The Debt Settlement Industry Is Busy, but It’s a Bit Nervous, Too

David Streitfeld|The New York Times
pile of bills

This should be a triumphant time for the debt settlement industry. If ever there was a moment when masses of people needed help so they were not smothered by the weight of their credit card bills, it is now.

But at a conclave of settlement professionals here this week, the mood was more of crisis than celebration. One sober question hung in the air: Would the industry exist in anything like its present form in a few years?

A formidable array of forces is concerned about the way the settlement companies solicit consumers and negotiate lower payments on their debts. The industry is in the cross hairs of the Federal Trade Commission, state regulators, members of Congress and state legislatures. Credit card companies are not fond of it, and many consumer advocates practically loathe it.

The common complaint among all these groups is that too many debt settlement companies are more interested in helping themselves earn fees than aiding their beleaguered clients. Their ads promise the clients will get out of debt but, critics say, the reality is that they often become even more enmeshed.

Noting “the legal firestorm that has subsumed the debt settlement industry” in recent years, Jeffrey Tenenbaum, a lawyer representing dozens of settlement firms, warned that many companies could be “legislated, regulated or litigated out of business.” Like the other speakers, he stood on a conference stage outfitted as a boxing ring.

Some attendees confronted the prospect of new laws with foreboding. “I think regulation is going to be a killer,” said David Fishman of Arbitronix, based in Las Vegas.

But others saw it as good news. “There’s a lot of bad apples in this industry,” said David Jenkins of First American Debt Relief in Newport Beach, Calif. “Let’s clean it up.”

A third group said it was all a problem of miscommunication.

Regulators and attorneys general “don’t understand what we do and how we do it, and the benefits we provide for consumers,” said Peter McLaughlin of Preferred Financial Services in Andover, Mass.

Understanding might be on the upswing, although whether it will lead to appreciation is a separate issue. Preferred Financial was one of numerous settlement companies that received a subpoena from the New York attorney general, Andrew M. Cuomo, last month as part of a wide-ranging investigation.

The settlement companies, which number about 2,000, have varying business models but generally develop programs for strapped individuals to pay off a percentage of their credit card debt and avoid bankruptcy.

Only a handful of the companies came to this convention, which was run by a trade group called the United States Organizations for Bankruptcy Alternatives. Participants stressed that that it was the people who were not there who were the problem.

“The bottom feeders are ruining our reputation,” said John Ansbach, the general counsel for EFA Processing in Frisco, Tex. “The good stories are not being told.”

Part of the problem with industry, Mr. Ansbach said, is that there are few barriers to entry. Many of the smaller firms are virtual outfits, contracting with outsourcing companies to do all the back-end work of talking to the debtors, enrolling them and negotiating settlements.

EFA itself is one of these outsourcers, handling settlement programs for dozens of corporate clients. Mr. Ansbach says EFA rejects more new clients than it takes on.

There are even companies to help secure the customers. Max Bruck is the vice president of sales for Find Your Customers Inc., which develops print, radio and television spots. The most successful ads, he said, emphasize words like “stress” and “anxiety” and showcase notions like the inability to sleep or frequent fights with a spouse.

Mr. Bruck has just finished a radio ad that begins with an employer calling a job applicant, ominously wondering why the job-seeker went bankrupt. “Bankruptcy stays with you forever,” the announcer warns.

Listeners’ calls are funneled to clients of Mr. Bruck who pay $80 each. The average ad generates 500 to 1,000 calls, he said.