Debt settlement protections start for consumers
September 27, 2010
Tougher Rules on Fees Begin on October 27
WASHINGTON, D.C. – More and more consumers have turned to debt settlement firms to try to pay off their debt in recent tough economic times. But many consumers have found that debt settlement firms collect big fees but fail to deliver on their promises to eliminate debt.
Now new rules adopted recently by the Federal Trade Commission (FTC) will begin to help curb deceptive and abusive practices in debt relief services and ensure that consumers won’t end up paying big fees without getting relief.
“Debt settlement firms have raked in millions in fees even though many of their clients don’t get the help they are promised,” said Lauren Bowne, Staff Attorney for Consumers Union’s Defend Your Dollars campaign (www.DefendYourDollars.org). “These new rules will help put an end to debt settlement rip-offs and make sure that consumers get treated fairly.”
Most debt settlement companies market their services through internet, television, or radio advertising. The advertisements typically promise to substantially reduce debt and urge consumers to call a toll-free number to find out more. Once the consumer signs up, the debt settlement company takes its fees over the first half of the contract period. The FTC reports that nearly two-thirds of consumers who enroll in debt relief services, most of which pay an advance fee, end up dropping out of the programs within the first three years without getting the help they paid to receive.
Debt settlement companies usually advise consumers to stop paying their creditors and to instead set up a special account to build savings that will be used in the future to negotiate a settlement. As the consumer deposits savings into the account, the debt settlement company withdraws money to cover its fees even though it hasn’t reached a settlement with creditors.
Starting September 27: New Disclosure Requirements
Starting today, debt settlement firms must disclose to consumers the time it will take to reduce the debt, when the firm will negotiate a settlement with creditors, and how much money consumers must set aside before a settlement offer will be made. Debt settlement firms also must tell consumers about the negative consequences of not making payments to outstanding creditors, such as being subject to collections or lawsuits, decreased creditworthiness, and increased debt.
Starting October 27: New Limits on Advance Fees
Beginning on October 27, new rules will go into effect that will prohibit debt settlement firms from collecting fees for their services until they have settled some or all of a consumer’s debt. Under the new rules, a debt settlement company cannot charge any fees until it reaches a settlement on at least one of the consumer’s debts that the consumer agrees to in writing. Fees cannot be collected until the consumer has made at least one payment to the creditor as a result of the negotiated agreement.
If one portion of the debt is settled, the fee will be limited to a proportion of what the total fee would have been if the entire debt was settled or a percentage of the amount saved by the settlement.
If the debt settlement service requires the consumer to place funds in an escrow account, it must disclose that the fund is owned and controlled by the consumer and that the funds can be withdrawn at any time without penalty.
While the new FTC regulation will ensure that debt settlement companies only get paid if they help consumers, it does not stop them from charging outrageously high fees. Consumers Union supports legislation to cap debt settlement fees to a reasonable percentage of the actual savings for consumers.
“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,” said Pamela Banks, Policy Counsel for Consumers Union. “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.”
See Consumers Union’s fact sheet on the new debt settlement rules and tips for consumers struggling with debt.
Michael McCauley – 415-902-9537 (cell) or David Butler – 202-462-6262