New rules for debt-settlement companies to help consumers avoid scams

Debt-settlement firms, debt settlement, debt collectors, debt, FTC rulesRules from the Federal Trade Commission kick in today that will protect consumers from many of the most common abuses by debt-settlement firms. The new rules prevent these firms from misrepresenting themselves to consumers or making promises that they can't keep.

Since the recession began, debt-settlement firms have ramped up their marketing efforts, bombarding cash-strapped consumers with mailings and advertisements promising to help them erase debts for a fraction of what they owe. As WalletPop has warned, it pays to be wary of these promises.

But now that the FTC's new rules go into effect today, debt-settlement companies can no longer tell you about their "successful" track record or promise you that your credit score won't be hurt by debt settlement (in reality, settling a debt, especially using the methods these companies employ, will lower your score significantly.) Even more importantly, debt-settlement firms can no longer be paid up front.

"We think it's a game-changer," says Kathleen Day, a spokeswoman for the Center for Responsible Lending. "More has to be done. This is still an industry with bad practices, but this helps even out the playing field," she tells WalletPop.

One of the biggest problems surrounding the debt-settlement industry is that many of these companies get paid up front. They tell the cash-strapped customer to send their money to them instead of to the creditors, then they stockpile that money for several months until they've got enough of a fund built up to start bargaining with the creditors. The debt-settlement firm often takes a significant fee right off the top so unwitting consumers are actually paying the settlement company for the first several months while nothing is being done about their debt. As calls from creditors continue for weeks or months, many consumers get fed up and stop working with debt settlement company. The problem is that the debt settlement firm often ends up keeping your money with little, if any, of it going toward your debts.

As of October 27, debt settlement companies can't get paid until they've actually done something for you, such as make a payment on your behalf or negotiated more relaxed terms of a debt (like a lower interest rate or balance owed).
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