This story appears in the February 2009 issue of Cards&Payments.
The economic crisis is fueling growth among debt-settlement firms as more troubled borrowers seek help in reaching repayment agreements with creditors.
Consumers failing to qualify for the type of creditor concessions provided by routine credit counseling often contact debt-settlement firms, which negotiate with creditors to reduce debt by cutting interest rates and fees and sometimes by reducing part of the principal owed. The borrower agrees to repay all or part of the original debt in a lump sum or through a series of payments to the debt-settlement company, which retains a portion for its fee. Debt-settlement fees can range from hundreds to thousands of dollars, depending on the debt, say industry observers.
Teresa Schumann, vice president of operations at the U.S.-based debt-settlement firm Prosolvo Data Systems (previously Maximum Recovery Inc.) and an executive board member of the 176-member U.S.-based industry group The Association of Settlement Companies, says credit card debt is the fastest-growing area of her business. "We have seen strong growth in the last 24 months," she says.
Card issuers are becoming more open to settling debts, both directly and through debt-settlement firms, as they try to reduce their ratio of charged-off loans, Schumann says. JPMorgan Chase & Co. confirms that when it is directed to do so by its customers, it will enter into negotiations with debt-settlement companies.
A new trend Schumann sees is credit card issuers' growing willingness to agree to "term settlements," which enable borrowers to make monthly or quarterly payments to the creditor through the debt-settlement firm. This differs from the more-traditional arrangement of repaying the renegotiated debt in a lump sum.
"About a third of credit card debt settlements are now handled through installment payments," Schumann says.
Although certain unscrupulous debt-settlement firms tarnished the industry's image by charging excessive fees and sometimes failing to deliver services, the association is working to rebuild consumer trust. Founded in 2005, the association monitors industry participants' business practices to ensure they are operating within its guidelines. It also encourages consumers to work only with approved members listed on its Web site.