CFPB Releases Report on Debt Settlement, Credit Counseling Trends

The gap between the number of accounts that have been placed with a collection agency and the number of individuals who have engaged with a credit counseling service has increased during the past few years, while the gap between the number of accounts that have been placed with a collection agency and the number of individuals who have engaged with a debt settlement company has narrowed considerably, according to data released on Friday by the Consumer Financial Protection Bureau.

The report does not speculate why such a divergence is occurring, but did indicate that the increase in debt settlement activity is due to “changing
macroeconomic conditions, creditor account management strategies, and apparent increases in for-profit DSC activity.”

Interestingly, the amount of time that an account is in delinquency prior to it being settled increased in 2019, compared with 2018, after four straight years of decreases, according to the report. For 90% of accounts, they were settled after 40 months in delinquency, up from about 37 months in 2018.

Noting that debt settlement activity “rose dramatically” during the Great Recession, probably as creditors sought to try and recover as much as possible from individuals who were in bad financial shape. That activity dropped off during the early part of this decade, but has started to increase again.

“While recessions differ in their underlying causes and in their effects
on different types of households, to the extent the effects are similar, we may see patterns like those from the Great Recession repeat themselves in future downturns as consumers and lenders face increased pressures: increases in debt settlements and less time in severe delinquency or charge-off before settlement occurs,” the report concluded.

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