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FTC bans upfront fees for debt settlement firms

Those who owe on credit cards, other loans were often soaked, agency says

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For-profit debt settlement companies that promise to negotiate lower credit card debts can't charge consumers fees until they actually settle their debts under Federal Trade Commission rules that took effect in 2010.

The rules were developed in response to complaints from debt-ridden consumers and legitimate consumer credit counseling agencies who said shady debt negotiators often didn't deliver on ads promising to reduce debt. Instead, the services advised consumers to stop paying their credit card and other bills while paying debt settlement companies hefty monthly fees.

When it worked out, the debt settlement firm negotiated a reduced rate with creditors. Too often, the FTC said, it didn't work out, leaving consumers worse off than before. After a few years, many consumers ended up deeper in debt, facing lawsuits and unable to get their fees back from the debt settlement company.

"This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, upfront fees. Too many of these companies pick the last dollar out of consumers' pockets -- and far from leaving them better off, push them deeper into debt, even bankruptcy," FTC Chairman Jon Leibowitz said in a statement announcing the new debt settlement rules. The FTC said it and state regulators have filed 259 cases against debt settlement providers for abusive and deceptive practices over the past decade.

No debt fix, no fee
The FTC's new debt settlement rules took effect Oct. 27, 2010, and cover telemarketing by for-profit debt settlement services, credit counseling services and debt negotiation companies as well as companies falsely claiming to have nonprofit status. A for-profit company selling its services via the telephone may not charge customers fees until it "successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of the consumer's debts." However, the rules do not apply to in-person or Internet-only sales. Nonprofit credit counseling services are not covered in the new rules, according to the FTC.

Other aspects of the rules took effect sooner. As of Sept. 27, 2010, for-profit debt relief companies also:

  • Cannot misrepresent their services.
  • Must make specific disclosures about costs and services. Among the disclosures required: How long it will take consumers to pay off their debt, the conditions under which it will negotiate a settlement with creditors, and how much money consumers must pay before a settlement offer is made. They must also disclose that debt settlements will lead to a drop in credit and potentially expose them to lawsuits from creditors.
  • Must make the same disclosures and fee protections available to customers who call the companies in response to advertising pitches.

Pamela Banks, Policy Counsel for Consumers Union, praised the arrival of the rules in a statement issued Sept. 27, 2010, but said they do not go far enough. "The FTC's new rules will put an end to advance fees but more needs to be done to limit the amount of fees that can be charged for debt settlement services," she said. "Lawmakers should cap fees so consumers who are already drowning in debt don't have to pay a steep price to get a fair debt settlement."

Industry response: Debt settlers will go out of business
David Leuthold, executive director of The Association of Settlement Companies (TASC), said the ruling will likely mean many of the debt settlement companies will stop providing services.

We're disappointed that the FTC came out with this ruling, especially with regards to the advance fee ban... It's just a fact that companies need revenue coming in prior to the actual settlement being made.

-- David Leuthold    
The Association of Settlement Companies   

"We're disappointed that the FTC came out with this ruling, especially with regards to the advance fee ban," Leuthold said in a telephone interview. "It's just a fact that companies need revenue coming in prior to the actual settlement being made."

He said creditors normally "won't agree to a settlement unless that money can be paid "all at once or within a short period following the negotiation. "Most of our clients don't have any money saved up."

Waiting to charge fees until there is a settlement will create "a big financial burden to a lot of debt settlement companies. They just aren't going to be able remain in the business to help anyone."

"Now, there are going to be very, very few companies that are going to be able to service clients," he added. Leuthold estimated that there are about 1,000 companies currently offering debt settlement services in the United States. 

Consumer groups applaud rules
Consumer groups applauded the rules.

"The FTC regulations will ensure that debt settlement companies will only get paid if they help consumers, but it doesn't stop them from charging outrageously high fees," Lauren Z. Bowne, a staff attorney for Consumers Union, a nonprofit consumer advocacy group, said in statement. "Now it's up to state lawmakers or Congress to cap debt settlement fees to a reasonable percentage of the actual savings for consumers."

Michael Calhoun, president of the Center for Responsible Lending, said in a statement: "We commend the FTC commissioners for exercising their authority to lay down common-sense rules in the debt settlement arena, where unfair and deceptive practices are rampant."

He added: "Far too often, these companies never perform the task they were paid to do."

See related: How debt settlement works, how if affects credit scores, FTC cracks down on 'credit repair' scammers, Beware phone calls offering debt relief

Updated: October 27, 2010



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