Escalating levels of credit card debt have placed a strain on family finances. Private debt settlement companies have entered the consumer debt market promising to ease money problems and write off debt. Their popularity has risen because they appear to be a plausible alternative to filing for bankruptcy. According to an article in the New York Times by David Streitfeld, there are now 2,000 debt settlement companies operating in the US currently.
Key American Credit Card Debt Statistics
- US credit card debt reached $972.73 billion at the end of 2008; this represents an increase of 1.12% compared to 2007- Nilson Report, April 2009.
- The average amount of credit card debt at the end of 2008 was $10,679 per household- Nilson Report, April 2009.
- The average open credit card balance was $1,157 at the end of 2008. This figure has risen by 11 per cent in the last two years- Experian Marketing Insight Snapshot, 2009.
- In the last 12 months, 34 million Americans made late payments on credit card debt. A further 18 million people missed making repayments completely- National Foundation for Credit Counseling, 2009.
What do Debt Settlement Companies Aim to Offer?
A consumer no longer makes a monthly repayment to the credit card provider, money is instead paid to a debt settlement company. They aim to write-off debt in order that a consumer can pay as little as 40 cents of every dollar owed. It is regularly ‘sold’ to customers as a viable alternative to filing for bankruptcy.
Why do Some Debt Settlement Companies Fail Customers?
- Debt settlement companies charge 15 per cent of the amount owed as a fee. Customers have found that, rather than receiving a debt write off, their money problems are exacerbated. This is due to plans being front-loaded so management fees are paid in preference to creditors.
- US consumers that fail to make monthly repayments on credit card debt experience increased debt collection activity. The front-loading of plans annoys creditors as they receive only a tiny fraction of the money they are owed.
- The use of debt settlement companies causes a personal credit score to deteriorate, especially if a consumer hadn’t previously missed or made late payments.
Tackling credit card debt with the help of debt settlement companies may appear to be the ideal solution. In practice it incurs further charges, increases collection activity and can even further exacerbate money problems. Consumers seeking a debt write-off may wish to consider filing for bankruptcy as they will then receive court protection from creditors.