'Debt-relief' companies banned from charging advance fees over the phone

Starting next week, telemarketing companies peddling debt-relief services to consumers will be banned from charging customers advance fees. Any unscrupulous companies that flout the new rules will be caught and punished, the Federal Trade Commission announced.

The modifications to the Telemarketing Sales Rule, first announced last July, represent an effort by the commission to rein in abuses by an industry that's profited from thousands of financially-distressed Americans during the Great Recession.

As of October 27, consumers trying to dig themselves out from crushing debt will no longer be forced to fork out any fees until debt-relief telemarketers actually provide a service, such as settling or reducing a customer's credit card or other unsecured debt.

"The rule change that goes into effect next week is a major victory for consumers struggling to control and manage their debt without inadvertently digging themselves in deeper," said Chairman Jon Leibowitz in a statement. "Starting on October 27, debt-relief telemarketers are on notice – if you charge consumers before actually helping them, you will find the FTC and state enforcers knocking at your door to enforce the Rule."

Over the past decade, the FTC and state regulators have launched more than 250 law enforcement actions to terminate deceptive and abusive practices by debt-relief marketers. The FTC will be enforcing the new rule, as well as states – which also can sue companies that violate the Rule. "We look forward to working with our state partners to ensure that the Rule is enforced across the country," Leibowitz said.

Specifically, The new advance fee ban means fees for debt-relief services may not be collected until:
  • The debt relief service successfully settles or changes the terms of at least one of the consumer's debts.
  • There is a settlement agreement, debt management plan, or other agreement between the consumer and the creditor.
  • 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 rule also includes provisions to ensure that debt-relief providers don't front-load their fees if a consumer rolls multiple debts into one debt-relief program. The new advance fee ban isn't retroactive, and applies only to consumers who enroll in a debt-relief service after October 27, 2010.

Another new provision that takes effect next week allows debt relief companies to require that consumers set aside fees and savings for payment to creditors in a "dedicated account" only if the following five conditions are met:
  • The account is maintained at an insured financial institution.
  • The consumer owns the funds (including any interest accrued).
  • The consumer can withdraw from the debt relief service at any time without penalty and receive all unearned provider fees and savings within seven business days.
  • 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.
Other rules announced in July that went into effect in September prohibit debt-relief telemarketers from making misleading claims and require them to disclose all fees upfront.

According to an FTC fact sheet, there may be as many as 1,000 firms offering debt-relief services. Two trade groups representing 250 members estimate a combined customer base of 425,000. One of the trade groups reported that 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.
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