Some consumer relief from shady debt-relief? FTC issues new rules

Some consumer relief from shady debt-relief? FTC issues new rulesThe Federal Trade Commission announced a broad set of new rules designed to curb the "deceptive and abusive practices" of a debt-relief industry that's mushroomed during the worst U.S. economic crisis since the Great Depression.

One new rule bans for-profit telemarketing companies that sell debt-relief services from charging advance fees -- which can range from hundreds to thousands of dollars -- starting October 27, 2010. More that take effect September 27, 2010, forbid debt-relief companies from making misleading claims and require them to disclose all fees and other aspects of services.

The rules cover telemarketers that sell credit counseling, debt settlement, and debt negotiation services. Although the new regulations do not apply to nonprofit firms, they also take aim at debt-relief companies falsely claiming nonprofit status.

"This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up-front fees," Chairman Jon Leibowitz said in a statement. "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."

Although the FTC has pursued more than 250 cases against abusive debt-relief services during the past decade, consumer advocacy groups and others have lobbied hard for tougher rules. One of them, the Consumer Federation of America, applauded the new regulations.

"Desperate consumers scrape up their last dimes to pay the fees for these services, but too often they never get the debt relief they were promised," Susan Grant, CFA's Director of Consumer Protection, said in a statement. "Consumers are left deeper in debt because their money goes to the debt relief services instead of their creditors."

The advance-fee ban stipulates that fees for debt relief services cannot be collected until:
  • The debt relief service successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer's debts.
  • There is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, to which the consumer has agreed.
  • The consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
The new rules also prevent debt-relief companies from front-loading fees if a consumer enrolls multiple debts into a single debt-relief program. First, fees for a single debt must be in proportion to the total fee charged if all of the debts had been settled. Second, if the company bases its fee on the percentage of what it saves the consumer, the percentage charged must be the same for each of the consumer's debts.

Under the new disclosure and misrepresentations rules, debt-relief providers will be forbidden from making false claims about their success rates or nonprofit status. Companies will also be required to make several disclosures while peddling their services via the telephone, including:
  • How long it will take for consumers to see results.
  • How much the service will cost.
  • Negative consequences that could result from using debt-relief, such as costs and effects of filing bankruptcy.
  • Key information about dedicated accounts if they choose to require them.
Another new provision allows debt relief companies to require that consumers set aside their fees and savings for payment to creditors in a "dedicated account" only if the following five conditions are met:
  • The dedicated account is maintained at an insured financial institution.
  • The consumer owns the funds (including any interest accrued).
  • The consumer can withdraw the funds at any time without penalty.
  • The provider does not own or control or have any affiliation with the company administering the account.
  • The provider does not exchange any referral fees with the company administering the account.
According to an FTC fact sheet based on information provided by several debt-relief industry trade associations, there may be as many as 1,000 firms offering these services, with two associations estimating a customer base of their 250 members at 425,000. According to another trade group, nearly two-thirds of enrolled customers -- most of whom paid in advance -- dropped out of the programs within the first three years without obtaining results.

Before considering a debt-relief service, make sure to consult this list of do's and dont's.
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