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A BRIEF HISTORY OF DEBT SETTLEMENT
As a concept, lenders have been practicing debt settlement for thousands of years. However, the business of debt settlement became prominent in America during the late 1980s and early 1990s when bank deregulation, which loosened consumer credit lending practices, was instated to reverse an economic recession. Consumers were offered more credit, at higher rates to boost the US economy. Unfortunately this practice placed consumers in financial hardships where recurring credit card debt became increasingly difficult to manage, let alone payoff and eliminate.
With charge-offs (debts written off by banks) increasing, banks established their own debt settlement departments staffed with personnel who were authorized to negotiate with defaulting cardholders to reduce outstanding balances in hopes of recovering funds that would otherwise be lost if the cardholder filed for Chapter 7 bankruptcy. Typical settlements, were arranged in 3 installments, and ranged between 45% and 65% of the outstanding balance.
Alongside the unprecedented spike personal debt loads, there has been another rather significant change - the 2005 passage of legislation that dramatically worsened the chances for average Americans to claim Chapter 7 bankruptcy protection. As things stand, should anyone filing for bankruptcy fail to meet the Internal Revenue Service regulated ‘means test’, they would instead be shelved into the Chapter 13 debt restructuring plan. Essentially, Chapter 13 bankruptcies force borrowers to pay back some or all of their debts to all unsecured lenders. However, repayments under Chapter 13 may range up to 100% of the amounts owed to unsecured creditors.
As an alternative to punitive bankruptcy practices, today, in accordance with Federal Trade Commission regulations, American consumers have the right to enlist certified independent arbitrators to eliminate their unsecured debts through payment plans that are as manageable as the monthly minimum payment plans they pay their creditors. With the assistance of the right FTC certified arbitration program, consumers are offered the option of “Settlement” to eliminate outstanding unsecured debt balances, where they otherwise would remain in debt for the foreseeable future or file for Bankruptcy.
THE GATHERING STORM: AMERICA IN DEBT
Debt Settlement gained unprecedented popularity as means of financial survival with the “Great Recession” starting in late 2007, eventually causing American stock markets to crash in October of 2008. In the midst of this financial crisis many Americans were caught completely off guard. Life savings plans tied into securities and other investments disappeared seemly overnight. People were suddenly laid-off from their salaried positions as major employment institutions were forced to cut back on expenses or file bankruptcy. Secured assets such as mortgages went under water and people were now fighting to keep their homes.
For years preceding the crisis, consumers had grown accustomed to charging large balances on their credit cards and payment of these balances was not of major concern. This led to the so-called “credit crunch”, a major indicator in the impending financial collapse. Suddenly unemployed, and in debt to their homes, many consumers began to use their lines of credit to supplement the income they had recently lost. As this occurred credit tightened and interest rates went up leaving many Americans between a rock and a hard place. They kept charging their cards, only to become locked into revolving credit debt.
Unfortunately for distressed consumers, many fly-by-night operations and makeshift debt relief services companies appeared, looking to capitalize on the panic and uncertainty of the financial situation Americans were now facing. These companies were aware of the credit debt predicament and used the guise of “hardship” debt settlement and other legitimate debt relief programs as a means of profiteering.
THE RELATIONSHIP BETWEEN CONSUMER CREDIT AND PREDATORY LENDING
Our goal at Priority Capital is to educate and therefore protect our fellow consumers from the financial burdens that can result from predatory lending practices by credit card issuers. Predatory Lending is an expansive term and concept that pertains to all types of lending practices but exhibits unique characteristics in the consumer credit lending field. Predatory lending practices are all too common in regards to consumer credit lending; Priority defines it as follows. Predatory lending is when a credit card issuer intentionally solicits consumers where the issuer has empirical data (such as Debt-to-Income Ratio and W2) to suggest that the consumer may only be able to meet the minimal repayment criteria yet the lender issues a line of credit where minimum payments, once the line is maximized, may cause severe revolving credit card debt. In the case of consumer credit lending, we have observed that consumers falling victim to these practices often receive a steady stream of fixed income and thus become locked into revolving credit debt for years, in some cases even decades. Many never default or file for bankruptcy nor do they pay off the credit debt balance until exorbitant amounts of interest dwarfing the principal balance have been paid to the lender. In this way these consumers can be defined as “stable debtors” who will reliably make the minimum payment without defaulting, yet are unlikely to pay off the entire balance or large portions of the balance in any single payment.