Debt-settlement Companies take Federal Trade Commission Spotlight

The dire consequences of our nation's debt problems have come full circle in recent months.  As our most prestigious financial institutions have crumbled, our nation has begun to reassess its addiction to easy credit.  Debt-settlement companies have become more popular, and more scrupulous.

While legislators today are pondering bailouts of massive financial institutions, the same type of activity is taking place on a small scale.  Debt-settlement companies are swooping in to help consumers who are mired in debt. Firms in this fledgling industry, however, have no regulations or barrier to entry, which explains the enormous groundswell of newcomers.  

The Federal Trade Commission estimates that there are now three times as many debt-settlement companies on the market, which has sparked a national educational campaign to enlighten people in debt.

Understanding debt settlement

Debt settlement is a form of arbitration.  The debt-settlement professional works with a debtor and a creditor to agree on a reduced overall debt balance, in exchange for a guarantee that payment will be made in full.

These specialists use varying fee structures.  Some may charge a large fee up front, or spread out payments on a monthly basis.  Generally, the most highly regarded debt settlement specialists will charge based on the final settlement; a rough estimate of a "fair" price would be about 20 percent of the amount by which the outstanding balance is reduced.

As a debtor, you can perform debt settlement services by yourself, but many people prefer to have a specialist handle the complicated legwork for them.  This type of convenience comes at a price, however.  Because the industry is unregulated, many people often fall prey to unscrupulous tactics.

FTC warning signs

Not all debt settlement professionals push the limits.  Credit counseling experts, working for not-for-profit organizations, can provide you with the same types of results.  People can be easily tempted by an aggressive sales person, however, and may fall for a few of their typical scams.  In September, the FTC held a conference and talked about problems with the debt settlement industry, including:

• Improper advice.  Some debt settlement professionals will tell you to stop repaying your debt and ignore creditors.  This action will only result in a higher interest load for the debtor, and high fees for the debt-settlement represesentative.

• No regulation.  Debt settlers have no regulatory oversight.  Credit counseling agencies have been advocating for the FTC to get involved and establish some.

• Lack of certification.  Debt settlers should include debt arbitrators certified by the International Association of Professional Debt Arbitrators.  These people have expert knowledge of the laws governing the debt-settlement industry.

Debt relief is an attractive offer in today's economy.  If things go from bad to worse, the debt-settlement professionals increasingly will come out of the woodwork, and the abuses to those in search of much-needed debt consolidation will only get worse.  It will be interesting to see how the debt-settlement professionals will try to slow down an industry that's growing faster than regulation can reach it.