US Consumer Debt Relief: Industry, Overview, Laws & Regulations

By Felix Shipkevich

The debt relief industry is large and growing. It is becoming increasingly important to keep abreast of the history of the space, how and why it is being regulated, both federally and on the state-level, and any potential changes to come.

 

This Guide summarizes the history of consumer credit and debt, the rise of debt relief services, and provides an outline of the debt relief space and its participants, with a key focus on the debt settlement industry and its regulations.

 

Within the Guide you will find information on:

• The History of Consumer Credit and Debt
• The Debt Settlement Process and Its Participants
• Debt Settlement Companies
• Other Debt Relief Services
• The Types of Debt Settlement Models
• Debt Settlement Case Law and Enforcement Actions
• The Telemarketing Sales Rule (TSR)
• The Unfair or Deceptive or Abusive Acts or Practices (UDAAP)
• State Regulations on Debt Settlement

• Language: English
• Publisher: Shipkevich PLLC
• Release date: May 17, 2021
• ISBN: 9798201035440

Book preview

I. Introduction

This guide is for educational purposes and is meant to provide a regulatory and legal overview of the debt settlement space. The information in this guide may be helpful for in-house attorneys, compliance personnel, and outside counsel in trying to navigate federal and state issues in the debt settlement, as well as understanding its general market participants. You should consult with your counsel for individual matters. If you have questions, you can reach out to me via email at [e-mail]. I would love to hear your feedback.

History of Consumer Credit and Debt

In the United States, the idea of consumer credit did not emerge as an accepted concept until the turn of the twentieth century. By the 1920s, in the era leading up to the Great Depression, American spending was at an all-time high. Installment debt was increasing and extensive throughout social classes, and Americans were making larger purchases such as cars and appliances for their homes entirely via credit.

After the Great Depression, American consumers began saving more regularly. World War II led to an economic boom, and as the economy and consumers’ incomes grew, so did their use of credit. In 1950, Diners Club issued the first charge card, which would later become known as a credit card.¹ As the first major multipurpose charge card issuer, Diners Club gained widespread acceptance among merchants and paved the way for other issuers. By 1958 major companies, such as American Express and Bank of America, joined the competition.² Credit cards were being used more frequently for routine payments rather than for long-term borrowing for many reasons: they minimized the need to carry cash, offered consumers records of their spending patterns and use incentives, and provided both consumers and merchants protections alike.³

Since 1965, the amount of revolving consumer credit relative to disposable personal income has steadily risen.⁴ Consumers were making more money and spending more money with ease. As the popularity of bank and nonbank credit cards exploded, the credit card industry grew from thousands of cardholders to millions. However, because credit cards surged at such a rapid pace, many consumers were unclear as to how the industry’s fundamental rules of credit worked, for example, what a credit card's interest rate meant.⁵ Key legislative acts were enacted, such as the Fair Debt Collection Practices Act of 1977, to address consumer complaints against this fast-growing industry.

By the 1980s and 1990s, federal and state governments began massive deregulation efforts in the banking industry, and consumer credit and debt saw a steep increase.⁶ Until the late 1970s, states were limiting the interest rates credit card issuers could charge on outstanding balances; however, certain court decisions and new state legislation relaxed the restrictions on credit card interest rates and allowed for national banks based in those states to charge market-determined rates throughout the country.⁷ The reduction in legal impediments and improvements in data processing and telecommunications contributed to the growth of revolving credit.

The increased use of revolving credit coupled with deregulation led to unsecured debt becoming the norm of daily American life. According to the Federal Reserve Board, Survey of Consumer Finances, about 71 percent of families held general-purpose credit card accounts issued by banks in 2004, as compared to just 16 percent in 1970.⁸ Credit card companies began targeting consumers as early as the college level. Soon, with the greater availability and ease of use of credit cards came more consumer debt, and from 1990 until the early 2000s, consumer credit debt doubled.⁹ Most families carried and continue to carry debt regardless of the age, race, ethnicity, and work-force status of the household head and regardless of the household’s housing status (own versus rent) and net worth.¹⁰ This all came to a head in 2008 with the financial crisis or Great Recession. With the Great Recession came a big squeeze in finances, higher inflation, and a rise in unemployment. Americans found themselves drowning in consumer debt with significant challenges to get out of it.

The Rise of the Debt Settlement Industry

Since the 1990s, there has been a direct correlation between the rise of the debt settlement industry and increased consumer credit and debt in the United States. As consumer credit use increased, unsecured consumer debt increased alongside it. Consumers in debt often experience severe financial hardships due to major life events, such as a divorce, job loss, or illness, resulting in large bills. Major life events like the ones described above can cause increased use of credit to survive, and consumers have had to find a manageable way to pay down their debts.

While debt relief options such as bankruptcy or credit counseling exist for consumers, many significant debts, such as student loans, cannot be discharged without proving the loss of life or limb. Some consumers simply are not earning enough income to pay off the amount of debt they have accumulated. Significant debt limits available cash flow to pay down or continue servicing minimum payments on debts. Debt settlement companies offer another option for consumers who cannot adhere to the strict parameters of bankruptcy but need more structure than what credit counseling can provide.

By enrolling in debt settlement programs, consumers may improve their debt-to-income ratio and gain more control over the process of getting out of debt. Debt settlement programs could benefit consumers in the lower-to-middle income bracket or who lack assets to borrow against or savings to draw from. Debt settlement programs can help consumers form responsible financial habits by continuing to pay off a minimal amount of debt per month even after graduation from the program. As credit card debt only continues to rise in America, and with the global COVID-19 pandemic creating another massive rate of unemployment, the debt settlement industry will only continue to grow.¹¹

Unwarranted Negative Stigma Around Debt Requires Better Regulatory Oversight

With the exponential increase in consumer debt came the negative stigma around those who found themselves in debt. This negative