For those consumers unable to fully repay their debts, there are three main options—bankruptcy, credit counseling, and debt settlement. Generally speaking, debt settlement serves those who do not qualify or who cannot afford other debt relief options, and seek to avoid the toll of filing for bankruptcy. Simply defined, debt settlement is the process by which a debt settlement firm, working on behalf of a borrower, negotiates with a creditor over the settlement and discharge of a borrower’s unsecured debt. While it may not be the best option for everyone, research has shown that debt settlement ultimately results in an in economic benefit to the consumer.
Expanding on the body of research around debt settlement, the Consumer Financial Protection Bureau (CFPB) recently published a report titled “Recent Trends in Debt Settlement and Credit Counseling” that explores the use and proliferation of debt settlement in the past 15 years. The report is the latest installment in the bureau’s Consumer Credit Trends series, which tracks developments in consumer credit markets and helps to identify potential problems in a given market. Using data from the CFPB’s Consumer Credit Panel, a longitudinal and nationally representative sample of approximately 5 million de-identified credit records, the report found that nearly one in 13 consumers with a credit record had at least one account reported by creditors as settled or with payments managed by a credit counseling agency.
The report also found that debt settlements rose dramatically during the Great Recession but became less common afterward, mostly due to improvements in the overall post-crisis economy. However, since 2017 there has been a significant uptick in reported debt settlement activity and delinquency without a corresponding increase in credit counseling.
While these findings identify some important trends across the economy and debt settlement industry, it is important that regulators do not use this report as a justification for burdensome new regulation of debt settlement firms. Although the report concludes that further research is needed, the CFPB has historically been all too eager to regulate—sometimes even industries it is expressly forbidden to—and has even used flawed and nominal research to underpin rulemaking in the past.
In addition to this report, the CFPB hosted an event in March titled “Evolutions in Consumer Debt Relief,” which focused partially on the debt settlement industry. In fact, at that event, a CFPB staffer said that the overall increase in consumer debt in recent years, among other reasons, has piqued the bureau’s interest in the debt settlement industry. While it remains unclear if the CFPB has any debt settlement rulemaking planned, that event and this follow-up report may indicate that the bureau is setting its regulatory sights on this industry.
Simplification and modernization of outdated rules is always welcome, but it is unnecessary to impose burdensome new regulation on the debt settlement industry, when it has long been one of the most highly regulated sectors of the American economy. In order to maintain legal and regulatory compliance, debt settlement firms must adhere to a complex patchwork of statutes from all 50 states, in addition to a number of federal laws—including the Bankruptcy Abuse Prevention and Consumer Protection Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Consumer Financial Protection Act, the Bank Secrecy Act, and the Gramm-Leach-Bliley Act, to name a few.
Due to the nature of the services that debt settlement firms offer, much of their business overlaps with the contractual obligations of consumers and their creditors. That means that debt settlement firms often must comply with the same laws and regulations that govern creditors and their collection activities, in addition to those that apply to their industry specifically.
My Competitive Enterprise Institute colleagues and I have praised CFPB Director Kathy Kraninger for taking a slow and steady approach to rulemaking and doing much to turn the bureau into a pro-consumer regulatory agency. Seeing as debt settlement is an important tool for struggling consumers to make good on their debts, especially in times like these, Director Kraninger should continue her slow and steady approach and be cautious to invoke the heavy hand of government when the research is inconclusive.