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Debt Settlement Industry Survives Despite Adoption Of Strict Legislation

it was in the early fifties that most American states and a few others in other parts of the world felt that it is necessary to regulate the debt settlement companies.

Debt settlement industry is a die-hard industry that survives in spite of the adoption of strict legislation. Coming into existence, not a long time back, it had a very small market that is intrinsically linked with the magnanimous money market. Over the years, there have been a few legislative changes made in the functioning and operation of the debt settlement companies.


The working process of the debt settlement companies is significantly different from that of the financial recovery companies. Though the working process of these companies is not as ruthless as the debt collectors, it was in the early fifties that most American states and a few others in other parts of the world felt that it is necessary to regulate the debt settlement companies. In fact, there are several states that had simply prohibited them.

However, in the later course of time, different regulatory frameworks were designed and adopted these only to mutate the debt settlement industry to its present state. Historically, most of these companies were non-profit organizations and had no interest in how much money the debtors struggling to make payments gained from a successful debt settlement. These companies acted more like “credit counseling agencies” and were usually funded by different financial institutions.

The idea behind

The main concept of debt settlement is to prevent consumers from going bankrupt and helped the lenders to get at least the major portion of the outstanding amount back and not lose the entire amount due to the inability of the debtor to repay.

These companies usually did not reduce the debt of the consumers substantially but instead, they focused on:

• Getting reductions in the rate of interest

• Other fees and

• Penalties and concessions from the creditors.

This, in turn, reduced the monthly installments of the debtors eventually helping them to produce and follow a budget.

At the beginning of the 20thcentury, debt settlement companies of today emerged and they are known by several names such as:

• Debt adjusters

• Debt consolidators

• Debt poolers

• Debt managers

• Debt consultants or

• Debt pro-raters.

These companies promised overall settlement from the creditors and in return claimed fees from the debtors.

The changing scenario

However, slowly these companies started to follow unethical business practices and a lot of reports started to pour in the New York Bar. Abusive and deceptive practices became a common issue in the thirties and companies indulged in several unethical methods such as:

• Charging exorbitant fees

• Making false claims

• Defrauding people outright and even

• Leaving consumers with larger debts.

It was in 1935, regulations were imposed for the first time on those unscrupulous debt settlement companies which some lawmakers termed as “rackets.” Their permits were suspended for the first time but within the next fifteen years, these companies somehow continued to grow and increased their market share considerably.

All these affected the debt settlement ratings significantly both in the positive as well as in a negative way. By the mid-fifties, more consumers reported that they were suffering more and more from these debt settlement companies. The situation grew so worse that at a point of time several American states seriously started considering the need to simply end the right of such companies to operate. Few even did that while others imposed strict regulatory measures and the need to obtain a permit to operate in their territory.

The ongoing debate

However, no rule or law is passed without debate and the prohibition and regulation advocates continued in this matter as well. The government was very strict with their stance to stop the nefarious companies operating in their state and strictly went with the legitimizing process of these companies.

• Seeing no alternative but to agree and give in to this strong intent of the government, most of the American states and Congress gave a nod to the need of prohibiting the operation of the for-profit debt settlement companies totally by the mid-fifties and the mid-seventies.

• A consensus was reached in which these companies strictly required permits, surety bonds, controls over fees and prohibition of a few specific practices. This ensured the licensing statutes and its enforcement that merely gave the state’s approval to such activities. The multiple prohibitions imposed resulted in the removal of a few companies from the market.

However, this respite was short-lived and lasted for only a few decades and in the early 2000s, the world witnessed the emergence of the so-called “modern” debt settlement companies.

Factors for resurgence

The New York Bar believes that there are three specific factors that have contributed to such resurgence of the debt settlement companies in the United States. These are:

• The space created by the removal of the for-profit debt settlement companies was filled up by the non-profit organizations largely in the eighties and nineties.

• As revealed through the Senate investigation in 2004, some of these companies still engaged in significant abuses such as overbilling, unsatisfactory services and excessive executive salaries. This increased monitoring by the InternalRevenue Service which harmed the credit counseling NGOs also. This led to the proliferation of for-profit debt settlement companies once again.

• Lastly, when the economic situation of households declined due to reduced incomes and the high cost of living there was a rise in consumer debt. This once again created a fertile landscape for the debt settlement companies.

There were several loopholes discovered by the debt settlement companies in the prohibition. The state laws typically targeted those companies that distributed or received funds collected from the debtors. Realizing this, the “modern” debt settlement companies now strategically avoided managing or receiving an amount directly from the debtors and instead entrusted this job to a third-party company.

To sum up

The practices of these companies in a previous era are still followed today such as:

• Aggressive marketing

• Cash advances to cover several substantial fees

• Problematic and illegal stipulations

• Misleading advertisements and claims of association with government programs

• Un-kept promises of debt reductions

• Use of third party companies for high management fees and

• Arbitration and court agreement clauses.

In reaction to all these, the government proposed a framework law in 2005 called the Uniform Debt-Management Services Act for better control.

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