There are a number of problems in working with companies that provide for-profit debt related services. I discuss some of them in a recent article [Should You Work with a Debt Settlement Company?].
After writing the article, I felt it was also important to update readers on a new important FTC rule impacting for-profit companies providing debt related services over the telephone. These companies can no longer charge fees before they settle or reduce a person’s unsecured debt.
Why is the new rule important?
The new rule, which will take effect in October of 2010, should help govern the industry better.
Here’s what the FTC chairman has to say about the rule change:
At the FTC we strive every day to make sure America’s middle class families get straight deals for their dollars, Chairman Jon Leibowitz said. 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. 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.
When can fees be collected?
One of the problems created in the past by working with such companies has been the advance fee. The new rule states when fees can be collected to make sure customers are getting something for their money.
- 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, and the consumer has agreed to it; and
- The consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
How can debt service providers collect fees?
Consumers must set aside savings for payments to creditors and fees in a separate dedicated account. Here are some of the rules for the dedicated account:
- 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; and
- The provider does not exchange any referral fees with the company administering the account.
As you may have read in my article [Should You Work with a Debt Settlement Company?], I’m not a fan of working with for-profit debt settlement companies. Beyond the financial issues (which now look to be better governed) there are other impacts to your credit, taxes owed on amount settled, etc. You’re much better off working with creditors directly, or seeking the assistance of a nonprofit counselor at Credability or Crown Financial Ministries.