How Debt-Settlement Companies Skirt the New FTC Rules

Earlier this year, the Federal Trade Commission issued strict new regulations to protect consumers from deceptive companies claiming to help settle their credit-card debts. The ruling prohibits companies from charging upfront fees for debt-settlement services, for example, or from misrepresenting their services, such as by making telemarketing promises to cut clients' debts in half or to free clients from debt in only 12 to 24 months.

Despite the new rules, consumer groups warn that plenty of illicit debt-settlement businesses continue to thrive on the Internet, uncontrolled by the government. "The amount of consumer harm in this issue is unbelievable," says Christopher Viale, CEO of Cambridge Credit counseling, a nonprofit that tries to arrange low-cost debt resolutions for consumers. "There's $40 billion to $50 billion wrapped up in these types of programs, and there is only a 2% success rate."

Companies seeking upfront fees certainly exist. DailyFinance called one company, chosen at random, that advertises its services on Twitter. In a phone interview, a representative at a debt-settlement firm in Arizona said the company could settle credit-card debts for as low as 20 cents on the dollar, that it guarantees its services and that it would need an advance fee of $5,000 to start the settlement process. However, under the new rules, companies are prohibited from doing all of those things on the phone.

The Latest Loopholes

Debt-settlement companies offer to help people work their way out of heavy credit-card debts by bargaining with the credit-card companies: They agree to set up reasonable payment programs with the consumers in return for reductions in total debt. The threat is that the credit card companies will get nothing if they don't cooperate, but industry figures indicate these settlement companies rarely are successful in winning concessions from the big banks.

In a presentation to the FTC this week, Cambridge Credit's Viale outlined some of the ways debt-settlement firms flout the new regulations. Some pose as attorneys who represent debtors and claim they can charge a retainer fee in advance because FTC rules don't cover legal fees, he says.

But FTC regulations specifically state that legal fees are not exempt from the regulations unless the sales pitch is made in person by the law firm, and not over the phone. As a result, some debt-settlement firms are now sending notaries and other officials to meet potential clients in Starbucks and Dunkin' Donuts outlets to get around that restriction, Viale says. The Association of Attorneys for Debt Resolution didn't return a call requesting comment.

Thinly Disguised Marketing

In another twist, some companies send text messages inviting debtors to participate in a survey about how to get out of debt. They then claim they're not telemarketing, but merely conducting a a survey.

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How widespread is this subterfuge? Before the rules took effect in September and October, some 1,000 firms were involved in credit card settlement, Viale says. Of those, only 20 to 30 have agreed to comply with the regulations, he adds. Overall, the FTC "has not done a good enough job to warn the public" about debt-settlement agencies' new strategies, Viale says. An FTC spokesman declined to comment on Viale's complaints but confirmed that the agency had received a letter from Viale.

The FTC did file lawsuits against two firms in December, but that was for activities that happened before the new rules took effect. The agency spokesman says the FTC has taken no enforcement action against violations since the new rules were issued. The message for consumers: Tread very carefully when dealing with a debt-settlement firm.