Debt — long an American boogeyman — has spiraled out of control. Consumers are drowning in the red.
No generation is immune. The average Gen Xer has nearly $33,000 in non-mortgage debt, while the average Millennial has over $27,000. On the whole, consumer debt hovers around $14 trillion — roughly equivalent to the economic output of China. That is right: The entire Chinese economy. Credit card debt accounts for $1 trillion of it — more than the entire economic output of the Netherlands.
Before the COVID-19 pandemic, the average credit card balance per person surpassed $6,000. While the pandemic has led to a drop in short-term consumer spending — and, by extension, credit card debt — it is set to spike in the coming months, due to mounting financial challenges. This will impact Americans in a wide range of ways: From renting and home-buying to finding a new job that requires a background check, consumer debt takes a toll on the credit scores that employers, landlords and lenders rely on to vet their customers.
However, for debt-ridden Americans, there is light at the end of the tunnel. Consumers with a significant amount of unsecured debt can opt to settle their debt, which may lower their debt load and monthly payments without resorting to the nuclear option of bankruptcy. Those going through financial hardship deserve every option for resolving their debts.
Debt settlement takes on outsized importance in the COVID-19 economy. Since 2015, the total available market for debt settlement has grown by 50 percent. Due to the pandemic, the TAM for debt settlement is expected to rise more than 70 percent in 2021. Indeed, the number of consumers utilizing debt settlement will rise at a compound annual growth rate of nearly 30 percent.
How does it work? Debt settlement is the process where a debt settlement company negotiates, on behalf of a consumer, with creditors to allow the consumer to pay a “settlement” amount that resolves the debt in full. The settlement amount is a lump sum that is usually less than the full amount owed. The agreed settlement amount is usually a percentage of the initial amount owed, typically ranging between 50 percent and 70 percent. Debt settlement is significantly different from credit counseling, which only reduces interest rates paid on debts. Additionally, credit counseling companies are usually paid by credit card companies, whereas debt settlement companies are independent advocates for consumers, only charging fees based on successful settlements.
Unfortunately, debt settlement took on a bad name in the past, due to a bevy of bad actors in the space. Some made empty promises, forced consumers to make monthly payments without settling the debts with credit card companies and generally acting in bad faith.
Then there’s cronyism. Legislators and lenders have formed an unholy alliance by joining forces to deny consumers the ability to do what the wealthy have done for years — take control of their finances and negotiate their debts. In 2020, the credit and finance industry spent more than $23 million on lobbying, with MasterCard and Visa being the most active. Buoyed by the government, such companies have an incentive to lend money to people who can least afford it, charge exorbitantly high interest rates and fees, and then aggressively collect on them.
Fortunately, there are many good actors in debt settlement that can help consumers fight back. The government also has a role to play: Due to the Federal Trade Commission’s Telemarketing Sales Rule, debt settlement companies that use telemarketing can no longer be abusive and deceptive. Nor can they charge upfront fees or misrepresent their services. Additionally, several states have worked collaboratively with the debt settlement industry to develop sensible regulations, protecting consumers while permitting the industry to operate.
Perhaps most importantly, transparency is now the name of the game: Today’s debt settlement companies must disclose the full cost of their services, an expected timeframe for the completion of services, and potentially negative consequences that may arise.
In the name of such transparency, I launched the Consumer Debt Relief Initiative to help ensure that consumers are dealing with compliant, reputable debt settlement companies that have their best interests in mind. Consumers need to understand that no other debt relief option provides them experienced professionals who will truly advocate on their behalf. CDRI’s efforts will enable debt-ridden consumers to take advantage of a changed landscape to climb out of the red and toward a brighter future.
The fewer Americans drowning in credit card debt, the stronger the U.S. economy becomes. If you are one of them, there is no reason for despair — you are not alone and you can swim to safety.
Tomas Gordon is the CEO of ClearOne Advantage in Baltimore, Md., and serves as founding chairman of the Consumer Debt Relief Initiative.
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