Debt adjustment is a form of debt relief that helps a person to repay a debt. Repayment generally requires smaller payment amounts than the lender and borrower originally agreed upon. It is an alternative to bankruptcy.
The function of debt-adjusting agencies is to help financially distressed debtors settle their obligations by the modification of their indebtedness through the services of an intermediary; known as a debt adjuster, debt pooler, budget planner, or credit counselor.
“Debt adjusting” means the making of a contract, express or implied, with a debtor whereby the debtor agrees to make periodic payments of a certain amount of money or other thing of value to the the debt adjusting business who for consideration distributes the same among certain specified creditors in accordance with a previously agreed upon plan. Debt adjustment includes budget counseling, debt management or debt pooling service or the holding of oneself out, by words of similar import, as providing services to debtors in the management of their debts and contracting with the debtor for a fee to (a) effect the adjustment, compromise, or discharge of any account, note, or other indebtedness, of the debtor, or (b) receive from the debtor and disperse to his creditors any money or other thing of value”[i].
In some states the business of debt adjusting is defined by statute as the making of a contract, express or implied, with a particular debtor whereby the debtor agrees to pay a certain amount of money periodically to the person engaged in the business who, for a consideration, distributes the same among certain specified creditors in accordance with an agreed plan[ii].
The business of debt adjusting gives rise to a relationship of trust in which the debt adjuster, in a situation of insolvency, marshals the debtor’s assets in the manner of a bankruptcy proceeding.
Although the practice of budget planning or debt adjusting is considered a lawful business in the absence of a valid statute prohibiting it, a state legislature may prohibit it. This is due to the fact that while some debt adjusters perform a commendable service, many others commit fraud and abuses and add little to the efficient functioning of the economy, serving mainly to increase the burden of debt upon the typical user of consumer credit who invokes their aid, without substantially furthering his or her attempts to liquidate his or her pre-existing obligations.
[i] American Mortg. Assistance v. State, 570 So. 2d 203 (La.App. 5 Cir. 1990)
[ii] EEOC v. Pennsylvania Liquor Control Bd., 503 F. Supp. 1051 (M.D. Pa. 1980)