The History of Debt Settlement

Debt settlement as a debt relief concept has been in existence since the earliest days of lending. Resulting from a confluence of external factors like looser consumer lending practices and a struggling economy putting more Americans into financial hardships, debt settlement as an industry first entered into the mainstream as a legitimate debt relief option following 9/11. Banks had long since established internal settlement departments responsible for negotiating with cardholders in hopes of recovering delinquent or charged-off debts, and some law firms had been negotiating with creditors to help their clients avoid bankruptcy for quite some time. However, the establishment of third-party settlement companies with the sole purpose of negotiating with creditors and collection agencies became increasingly popular following 9/11.

Underlying the trend toward debt settlement becoming a more viable debt relief alternative has been the loosening of the borrowing practices of regular Americans. Much of this is best understood against the backdrop of the rising cost of living and the fact that real wages (wages against inflation) have not increased since the 1970s, so more Americans are relying on credit cards to make ends meet. At the same time, Americans’ increasing consumer appetite and poor spending habits is another important contributor to the credit card debt epidemic. With the demand for credit cards high, banks have been quick to supply them, oftentimes to consumers who cannot afford them at interest rates that were previously illegal.

With charge-offs and credit card delinquencies increasing, debt buying companies became important players in the “bad debt” arena. Between 2000 and 2005 the debt buying industry doubled in size, purchasing over $110 billion of delinquent debt in 2005. As “junk debt buyers” began purchasing more and more charged off credit card accounts, oftentimes for less than 9% of the balance owed, debt settlement started making even more sense for both debt buyers and credit card companies.

The culmination of the relevance of debt settlement for consumers came with the passage and eventual implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act in October of 2005. With fewer consumers qualifying for bankruptcy or being pushed into Chapter 13 “payment plan” bankruptcies, more Americans than ever began turning to debt settlement as a legitimate alternative to bankruptcy.