How effective are debt consolidation and settlement services in relieving the financial stress faced by today’s debt-strapped consumers? As with most complex questions, the answer depends on whom you ask. If you ask the writers at financial website Bankrate.com, debt consolidation and settlement doesn’t work often enough. If you ask officials with the Association of Settlement Companies, a trade association, these services are the best ways for struggling consumers to shrug off their financial woes and start a new life debt-free. It’s a debate that doesn’t look to end anytime soon.
The Association of Settlement Companies may not be the most objective source of information on debt consolidation or settlement. The trade association, after all, represents the companies that make a living in this industry. Its job is to make sure that these companies receive good press and avoid tough federal or state regulations. Still, the numbers provided by the association do point to an industry that has helped its share of consumers escape high debts. In 2009, according to the association, debt settlement companies helped settle more than $1.1 billion of consumer debt. This saved consumers more than $600 million of debt that they would not otherwise have been able to repay. The association’s numbers showed that more than 34 percent of consumers completed their debt-settlement program. That’s not a great figure, but it is better than the 21 percent to 26 percent of consumers who completed credit-counseling programs.
There always have been critics of both the debt consolidation and debt settlement industries, though. Bankrate.com, one of the better known online providers of consumer financial news, has long been critical of both types of financial assistance. In a recent story on the site, reporter Steve Bucci wrote that debt settlement rarely or never works. The biggest problem? Most lenders want a lump sum repayment of at least 60 percent of the debt that they are owed. Most borrowers simply don’t have that money, Bucci wrote. The Association of Settlement Companies debated this point, and said that debt settlement often does work for struggling consumers.
Debt consolidation receives its share of complaints from critics, too. Most of them point out that debt consolidation companies often charge high interest rates for their services. Others say that the fees involved in these loans are too high, while still others say it sometimes takes far too long for consumers to pay off their debts under such arrangements. This debate is likely to continue. But until the economy improves, you can bet that consumers will continue to turn to debt consolidation and settlement services, no matter what the financial experts say.