Consumer Guide: FTC Debt Relief Rules

After investigating the practices of debt relief companies that charge consumers high upfront fees but fail to help them resolve their debts, the Federal Trade Commission has issued its “Final Rule to Protect Consumers in Credit Card Debt” in August 2010.

This is not a new law. Instead, the FTC extended the Telemarketing Sales Rule to cover companies offering debt relief services.

In this consumer guide we will help you understand how the new debt relief rules affect consumers. We will use the terms “debt relief,” “debt settlement,” or “debt negotiation” interchangeably, although the rule applies to all of these.

Who It Covers

The Final Rule covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services. It applies to companies that take inbound calls from clients, as well as those who make outbound calls.

What you need to know: The new rules do not apply to legitimate non-profit debt relief firms, such as non-profit credit counseling agencies. Attorneys who do not engage in inter-state telemarketing and who meet face-to-face with clients are also exempt in most cases.

Upfront Fees are Illegal

After October 27, 2010, debt relief agencies will not be allowed to charge a fee in advance before providing any services. A fee can only be charged when:

• The debt relief firm successfully settles or reduces at least one of the client’s debts;
• The creditor provides the settlement or payment plan in writing to the consumer and the consumer has agreed to it; and
• The debtor has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief firm.

Even then, the settlement agency cannot charge the entire fee when the first debt is settled. Instead, each fee the consumer pays must be “proportional” to the total fee that will be charged. 

What you need to know: There is no cap on the amount of fees that may be charged by settlement firms. Firms may charge a flat fee per debt, for example, or a “contingency” fee based on the amount of money “saved” by the consumer. Fees may also be stated as a percentage of the total debt the consumer owes when they enter into the program. Some state laws, however, limit the amount of fees firms can charge.

Upfront Disclosures

Before a consumer signs up for a debt negotiation or debt relief program, the firm must disclose important key information:

How Much It Will Cost: Fees must be disclosed, along with refund policies. Firms that charge contingency fees based on a percentage of the money saved must provide an estimate of the fees each debtor will pay. This can’t be a broad “guesstimate” – it must be based on the results the firm expects to get based on their experiences with that consumer’s creditors.

How Long It Will Take To Get Results: Debtors must be given a good faith estimate describing how long it is likely to take to settle their debts based on the debts they owe (both the amount they owe, as well as the amount their creditors are typically settling for), and their ability to save money to settle.

How Much Money You’ll Need to Settle: Firms must give consumers an estimate of much money they will need to save to settle their debts. Again, it must be based on the consumer’s actual situation. Example: You owe $10,000 to a creditor who has been settling debts for consumers like you for 50% of the total balance. The firm must tell you that you will likely need to save $5000 to settle that debt.

The Risk of Not Making Payments: Firms must warn consumers that if they stop making payments to their creditors, their credit scores may be severely damaged, their balances may go up as new fees and interest accumulates, and they may be sued.

Tax Consequences: Debt relief firms should warn consumers that they may owe taxes on forgiven debt.

Truthful Advertising

Debt relief firms must adhere to strict new guidelines when the market services. Advertising claims must be based on the firm’s actual experience with all consumers it has served, not just the “best” examples.

For example, if a debt relief firm says consumers can settle their debts for half of what they owe, they must be able to back up that claim based on all of the clients they have worked with, including those who dropped out of the program and settled no debt. And they must subtract fees paid when calculating savings. 

Dedicated Savings Accounts

If a debt relief company requires you to save money in a “dedicated account” you can use to settle your debts, they must meet five conditions:

• The account must be maintained at an insured financial institution (for example, an FDIC-insured bank);
• You own the funds (including any interest that accrues); You can withdraw the funds at any time without penalty;
• The debt relief company does not own or control or have any affiliation with the company that administers the account; and
• The debt relief company doesn’t exchange any referral fees with the company that administers the account.

Is Debt Settlement Right for You?

Are you a candidate for debt settlement?  Before making the final decision, be sure to review Gerri's "Consumer Guide to Debt Settlement" and "Fourteen Questions to Ask a Settlement Company" located in the Credit.com Learning Center.