Unrealistic Collection Expectations Drive Consumers to Debt Settlement

Partial payments of outstanding consumer debt have to be incorporated into the current economic environment, says Robert D. Manning, research professor and director of the Center for Consumer Financial Services, Rochester Institute of Technology, Rochester, New York.

Manning, author of "Credit Card Nation" (Basic Books, 2000), said that while debt settlement companies fill that roll now, creditors and consumers would be better served if they worked together to determine appropriate settlements and payment plans for outstanding debts rather than using debt settlement companies.

Manning was among those who discussed these issues at the Federal Trade Commission’s workshop that discussed the debt settlement industry and possible regulations for it ("Debt Settlement Companies Put Under FTC Microscope," Sept. 29).

He faults lenders for granting too much credit as the catalyst of the current credit crunch. Too much lending centered around equity and liquidity values of homes, not on income. Repayments had historically been based on liquidity values of assets and incomes.

Both the lending and the repayments need to be based on income, Manning said. He added that creditors need to accept that home values have declined sharply, so consumers no longer have the home equity safety valve that they once did, impairing their ability to repay debt.

“One of the fundamental problems is that creditors have no empirical evidence to determine what someone can afford to pay,” Manning said. Therefore, creditors are demanding more than debtors can afford, driving them to debt settlement companies or bankruptcy.

But Manning said that the debt settlement companies hurt creditors and consumers alike – creditors because funds they might otherwise be able to collect go to pay debt settlement fees instead, and consumers because debt settlement companies escrow funds before any settlement is made. While creditors are waiting to be paid, the debtor’s credit rating continues to drop.