A Roll of the Dice: Debt Settlement Still a Risky Strategy for Debt-Burdened Households

Leslie Parish
Center for Responsible Lending

Consumers with unmanageable debt loads face challenging options for dealing with their obligations, including filing for bankruptcy. Debt-settlement companies purport to offer indebted consumers an alternative way to become debt free while paying substantially less than what they owe. Though this sounds like an attractive option, consumers are likely to underestimate the risk that they will be unable to settle enough debt to benefit. Using data reported by the industry’s trade association, I find that debt settlement is likely to leave consumers financially worse off, despite improved consumer protections enacted by the Federal Trade Commission (FTC) in 2010. The model specifically shows that consumers must settle at least two-thirds of their debts to benefit from enrolling in a debt-settlement program. Recent data from state regulators suggest that—similar to the outcomes before the 2010 FTC rule—debt settlers routinely fail to settle enough debts for this positive outcome to occur.