayment plan. In addition, the rate of successful completion of credit counseling program is only 21% according to a study undertaken by the credit counseling industry itself.(d) In other words, 79% of the people enrolled in a credit counseling program do not complete their plan as originally contemplated.

Debt settlement offers an alternative for both the debtor and the creditor. It provides a middle ground where the debtor and creditor can negotiate the outstanding financial obligation, including principal, to a mutually agreeable level. This permits debtors to make restitution on their financial obligation in a shorter time period and a more manageable monthly payment than that required through a credit counseling program.

Compared with credit counseling and bankruptcy, debt settlement is a relatively new industry with a significantly smaller number of participants. Therefore, there is no long term statistical evidence regarding expected completion rate for this type of program. (Although anecdotal evidence within the industry suggests that the rate exceeds that for Chapter 13 plans and significantly exceeds that for credit counseling). One factor which may explain the more favorable completion rate is that the consumer participates in determining the repayment terms. By comparison, in a Chapter 13 filing, the payment terms are determined by a Trustee while in a credit counseling program, the payment terms are dictated by the creditors. In the debt settlement model, the consumer debtor has significant input on the amount and terms of the repayment. The consumer debtor is in the best position to determine the feasibility and compliance thereof from any repayment plan. By empowering the debtor with this ability, there is a greater likelihood of completion with the debt settlement program. In addition, evidence within the industry suggests that consumers who complete debt settlement programs generally do so in shorter periods of time and for less money than would have been the case had they been involved in credit counseling.

This background provides statistics of which you may already be aware. The purpose is not to solve the greater issue of rising consumer debt in this country but to preserve options to consumers that are attempting to recover from the destructive effects of excessive debt.

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