Debt Management Companies in America

Until about the 19^th century, managing debt was decidedly one-sided. Workarounds may have existed, but were seldom formalized and never legislated in favor of the debtor. The rule of the day held that you paid your debts in full; if you did not, you either became your creditor's slave or were sent to debtor's prison.  Today, with a few exceptions, such things no longer exist, and the courts and creditors alike are much more amenable to working out a schedule for paying down debt.

Consumers burdened by escalating credit card interest, mounting debt, and overly aggressive debt collectors need help in creating a workable, comprehensive strategy for getting back on track. When it becomes too much for one person to handle on their own, today's debtors frequently turn to debt management companies  that offer solutions such as debt consolidation, debt settlement, or credit counseling.  Companies offering these solutions have evolved over the last few decades in response to changes in the credit industry, a crippling recession, intractable unemployment, and legislation designed to bring a new level of uniformity to the debt management industry.

The Relationship Between Debt Management and Debt Collection

For as long as there have been debts, there have been strategies for managing them. Debt management is driven in part by the growing debt collection industry – a $12 billion business, according to Bharat Book Bureau. Despite legislation designed to rein in the industry, most complaints made to the FTC have to do with debt collection agencies going too far, violating the Fair Debt Collection Practices Act (FDCPA), and harassing debtors. Within this operating mode of intimidation and veiled threats, individuals find it difficult to manage their debts on their own, and increasingly turn to debt management programs for relief.

Formal Debt Management Is a Newer Phenomenon

While debtors and creditors have always been free to establish deals and workarounds on their own, as a formal industry debt management has only been around since the recession of the early 1980s. At that time, deregulation of the banking industry led to loose lending practices and easy credit — followed by inevitable debt problems. In response, banks, and later non-banking companies, started to negotiate defaulted credit card balances as a way of recovering some funds that might otherwise be lost to bankruptcy.

How Recent Legislation Affects Debt Management Services

Debt settlement agencies have historically presented a mixed bag of services, and there is no doubt that some scam artists have penetrated what is otherwise a legitimate service. Many debt settlement firms in the past have demanded up-front fees before delivering results. This practice resulted in some consumers losing thousands of dollars. Other consumers have gotten even deeper in debt by following questionable advice from unscrupulous debt settlement companies. The FTC's Telemarketing Sales Rule, part of the Telemarketing and Consumer Fraud Abuse Act, was amended in 2010 to bring added protection to consumers working with debt settlement services. Though these rules are directed at debt settlement services, debt management companies have also had to comply to some of the changes.

The FTC's added regulations prohibit companies from charging advance fees before settling or reducing a customer's debt. The rule also requires debt relief companies to make specific disclosures, and prohibits them from making misrepresentations.  There are a few limitations, however, which give some rogue operators room to remain in business. The rule covers only services that are sold over the telephone, either through outbound solicitations or from inbound calls made in response to an ad. It also only covers for-profit debt relief services, giving non-profit agencies a pass on compliance. 

More FTC Regulations in the Debt Management Industry

Another important piece of legislation that dramatically affected the debt management industry was the 2005 amendment of the Bankruptcy Act. The changes to the act made it much more difficult for consumers to file for Chapter 7 bankruptcy by imposing a means test designed to push them into a Chapter 13 reorganization instead. The inability to escape debts in a Chapter 7 bankruptcy has led more consumers to settle or negotiate debts rather than resorting to bankruptcy.

Today, debt management is a rapidly evolving field that has more oversight and control as well as more legitimate players. It can deliver solid, meaningful benefits to many consumers in debt.