It’s a Game Changer – Initial Review of New Rules for Debt Relief Services, Advertisers, Marketers, and Providers

This assessment of the new debt relief industry rules from the Federal Trade Commission comes from my friends at the Venable law firm and is worth reading for their assessment.


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FTC Issues Final Rules for Debt Relief Services:
Landmark Changes for Service Providers, Advertisers and Marketers of Debt Relief Services

On July 29, 2010 at the White House, with Vice President Biden at the podium, the Federal Trade Commission (the “FTC” or the “Commission”) announced its long-awaited amendments to the Telemarketing Sales Rule (“TSR”) targeting the sale of “debt relief services” (the “Final Rule” or the “rule”). Under the Final Rule, virtually all debt relief service providers that promote their services through inbound or outbound telephone calls, including calls arising from lead generators and online advertising, will be subject to a ban on advance fees before services are provided, as well as new and existing requirements, and other provisions, of the TSR.

Although the TSR does not apply to bona fide nonprofit credit counseling agencies, the new rule potentially may impact such agencies because they now fall under the jurisdiction of the new Bureau of Consumer Financial Protection, which shares enforcement authority with the FTC for violations of the TSR.

The Final Rule will be published in the Federal Register shortly, and is available now on the FTC’s website. The provisions of the Final Rule will take effect on September 27, 2010, with the exception of the advance fee ban provision, which will take effect on October 27, 2010. Importantly, the advance fee ban does not apply retroactively, so it does not apply to contracts with consumers executed prior to October 27, 2010. The FTC has issued guidelines for complying with the TSR, including the new debt relief rules.

The FTC’s stated goal for the new rule is to curb deceptive and abusive practices in the telemarketing of debt relief services. The rule defines the term “debt relief service;” ensures that, regardless of the medium through which such services are initially advertised, telemarketing transactions involving debt relief services will be subject to the TSR; mandates certain disclosures and prohibits misrepresentations in the telemarketing of debt relief services; and, most significantly, prohibits any entity from requesting or receiving payment for debt relief services until such services have been fully performed, accepted and documented to the consumer.

A few other highlights of the rule:

(1) it is illegal to provide “substantial assistance” to another company if you know they are violating the rule or if you remain deliberately ignorant of their actions (this expressly applies to lead generators, back-office processors, and “dedicated account” providers, among others);

(2) strict parameters are established regarding “dedicated accounts” utilized to set aside funds for settlement and settlement company fees;

(3) there are very specific and strict guidelines for the types of substantiation necessary before certain marketing claims can be made; and

(4) the rule can be enforced by the FTC, the new Bureau of Consumer Financial Protection, state Attorneys General, and through private litigation, including class actions.

The Final Rule is likely to cause debt relief providers – primarily for-profit debt settlement companies – to have to transition to new business models and to develop compliance programs that reflect strict advertising and marketing requirements.

It also will impact the activities of lead generators, affiliate marketers, back-office service providers, payment processors, banks, and others that provide substantial assistance to debt relief providers, even if they do not sell or provide debt relief services directly to consumers.

In short, according to the FTC, those who provide such “substantial assistance” will now be required to review the policies, procedures and operations of debt relief companies to ensure they are complying with the Final Rule, or risk violating the law themselves.

The Commission adopted the rule by a 4-1 vote, with Commissioner J. Thomas Rosch voting “no.” In the announcement, Chairman Jon Leibowitz said that the “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.”

Below we provide a summary of the key provisions of the Final Rule, the FTC’s Statement of Basis and Purpose (“SBP”), and the newly issued business guidance for debt relief services. The focus is intended to be broad to cover a range of industry participants and issues. Nevertheless, please note that the discussion is general in nature and how the Final Rule may impact your activities and relationships may differ. In addition, we note that this is not a discussion of all of the requirements under the TSR, which include provisions concerning the Do-Not-Call Registry and other telemarketing practices.


While the FTC’s debt relief services rule has its technical origins in the TSR, which is promulgated under the Telemarketing and Consumer Fraud and Abuse Prevention Act (the “Telemarketing Act”), the FTC has long been active in bringing enforcement actions to stamp out deceptive debt relief practices. In the last seven years, the FTC has brought over 20 lawsuits against sham nonprofit credit counseling agencies, debt settlement companies, and debt negotiators. These cases involved allegations of violations of Section 5 of the Federal Trade Commission Act (the “FTC Act”), which prohibits unfair and deceptive trade practices, and some of these cases involved TSR violations.

The Commission also has issued numerous publications to consumers warning of debt relief scams and has sent warning letters to media outlets. In addition, the FTC has authority to challenge credit repair companies under the Credit Repair Organizations Act and has a pending rulemaking to address Mortgage Assistance Relief Services.

The state Attorneys General and other state regulators also have been very active in bringing law enforcement actions against debt relief companies, having filed over 200 cases in the last several years. Nearly every state has laws that regulate debt adjusting to some degree, including debt settlement, debt management, and credit counseling, and have used these laws to regulate debt relief service providers.

In light of all of this ongoing activity and the growing number of consumers in financial distress because of the state of the U.S. economy, the FTC held a public workshop in September of 2008 entitled, “Consumer Protection and the Debt Settlement Industry.”

On July 30, 2009, the FTC issued a notice of proposed rulemaking that sought comments on the proposed debt relief amendments to the TSR. The comment period, as extended, closed on October 26, 2009. The FTC received 321 comments from interested parties. The FTC held a public forum on November 4, 2009, where Commission staff and interested parties discussed the proposed amendments and issues raised in the comments.

Types of Entities Subject to the Rule.

The new rule applies to for-profit sellers of debt relief services and telemarketers for debt relief companies. The TSR defines “telemarketing” as a “plan, program, or campaign . . . to induce the purchase of goods or services” involving more than one interstate telephone call.

In addition, under the TSR, it is illegal for a person to provide “substantial assistance” to another seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer is engaged in any act or practice that violates the rule.

Although the TSR generally exempts inbound calls placed by consumers in response to direct mail or general media advertising, there is no such exemption in the Final Rule. The Final Rule, consistent with the proposed rule, carves out inbound calls made to debt relief services from that exemption. As a result, virtually all debt relief transactions involving interstate telephone calls are now subject to the TSR.

Definition of Debt Relief Services.

The Final Rule defines “debt relief service” as “any service or program represented, directly or by implication, to renegotiate, settle, or in any way alter the terms of payment or other terms of the debt between a person and one or more unsecured creditors or debt collectors, including, but not limited to, a reduction in the balance, interest rate, or fees owed by a person to an unsecured creditor or debt collector.”

The FTC’s SBP makes clear that the use of the term “service” is not intended to be limiting in any way. As a result, the Commission states that “regardless of its form, anything sold to consumers that consists [sic] of a specific group of procedures to renegotiate, settle, or in any way alter the terms of a consumer debt, is covered by the definition.” Further, “he Commission believes that this definition appropriately covers all current and reasonably foreseeable forms of debt relief services, including debt settlement, debt negotiation, and debt management, as well as lead generators for these services.”

Although the Final Rule does not include “products” in the definition of “debt relief services,” the Commission notes in the SBP that this limitation should not be “used to circumvent the rule by calling a service – in which a provider undertakes certain actions to provide assistance to the purchaser – a ‘product.’ Nor can a provider evade the rule by including a ‘product,’ such as educational material on how to manage debt, as part of the service it offers.”

Coverage of Attorneys.

The FTC is concerned with attorneys in connection with debt relief services. Based on the record in the rulemaking, the Commission decided that an exemption from the amended rule for attorneys engaged in the telemarketing of debt relief services “is not warranted.” The FTC offers several reasons for its decision, including that:

[I]n general, attorneys who provide bona fide legal services do not utilize a plan, program, or campaign of interstate telephonic communications in order to solicit potential clients to purchase debt relief services. Thus, an attorney who makes telephone calls to clients on an individual basis to provide assistance and legal advice generally would not be engaged in “telemarketing.”

In addition, the FTC states that “it is important to retain [TSR] coverage for attorneys, and those partnering with attorneys, who principally rely on telemarketing to obtain debt relief service clients, because they have engaged in the same types of deceptive and abusive practices as those committed by non-attorneys.” The FTC also states that its decision to not grant an exemption to attorneys from the Final Rule is consistent with the existing scope of the TSR and several other statutes and FTC rules designed to “curb deception, abuse and fraud.”

Coverage of Sham Nonprofits.

See also  NAACP and AFL-CIO Tell FTC, Advance Fee Debt Settlement Must Be Banned

The Final Rule does not cover bona fide nonprofit organizations, but does cover companies that falsely claim nonprofit status. Over the years, the FTC has brought enforcement actions against companies that it has alleged are sham nonprofits in order to curb perceived unfair and deceptive conduct.

Persons Providing Substantial Assistance.

The FTC is concerned about those that work with debt relief companies and telemarketers. As mentioned above, the TSR makes it illegal to provide “substantial assistance” to a provider if that person knows that the primary actor is violating the rule or if the person remains deliberately ignorant of their actions. In particular, the FTC provides examples in its business guidance that, in the context of debt relief services, substantial assistance may include: obtaining leads, helping a debt relief provider with its back-room operations, and offering dedicated accounts (as explained below). The FTC warns businesses, “[i]f you work with debt relief companies, review their policies, procedures and operations to make sure they’re complying with the Rule. Willful ignorance isn’t a defense.”

Scope of Prohibitions and Disclosure Requirements.

The Final Rule cites a number of practices that it views as deceptive or abusive under the TSR, thus making them illegal. While the Final Rule contains provisions similar to the proposed rule, it differs in a number of critical respects. Below we provide a brief summary of these provisions.

Advance Fee Ban.


The FTC rule will make charging an advance fee before providing any debt relief services illegal throughout the United States, effective October 27, 2010. As mentioned above, several states already have laws regulating debt relief services, outlawing advance-fee debt relief services, and establishing maximum fees that may be charged.

As explained in the SBP, the Commission believes that regulating the timing of fee collection constitutes a reasonable exercise of authority under the Telemarketing Act in light of the record and its own observations. In the Final Rule, the FTC takes the position that charging an advance fee for debt relief services is abusive. The TSR already bans the abusive practice of collecting advance fees for three other services – credit repair services, recovery services, and offers of a loan or other extension of credit, the granting of which is represented as “guaranteed” or having a high likelihood of success. In reaching its decision, the SBP goes into significant detail to address comments both in support of and against the advance fee ban.

Specifically, the Final Rule includes an advance fee ban, but in a form modified from the proposed rule. In short, the Final Rule sets forth three conditions before a debt relief provider may collect a fee for resolving a particular debt:

  • the consumer must execute a debt relief agreement with the creditor or debt collector;
  • the consumer must make at least one payment pursuant to that agreement; and
  • the fee must be proportional, i.e., the fee must bear the same proportional relationship to the total fee for settling the entire debt balance as the individual debt amount bears to the entire debt amount (the “individual debt amount” and the “entire debt amount” refer to what the consumer owed at the time her or she enrolled the debt in the program); in other words, if the provider settles a proportion of a consumer’s total debt enrolled in the program, it may get that same proportion of the total fee. Alternatively, if the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts.

As a result, front-loaded payments – charged by a number of debt settlement companies and the lifeblood of many advertisers and marketers – will be prohibited.

Dedicated Account for Fees and Savings

Notably, the Final Rule allows the provider to require customers to place funds in a “dedicated bank account” for provider fees and payments to their creditor(s) or debt collector(s) in advance of securing the debt relief, provided that certain conditions set out in the Final Rule are met. This is a significant change from the proposed rule – as it recognizes the risk of non-payment by consumers for services provided – and bears careful study by debt relief providers who choose to take advantage of this optional provision. There are significant restrictions on how these dedicated accounts may be set up and operated, which serve to safeguard the customer’s funds.

Limitation on Setup Fees for DMPs

Of particular importance to credit counseling agencies and debt management plan (“DMP”) providers, the Final Rule prohibits them from charging a set-up or other fee before the customer has enrolled in a DMP and made the first payment under the DMP, but it would not prevent the provider from collecting subsequent periodic (e.g., monthly) fees for servicing the account. For bona fide nonprofit credit counseling agencies, this is a requirement that bears careful scrutiny, even though the FTC does not have the jurisdiction to enforce the Final Rule against such agencies.

Relationship with State Law

State laws can impose additional requirements as long as they do not directly conflict with the TSR. However, providers may not charge initial or monthly fees in advance of providing the specified services, even if state laws specifically authorize such fees.

No Retroactivity

According to the FTC’s SBP, “[t]he Final Rule does not apply retroactively; thus, the advance fee ban does not apply to contracts with consumers executed prior to October 27, 2010.”


Under the Final Rule, providers will have to make several disclosures when telemarketing their services to customers. These requirements will take effect on September 27, 2010.

The FTC Rule mandates four debt relief-specific disclosures that must be made before a customer consents to pay for the goods or services offered. These are in addition to the existing, generally applicable disclosures currently in the TSR (not discussed within this article in detail). Before the customer consents to pay, the Final Rule requires debt relief service providers to disclose to the customer, clearly and conspicuously:

  • the amount of time necessary to achieve the represented results;
  • the amount of savings needed before the settlement of a debt;
  • if the debt relief program includes advice or instruction to consumers not to make timely payments to creditors, that the program may affect the consumer’s creditworthiness, result in collection efforts, and increase the amount the consumer owes due to late fees and interest; and
  • if the debt relief service provider requests or requires the customer to place funds in a dedicated bank account at an insured financial institution, that the customer owns the funds held in the account, may withdraw from the debt relief service at any time without penalty, and then may receive all of the funds in the account.

According to the SBP, the above disclosures are required “to the extent that any aspect of the debt relief service relies upon or results in the customer failing to make timely payments to creditors or debt collectors.”

The proposed rule contained three additional debt relief-specific disclosures that have been omitted from the Final Rule:

  • that creditors may pursue collection efforts pending the completion of the debt relief service (which has been combined with another required disclosure);
  • that any savings from the debt relief program may be taxable income; and
  • that not all creditors will accept a reduction in the amount owed.

The Commission decided the above omitted disclosures were “largely duplicative or likely to detract from the efficacy of the required disclosures.” In addition, the Commission acknowledged that “even those creditors that claim not to work with debt relief providers may do so in certain situations.”


The Final Rule supplements the existing TSR prohibitions against misrepresentations with a provision specifically intended to target deceptive practices by debt relief service providers. Under FTC precedent, an act or practice is deceptive if: (1) there is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances; and (2) that representation or omission is material to consumers.

Debt Relief-Specific Illustrative Examples

The Final Rule prohibits sellers or telemarketers of debt relief services from making misrepresentations regarding any material aspect of any debt relief service and it provides several illustrative examples, including misrepresentations of:

  • the amount of money or the percentage of the debt amount that a customer may save by using such service;
  • the amount of time necessary to achieve the represented results;
  • the amount of money or the percentage of each outstanding debt that the customer must accumulate before the provider will initiate settlement attempts with the customer’s creditors or debt collectors or make a bona fide offer to negotiate, settle or modify the terms of the customer’s debt;
  • the effect of the service on a customer’s creditworthiness;
  • the effect of the service on the collection efforts of the customer’s creditors or debt collectors;
  • the percentage or number of customers who attain the represented results; and
  • whether a service is offered or provided by a nonprofit entity.

Debt Relief Savings Claims

The FTC requires that representations promising specific savings or other results be truthful, and that the provider have a reasonable basis to substantiate the claims. In this regard, the SBP contains extensive guidance about the specific evidence required to make various representations regarding debt relief services. For example, the SBP states when a debt relief service provider represents that it will save the consumer money, the savings claims should reflect the experiences of the provider’s own past customers and must account for several key pieces of information. Although this is consistent with the FTC’s longstanding policy statement on advertising substantiation, the Commission provides detailed guidance on the proper methodology for conducting this historical experience analysis. This guidance should be studied carefully by anyone making debt relief savings claims or other representations concerning debt relief services.

Existing TSR Provisions Prohibiting Deceptive Representations and Misleading Statements

In addition to the above debt relief-specific misrepresentations, existing prohibitions found in the TSR will now apply to the inbound or outbound telemarketing of debt relief services. The SBP provides guidance on the meaning of these prohibitions in the context of debt relief services, using claims that are frequently used in the marketing and sale of debt relief services.


Under the Final Rule, any debt settlement, DMP or other debt resolution plan from a creditor must be in writing. Providers must keep these documents for at least 24 months. Further, the FTC business guidance recognizes that oral agreements for settlements may be needed in isolated cases, but strongly favors written approval for settlements.

Enforcement and Outlook.

At the July 29 press conference, Chairman Leibowitz promised “aggressive” enforcement of the new debt relief rules. The TSR and the Final Rule are enforceable both by the FTC and state Attorneys General, and provide the ability to obtain nationwide injunctive relief, civil penalties, and consumer redress. Also, the TSR may be enforced by the Bureau of Consumer Financial Protection, under the Consumer Financial Protection Act, which amended the Telemarketing Act. Finally, the TSR provides for a private right of action, whereby injured consumers can bring private litigation, including potentially as class actions, for violations of the TSR.

As a legal matter, the FTC only has the authority to enforce the rule against debt relief providers within its jurisdiction. The FTC Act exempts banks and other depository institutions and bona fide nonprofits, among others, from the Commission’s jurisdiction. These exemptions apply to the Telemarketing Act and the TSR as well. As discussed above, this means that the FTC’s authority to enforce the new rule would not extend to bona fide nonprofit credit counseling agencies.

The new Bureau of Consumer Financial Protection was granted authority to enforce the TSR by amendments to the Telemarketing Act that took effect with the enactment of the Consumer Financial Protection, which is part of the comprehensive Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result, the Bureau has the ability to enforce the FTC’s amendments to the TSR regarding debt relief services against bona fide nonprofit credit counseling agencies, even though the FTC itself lacks jurisdiction over such agencies. For instance, if the rule was applied to bona fide nonprofit credit counseling agencies by the Bureau, no initial DMP set-up fee would be permitted to be charged. This bears close watching by the nonprofit credit counseling industry and other nonprofit organizations providing debt relief services, especially as new less-than-full balance DMP programs and other settlement-type products gain steam.

Although the FTC announced no new enforcement actions at the press conference, we understand that it has a number of pending non-public investigations in response to perceived abuses by debt settlement companies and others, including affiliate marketers and lead generators. We also are aware that several state Attorneys General and other state regulators have open investigations and pending lawsuits against a number of debt relief providers. In addition, it is not unusual for the FTC to coordinate with state Attorneys General to bring a law enforcement sweep against violators shortly after a new rule becomes effective (this happened after the enactment of the Credit Repair Organizations Act, for instance). Lastly, FTC staff has publicly stated that the Final Rule is in addition to existing compliance obligations under Section 5 of the FTC Act, which would allow the Commission to bring an enforcement action even if the activities in question fall outside of the TSR.

Debt Settlement Industry Legal Challenge Possible.

The FTC is authorized to conduct rulemaking proceedings under the Telemarketing Act using the Administrative Procedure Act’s “notice-and-comment” procedures. The FTC generally does not have rulemaking authority under Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. Moreover, unlike the FTC’s pending rulemaking for mortgage assistance relief services, this rulemaking was not authorized specifically by statute. Rather, the FTC is using the Telemarketing Act’s deceptive and abusive practices standard as its basis to issue the Final Rule.

As a result, while expedient, the FTC’s use of the Telemarketing Act to regulate the debt relief services industry is aggressive since a “debt relief” rule was not specifically authorized by law. Although it is safe to assume the FTC believes it is in on firm ground, there are some significant questions about whether the rule is enforceable given its origins. Therefore, debt settlement industry opponents of the rule potentially may attempt to challenge the authority of the FTC to issue the rule under the Telemarketing Act. The prospects for industry success are uncertain in light of the record developed by the FTC during the rulemaking and the discretion granted by courts to government agencies.

* * * * * *

For several years now, many in the debt relief industry and consumer groups had publicly wondered who would be the executioner of the present day for-profit debt settlement business model that relies on advance fees to maintain their business and finance advertising and marketing. The answer to that question now appears clear.

With the announcement of the Final Rule, the FTC has taken decisive action to promulgate rules and issue guidance related to debt relief services. Now the questions become: (1) Will the Final Rule be enforceable?; (2) How will the Bureau of Consumer Financial Protection utilize the rule?; (3) How will providers of debt relief services react to and comply with the new requirements?; (4) For those that are not able to or are unwilling to comply, how long they will be able to continue before the FTC, state Attorneys General, or consumers (acting under a private right of action) catch up to them in a law enforcement action or private lawsuit?; and (5) What will happen to debt settlement company customers if a company chooses to or is forced to close its doors?

In addition, up until just a week ago, for nonprofit credit counseling agencies, the proposed rule had only been a policy matter that was easy to support. Now, however, nonprofit credit counseling agencies will potentially be confronted with new compliance requirements under the Bureau of Consumer Financial Protection that will share enforcement authority under the Telemarketing Act with the FTC. In addition, the new Bureau is likely to look at the FTC for guidance in developing its own rules, including rules to regulate credit counseling, debt management plan services, and other debt relief services. As a result, as nonprofit credit counseling agencies develop new services to address the needs of consumers in financial distress that closely resemble those services regulated under the TSR – such as less-than-full-balance DMP programs – they should be mindful of the baseline requirements established by the FTC.

Lastly, as a practical matter, the Final Rule (and business guidance) may be viewed by many as establishing a new minimum level of standards to which those advertising and engaged in providing debt relief services may be held by regulators and private plaintiffs, irrespective of whether they are organized as nonprofit or for-profit organizations. As a result, all providers of debt relief services – both nonprofit and for-profit – should carefully consider their operations, policies and procedures, including advertising and marketing (e.g., websites, inbound telephone scripts, print, radio, television and Internet advertisements, affiliate relationships, lead generation relationships, back-office provider relationships), in light of the new rule.

* * * * * *

Jonathan Pompan, an attorney in the Washington, DC office of Venable LLP, represents nonprofit credit counseling agencies and others in a wide variety of areas, including regulatory compliance, as well as in connection with federal and state investigations and law enforcement actions. Jeffrey Tenenbaum chairs Venable’s Credit Counseling and Debt Services practice, as well as its Nonprofit Organizations practice. For more information, please contact Mr. Pompan at 202.344.4383 or jlpompan@Venable.com, or Mr. Tenenbaum at 202.344.8138 or jstenenbaum@Venable.com.

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25 thoughts on “It’s a Game Changer – Initial Review of New Rules for Debt Relief Services, Advertisers, Marketers, and Providers”

  1. Yes, it is a frustrating situation. I graduated college last year and have been doing this since, but I have to say I am strongly considering just jumping ship and getting into a more reputable industry. Hopefully, the banking/finance world sees this as positive experience, rather than associate me with a “shady” industry. Once again, your help is appreciated.

  2. Steve,

    Thank you for the response. I guess I have to just accept that I will not know exactly what will happen to my job until it actually happens.

    I completely understand your point as far as enrolling the right clients, but I still do believe we get a lot of cancels for reasons beyond what we can control. For example, if i enroll someone into the program, they make payments for 6 months, then lose their job. We have put time, money, and labor into that client. Lead generation is expensive, I (the salesperson)need to get paid- I spend a long time working with them, as does customer service. This could be the perfect candidate at the time of enrollment. That being said, we should not have collected 50% of our fee by that time, but we should be able to collect something. Additionally, I have had clients make payments for 5 months, then once the cease and desist letters go out, they figure, why keep paying? I can go on and on about situations where good clients have dropped out of the program before a debt is settled. Again, upfront fees should be regulated, but the new rule just seems unfair. Upfront fees are a problem from companies who just enroll anybody without disclosing everything, since that will be taken care of (in theory), if the company is disclosing everything, why should they not be allowed to charge something upfront?

    • Julian,

      One alternative approach is that the right client to enroll into the program is one that has or very shortly will have the funds on hand. If you did that then you would not be investing administrative time on a client that was not ready and able to settle.

      Paying for leads or acquisition and servicing clients not able to settle now is not a reason to continue the old model of advance fees. That is a choice the company made and decided to follow.

      The cease & desist approach has been said by many creditors as a fast track to being sued and I would have to agree. The C&D letter limits communications with third party collectors except for a suit.

      The reason you would not be allowed to charge something upfront is because the rules don’t allow for it and why don’t they? Because the debt settlement trade associations fought and blocked efforts to allow that under the Uniform Debt Settlement Management Act. The need for regulation is not necessarily the result of your practices, but the result of an industry unwilling or unable to self-regulate and protect consumers.


  3. First of all, thank you so much for all of the information, I really do appreciate it.

    I work for for a company that represents a debt resolution law firm. The bosses are making it seem like we will not be effected by these new rules, but the article contradicts this. I know they are spending a lot of money to hire an attorney, but they seem to want to leave me in the dark. Is it possible we will be able to continue to operate or are the new laws definitely going to effect law firms that do debt settlement? I understand this was answered, but I have read and heard conflicting viewpoints, so I would like to know how sure you are. I cannot understand why we would spend all this money if it was clearly going to effect us, and I am sure we cannot operate if we have to wait until our clients debts are settled.

    My personal opinion… My company has always followed the the rules of disclosure, however the fee structure is problematic. I am glad all companies will have to disclose everything, however I feel the fee regulation is unfair. I have had many good candidates enroll into the program, only to stop making payments, and then try to blame us. I understand the upfront fees have been abused, why not a middle ground? I think it would be most fair to have restrictions on how much can be charged upfront.

    Anyway, any input would be appreciated, thanks again.

    • Julian,

      If the firm is selling debt settlement services over the telephone and engaging in marketing in which consumers call, the new FTC TSR would appear to cover that. However, I expect thereto be legal challenges to the new rules and the FTC sued. There is too much money at stake in profits for companies to walk away from this fight.

      It does not really matter is an attorney is “exempt” from the new rules, there is no exemption for fraud, deception, or abuse. I expect to see regulators, the government and states fight back harder if the new rules are challenged and I expect the new rules to be challenged.

      You know, the new FTC rules are really not that unreasonable for companies that enroll the right consumers who are ready and able to settle. The rules don’t outlaw debt settlement nor restrict the fees that can be charged. They simple require debt settlement providers to provide factual disclosures and collect a fee once the service is provided.

      With clients dropping out of your program you need to look into why. If the problem is they are unable to make the monthly payment then were they ever appropriate to enroll in the first place and did the firm keep the initial payments as fees even though the client bailed from the program and never was able to achieve a debt settlement?

      The upfront fee was what was what was suggested under the UDMSA provisions that some states wanted but the debt settlement trade associations fought that.


    • Julian,

      I agree that there should have been more focus on a middle ground solution to the fee structure regulation. Industry never approached it. They focused on preserving the model that paid them the most and the quickest. There was some discussion of a “pay go” model that was essentially the same thing many firms are using up to now.

      To my knowledge I was the only one who submitted suggestions to the FTC which provided an alternative to the upfront fee ban and business as usual.

      I did so again with several senators when the Schumer bill was released.

      There was definitely middle ground to find in this. Unfortunately, there was no support to be found for the discussion.

  4. Overall and individual libility for ones actions. A company should be responcible for its staff, and a staff member should know the diffrence between right, wrong, compliance and just down right Fraud. Debt settlement isnt allways something people need to qualify for its a choice to be in default of any type of debt owed. Going thru these prgrams can be a very ruff taks for an individual, just like that of bankruptcy or even a loan Mod. If one chooses to enter into any type of debt program as long as all the disclosures are told to the client then its no diffrent than a person signing a credit card agreement at 30% Its a choice and that is the bottom line. I think we need to make people responcible for what they do in this word and stop grouping industries as bad versus individuals. Make people get licensed, make Firms Get licensed. Audits all the things that should have been done in the finince industry long ago.

    • Ryan,

      Just to help me be clear, is this your answer on, “What suggestions would you have to help regulators on limited budgets to protect the largest numbers of consumers without having to inefficiently chase individual companies and without broad rules?”

      Is your suggestion that regulators need to make firms get individually licensed and then chase them? How do they find every rouge firm and afford to chase them to make them comply?

      And how is this licensing going to happen when the trade associations fight any attempt at regulation, of which licensing would be a part? Which federal agency would oversee this licensing. Would it be like the Executive Office of the US Trustee that approves credit counseling groups for bankruptcy services?


  5. Steve I have worked for a debt settlement company for the last few years, as I would expect you have great knowledge of how it all works. When you sign these clients up it takes time, money and effort to get them on the right track. As there monies accumulate there is alot of back and forth not only between creditors and negotiors but most clients need constant hand holding as well. Do you personally feel all these efforts from start to finish really should go without a cost. The thought of that is very against the concept of captialism and America. We all provide either goods or services for a fee. We all get up and go to work for a paycheck. In debt settlement im sure there are allot of bad eggs but on the flipside there are alot of companies that do the right thing. Debt settlement aside how can anyone feel that while getting everything set up for these people in need dealing with most of them on a day to day basis and then dealing with there creditors on a day to day basis doesnt warrant a fee. Its just goes against everything this country was built on. I am all for complaince and doing the right thing. But last time I spoke to a lawyer or a doctor they made sure there monies were secure before they did any work for me.

      • Great interview steve, I just didnt feel it adressed my responce of the fact that time efforts and monies are things that occur when getting someone established in any type of debt elimiation program. To not collect monies along the way deems unconstitutional and to be blunt defies captialism. That being said they should Regulate bussiness properly and not shut down industries with sweeps of there hand. My opions start with wall street to debt settlement is it that hard to do the right things for fellow Americans during times like these? I am all for a profit but only one that makes you feel like you are accomplishing goals for the customer/consumer. Oh well we shall see how this whole song and dance carries out.

        • Ryan,

          What suggestions would you have to help regulators on limited budgets to protect the largest numbers of consumers without having to inefficiently chase individual companies and without broad rules?

          And debt settlement isn’t the only debt relief vertical market hit with such rules, loan modification and mortgage rescue has been as well.


  6. OPPS sorry about that
    The up front fee also pays for there employees wages while the companies sit and do nothing more than send a letter, I know that a creditor most likely will not settle out a CURRENT bill so they have to wait till the credit is shot and the account is charged off or near charge-off. The person still has to have the funds in house before they can do anything, but some of these companies only settle accounts in a single payment… now they have an issue of collecting the funds to settle first, before they are paid their fee. I think they will most likely try to settle a 100 dollar bill so they can collect their fee to comply with the new rule and leave the high balance accounts (say 4K+) for a later date to beat the system. maybe the rule should have been on an account for account basis. If they settle a small account they can get their fees and still leave the person on the hook for the remaining accounts and still be no better off. what are your thought on this or am i not understanding the new rule correctly?

    • It seems to me the underlying issue is enrolling the right clients. A company would only be wasting time, resources, and money in enrolling clients into a debt settlement program that are not ready, willing, or able to settle. There is no reason a consumer has to languish for years in a debt settlement program while the fee is taken and funds are collected. The settlement program offers no legal protection during the time the funds are accumulated.

      The new rules do allow a debt settlement company to settle a small debt and receive an appropriate share of the fee based on the debt. They company can earn a fee as each debt is settled and they don’t have to wait till the entire debt is paid if the creditor was willing to take payments. The fee can be earned after the first payment is made.

      I think this article does a good job of laying out each new rule using examples.


  7. Steve,
    The up front fee also pays for there employees wages while the companies sit and do nothing more than send a letter, I know that

    • I understand but another view point is the upfront fee pays for expenses the undercapitalized company spends prior to earning the income from providing the full service.

      When was the last time you paid a relator in advance to sell your house?


  8. Im wondering why all the press is about shutting down the debt settlement companies, when the credit card companies are the one’s getting the people into these situations in the first place. Then charging 30% interest when a person has never been late on a payment?!? If a person charges $1000 on a cc and pay $4000 back by the time their done, how is that fair but debt settlement isnt?

    I work for a debt settlement company and I will most likely be out of a job, aliong with the 50 other people I work with, because of this law…when i have had MANY cleints call me after there debt was settled thanking me for getting them out of debt. I understand there should have been some regulation, but this will put so many people out of jobs, not just the DS company employees, but all the media companies that market to them as well.

    Putting thousands of people out of work buy passing this law is hurting the economy more than helping the people that ran up their credit cards and didnt continue to pay on the program….If a consumer signs up for a DS program and continues to pay, they will have their debt settled…Thos that stop paying half way through the program and wonder why their debts arent settled, then blame the DS company for oweing all this debt.

    I guess if the debt settlement companies had lobbyists filling lawmakers pockets like the credit card companies do, this law would have never been passed.

    Now I will most likely be living off my cc until I find another job. Thanks FTC!

    • No answers? Steve, with how much you dislike the debt settlement industry and everything you have to say about it, I would like to know your thoughts on this…why not put all of your energy into regualting the credit card companies instead of the debt setlement companies?

      • Sorry, this comment would up in the spam filter. I did not answer the first comment because I was letting someone else chime in. I wasn’t aware it was a question for specifically me.

        It is a reality that credit card companies have big lobbyists. Geez, look at all the money and years they spent pushing through the 2005 bankruptcy reform that was never needed.

        While I certainly have issues about the issuance of credit, it is a complex problem. We live in a capitalist society that depends on credit. Nobody has a gun put to their head to take out credit, much of the credit decisions we make are the result of underlying issues, behavioral economics, brain chemistry, Veblan theories, etc.

        Credit is going to exist, it has nearly always existed, as I wrote about in the history of credit, and will always exist.

        The issue with debt settlement and the issues credit counseling faced a decade ago all stem around the same issue, the perception that consumers with financial problems are a disadvantaged class of consumers that deserve protection for deception and abuse when taken advantage of.

        Let’s not forget that the FTC did not make debt settlement illegal, or even control the fees that could be charged. If you distill the FTC rules down they simply say you can’t lie to sell the services, and you get paid the fee you set when you actually settle the debt. That seems fair and reasonable to me.

        Now the reason many debt settlement companies are going to struggle with these rules is because their business models are and always have been fundamentally flawed. The early days of debt settlement never faced the amount of consumer complaints experienced over the past four or five years. In the early days the fee was earned when the debt was settled, not paid in advance for services not delivered to most.

        In my opinion it’s not the FTC that you should be angry with, it is the debt settlement companies that lied in their ads, did not deliver services as promised, collected fees upfront of front loaded, and would not offer fair refunds when asked. Oh yes, and they kept enrolling consumers who were not able, ready and willing to settle their debt in twelve months or less. The long term consumers were never the appropriate people to enroll and those were just going to blow up, and guess what, they did.

        Finally, the day of the FTC regulations was not a surprise. It was a long time in the making. The FTC already had rules in place prohibiting debt relief services, like credit repair, from charging a fee till the service was performed. What I’m most stunned with is how the debt settlement trade associations blew it and never rushed to self-regulate the industry, to limit these bad acts. If they had, the FTC would never have stepped in.

        In fact at a meeting about four years ago the regulators made that clear, you guys regulate this industry or we will have to.


        • You are right noone has a gun put to thier head to get a credit card, but at the same time noone has a gun to their head to make them sign up for debt settlement….they call in and sign up all on their own and and fully told all fee’s and pros/cons involved with the program before signing up. Yes- credit has and always existed, but 30% interest rates and excessive late fee’s is another situation, my credit card interest rate was recently raised to 29% and I HAVE NEVER BEEN LATE ON A PAYMENT. I dont see how that is fair but a debt company changing me to settle my debt is not fair.

          You seem like you know what you are talking about, you spend everyday talking bad about about the debt settlement industry, but when you have debt settlement ad’s on your website it sortof takes away any from any creditability you are trying to establish.

          There are bad apples in just about every industry, but they does not mean they should put THOUSANDS of people out of work because a few companies did not operate correctly.

          Not many businesses do all the work for free then hope to get paid after their done, these people are already not paying their bills, whjat makes you think they will pay the debt settlement company once they have completed their service?

          • Regarding ads – refer to the site terms here. I talk about ads at length and referral relationships.

            Regarding thousands being put out of work – you really need to refer this issue to the debt settlement trade associations that were asked repeatedly to self-regulate their own industry, they continuously fought against that, and lost.

            Regarding working for free – why would a company not escrow the fee for the settlement along with the settlement so when the settlement was paid the company could be paid at the same time?


  9. Obviously Jonathan knows his stuff and I love reading his articles but I really want to know your opinion. I have a couple questions.

    The New Rule says that it provides no specific exemptions for attorneys in the TSR, but it doesn’t apply to attorneys that meet their clients face to face. Do you see any way that attorney’s will be able to side step this and still act as a “back end” for non-attorney “front end” companies as it exists today?

    The New Rule also spells out how it applies to non-profit organizations.

    “Bona fide non-profit organizations aren’t covered because the TSR applies only to for-profit companies. However, the Rule covers companies that falsely claim nonprofit status. “

    I know you have written in the past about “non-profit” debt settlement companies, but I don’t understand how a debt settlement company could legitimately operate as a non-profit. What would be the difference between a non-profit and for-profit debt settlement company? Does this strike you as something that could potentially be abused moving forward?

    After the ban on upfront fees, I feel the most important piece to this New Rule is the mandatory disclosures. It is very important that anybody considering debt settlement is informed of the dangers that come with any debt settlement program.

    The disclosures are right on, but i wonder, how will they enforce this rule? I understand the new Consumer Financial Protection Bureau will be taking over the role of enforcement, but if somebody has already enrolled in a debt settlement program and was not disclosed the dangers properly, won’t it become a “he said she said” situation? Do you think the FTC would possibly create a standard disclosure addendum that would need to be included with all debt settlement agreements, prior to enrollment?

    Overall, do you think the New Rule has the bite to stop the crap that has been going on in debt settlement? Or do you think that savvy businessmen and lawyers will find a way to circumvent these restrictions, and still operate as a complete ripoff?

    I believe that debt settlement does have a future, and obviously that future requires a performance based fee model. What do you think? Will the companies that exist today have the ability to switch over, or will this New Rule effectively close down the industry?

    I know, I know. This is way more than a couple questions, but you know me, long winded. I’m dying to know your opinion.

    By the way, we aired the press conference live on our website, and as soon as the live feed started, who do I see? Steve Rhode, in the flesh, at the White House.

    You’re the man, and I find it very hard to believe that you were not a strong influence in this New Rule being established. I want to thank you again for everything you do.

    • Andy,

      I don’t see how an operation could operate in a high volume as they are now unless they redefined face-to-face. But the state bar associations of acceptable marketing would have n influence on what is permissible.

      The only reason the TSR exempts nonprofits is because the FTC does not have the authority to regulate bona fide nonprofit organizations. I also know the FTC is anxious to go after sham nonprofit companies that attempt to setup as a nonprofit but who do not operate as an accepted nonprofit organization with a charitable purpose. While a company may attempt to try this approach, it would be foolish because it would be easy to pierce.

      In fact that company I covered before that you mentioned has attracted the attention of regulators and they are interested in talking to them.

      We will have to see how much prominence companies give to the disclosures. Will they be in small print? I think that will get the attention of regulators also.

      I don’t think the FTC will create such a document but the responsibility for disclosure notification will be the burden of the debt settlement company. The safe way to protect the company would be to make the disclosures prominent on the web site, save a copy of the web site on a regular basis to show the site at a given point in time, and place the disclosures on the agreement.

      The FTC has done a very good job in defining what is an abusive and deceptive practice. We already know the FTC is not going to go after every rule breaker, but state regulators might, and ultimately the consumers can go after the debt settlement company through small claims court using the FTC definition of what practices are not allowed.

      Many of the companies that are around I think will fold because their goal is not to provide a debt solution but to sell a service to collect a lot of money is a short period of time. My prediction is that they will fold because it is no longer easy money. Many will move on to create organizations to sell something else.

      I think I know exactly when you saw me. I was talking with Ed from US PIRG and I was standing in the center isle which must have been in front of the camera.

      It was fun to be there in person.

      I have a big review of the new rules that will publish in the morning.


  10. Ok, so a step in the right direction, but we need way more regulation. It appears this won’t affect internet generated biz…is that accurate? Also, it won’t limit fee amounts or %. Any Guesstimates as to when the bills in congress might become law?…they seem like they have a lot more teeth.

    • Freddie,

      The new rules have provided a clear boundary of what is deceptive practice and if an internet only solution makes promises and representations that fall outside of what will be accepted then it is deceptive and fair game to be targeted by regulators.

      My prediction is that the Debt Settlement Consumer Protection Act will languish because the new Consumer Financial Protection Bureau is going to have all the authority to enforce and go after bad actors.



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