The new Federal Trade Commission rules have now been released that will regulate how fees can be charged in debt settlement programs.
Any consumer that is thinking of enrolling in any debt settlement program before the new rules take effect on October 27, 2010 needs to be aware, after that date a debt settlement company can not charge you a fee before actually reaching a written agreement with your creditor.
Currently most of the debt settlement industry charges 15% of the debt enrolled into the debt settlement program with the first few payments going straight to fees and then a portion of the monthly payment going towards fees. Debt settlement companies also mark up the cost of the escrow services they partner with.
The Federal Trade Commission found that the vast majority of claims made by debt settlement companies regarding the following is unfair, deceptive and abusive.
- settlement percentages;
- success rates;
- creditors will not charge interest once enrolled;
- collection activity will stop;
- you will not be sued;
- wages will not be garnished;
- and the front loaded fees they charge now.
If you enroll with any debt settlement company before the effective date you should look for a debt settlement program that will not charge you any fee until:
- 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 to the creditor; 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.
The debt settlement program will need to make the following disclosures in a way you see them and preferably agree to them.
- 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.
You also need to be aware:
- 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.
Between now and the effective date of the new rules I fully expect debt settlement companies to sell as many people as possible into a non-conforming debt settlement programs in order to collect as many fees and revenue as possible, before they can’t.
Any contract for debt settlement services that does not conform to the new rules entered before October 27, 2010 will continue after the effective date and those agreements have already been determined by the FTC to be deceptive and abusive.
By the debt settlement trade associations own admission, they have predicted 85% of the debt settlement companies around today will go out of business under the new consumer protection rules.
Any money you pay to a debt settlement company in advance of them actually settling a debt for you will most likely be lost when the debt settlement company goes bankrupt if they have not already adopted the new rules and fee collection approach.