Debt Settlement Companies Largely Ignored by Banks

Creditors don’t like to talk about debt settlement companies, most likely because creditors see debt settlement companies as hurting rather than helping the debt collection process.

“We choose not to work with debt settlement companies,” said Matt Towson, spokesman for Discover Financial Services, Riverwoods, Ill. The company refused to comment beyond the statement. But most other major lenders won’t comment at all; they did not respond to repeated requests for interviews on the subject of debt settlement companies.

Their view of debt settlement companies shouldn’t be surprising due to the wall the debt settlement process tends to put up between debtors and creditors, said Jamie Welsh, director at accounts receivable management advisory firm Kaulkin Ginsberg.

Once the consumer signs up with a debt settlement company, the firm typically uses legal means to prevent further communication between the debtor and creditor(s). This sets off a chain of events leading to lower credit scores for the debtor and a communication black hole for the creditors.

By being non-responsive to creditor communiqués, the consumer’s credit score takes a hit. Instead of paying the credit issuer, the consumer is now obligated to make payments into the debt settlement company’s escrow account, which in turn does not make payments to the creditor until a minimum threshold is reached. For example, the debtor might pay the settlement firm $100 a month, but the firm might not pay the creditor until it has collected $400 from the consumer.

Meanwhile, the creditor has no contact with the debtor, with all calls being routed through the debt settlement company. They are often told that a settlement is in process. But no payments are being made on the consumer’s account. So the creditor is compelled to do the only thing they can: report the non-payments to credit bureaus, driving the consumer’s credit score even lower.

On the federal level, the debt settlement industry isn’t regulated in any uniform way, though there are some state laws that some of the firms -- depending on office location and where they do business -- must abide by.

In a recent workshop held by the Federal Trade Commission, panelists agreed that the Treasury Department’s Comptroller of the Currency should be the national regulator, which would provide a better solution than individual state oversight.

The FTC’s workshop also provided a rare opportunity for banks to speak out on the debt settlement industry. Speaking on behalf of the industry, the American Bankers Association noted at the workshop that the banking industry views the debt settlement industry as “very harmful” to both consumers and creditors. “[Banks] do not see the debt settlement industry as a necessary player,” said ABA spokesperson Virginia O'Neil.

O’Neil noted that the vast majority of banks do not have formal written procedures in place to deal with debt settlement companies. Settlements reached with the help of intermediary companies are typically the same as settlements reached dealing directly with the consumer, she noted.
 
The FTC will be collecting comments on the debt settlement industry through Dec. 1, and will then decide how to proceed in regulating the burgeoning industry.

Editor's note: Kaulkin Ginsberg is the parent company of insideARM.com.