M&A in Consumer Debt Settlement

Colonnade publishes industry commentary on consumer debt settlement.

The consumer debt settlement industry has been experiencing a resurgence since the shake-out of 2010 -2011, and we anticipate continued growth in the sector.  This growth, along with the intrinsic returns of debt settlement, will drive investor interest in the space.  Successful debt settlement firms are likely to be targeted for acquisition by private equity firms and other investors in the coming years.

The consumer debt settlement industry had a terrible reputation.  Debt settlement operators would solicit desperate consumers with promises of debt relief, collect an up-front fee to negotiate discounted payoffs with creditors and, in some cases, do very little in return for the payment.  The charlatan factor in the debt settlement business was significant.  The landscape changed on October 27, 2010 – the Federal Trade Commission issued the Revised Telemarketing Sales Rule, which prohibited debt settlement companies from charging fees to consumers prior to delivering any services.  Along with this prohibition, the FTC established very clear rules of the road for the debt settlement industry.  This is an unusual case of regulation rescuing an industry from its worst participants.  The charlatans are gone, the legitimate players have adjusted, and the new guidelines actually do protect and benefit consumers while allowing debt settlement firms to generate attractive returns to their equity holders.  Most importantly, the debt settlement industry provides consumers with significant debt relief – according to one study, the average settlement of an account enrolled in a debt settlement program was 48% of the balance owed.

Debt settlement has been around as long as there has been debt – creditors typically try to recover whatever they can when a borrower is in distress, and settlements are often negotiated to discharge the debt for far less than the amount owed.  Consumer debt settlement is a process performed by a service provider working on behalf of a financially distressed consumer. The service provider negotiates the settlement and discharge of the consumer’s unsecured debt.  The debt settlement firm acts as an intermediary/expert agent, but does not provide legal or tax advice.  Consumer debt settlement took off during the great expansion of consumer credit in the 1990’s and the subsequent recession of the early 21st century.