Inside the FTC’s War on Debt Settlement
Steve Rhode was at the White House when the Federal Trade Commission unveiled new telemarketing sales rules that would reshape the debt settlement industry. Standing six feet from Vice President Biden, Steve witnessed the beginning of the end for an industry the FTC officially labeled as engaging in “abusive and deceptive practices.” This Money America radio interview captures Steve’s analysis of what the rules mean and why the industry fought so hard against them.
The Advance Fee Ban Changes Everything
The single most important rule: debt settlement companies can no longer collect fees before they actually settle a debt and the consumer accepts the agreement in writing. This sounds like basic business practice because it is. Realtors don’t get paid before your house sells. Contractors don’t get paid before the work is done.
The debt settlement industry predicted 85% of their members would go out of business. Steve’s response: if you need a client on the books for five years before you can settle their debt, you’re enrolling the wrong client.
“These companies have operated no differently than a giant Ponzi scheme. Money from the client who enrolled a month ago and paid fees was not escrowed. Those fees were spent on marketing and operational costs.”
Most money news tells you what happened. I tell you what to do about it.Every weekday I read the enforcement actions, filings and fine print the outlets skip, and turn them into the one or two moves that actually improve your position — a rate worth moving for, a fee you can refuse, a deadline to beat before it costs you.
In the latest issue (Oct 8): A parent's nursing home bill can become yours
I write Your Money Actually most weekdays — actionable money information you will not find anywhere else, and the small decisions that compound. It is free, I sell nothing, and I take no money from any company I write about.
— Steve Rhode
The Boiler Room Behind the Promise
When you call a debt settlement company, you’re not talking to a financial advisor. You’re talking to a commission salesperson, often paid 100% commission. Court records show commissions as high as 75% of fees collected. One company offered salespeople $3,500 for every $5,000 in fees they collected from consumers.
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Many of these salespeople had no financial background. Many came from subprime mortgage boiler rooms. When that industry collapsed, they moved to debt settlement. When debt settlement gets regulated, they’ll move to something else.
The Numbers Tell the Story
The Illinois Attorney General found that debt settlement companies helped less than 10% of consumers resolve any debt. Of those who enrolled, 65% dropped out. The consumers who did receive savings got $58.1 million total but paid fees exceeding $56 million. It was essentially a complete wash, before even accounting for the credit damage, late fees, and lawsuits they endured along the way.
Steve estimates that less than 1% of people who enroll in debt settlement programs actually have all their debts settled. The industry has never provided data to dispute this.
What Legitimate Debt Settlement Looks Like
Good debt settlement does exist, but it looks nothing like what’s advertised on TV. A legitimate company charges based on performance, collecting 10% to 33% of the savings they achieve. They work with consumers who already have cash on hand to make offers, not people who need to save for years while their debts grow.
In fact, if you have 50% of your debt value in cash, you may not need a company at all. You can call your creditors directly and negotiate. There’s no magic formula. The formula is: fall behind, end up in collections, and then offer what you have. Some creditors take it, some don’t.
This Show Is For You
This episode of Money America with Steve Rhode provides a rare inside look at how the debt settlement industry really operates. If you’re considering debt settlement, talk to a bankruptcy attorney first — many offer a free consultation — then gather all the information and make an informed decision. Visit GetOutOfDebt.org for free guidance.
Dealing With Debt? Understanding your options is the first step. See how all your debt relief options compare — including ones most sites won’t tell you about. The Find Your Path quiz gives a recommendation based on your actual numbers, and the Scam-O-Meter checks any company’s complaint history before you sign. Federal Reserve research shows bankruptcy filers recover faster than those who don’t file.
Free Tool — Contract Decoder: Have a contract from a debt relief company? The free Contract Decoder analyzes it for red flags, hidden fees, and problematic terms — before you sign anything. Decode My Contract →
Key Takeaways
- The FTC's new telemarketing sales rules prohibit debt settlement companies from collecting any fees before they actually settle a debt and you accept the agreement in writing.
- Less than 1% of consumers who enroll in debt settlement programs actually have all their debts settled, according to Steve Rhode's extensive industry reporting.
- Debt settlement salespeople are typically paid 100% commission, with commissions as high as 75% of fees collected, creating extreme incentive to close sales regardless of whether the program fits the consumer.
- The first three months of debt settlement payments typically go entirely to the company's fees and marketing costs, not toward saving money to settle your debts.
- The Illinois Attorney General found consumers received $58.1 million in savings from debt settlement but paid over $56 million in fees, making it essentially a wash.
- If you have at least 50% of your debt value in cash on hand, you may not even need a debt settlement company. You can call your creditors directly and negotiate.
- Cease and desist letters sent by debt settlement companies to original creditors have no legal authority and essentially tell creditors to sue you.
Full Transcript
Click to expand transcript
Episode Introduction
Laval Smith: Good evening and welcome to another edition of Money America. My name is Laval Smith and I’m Thomas Fox. We’re with Cambridge Credit Counseling and Money America is produced each and every Sunday in conjunction with American International College. Today our guest is Steve Rhode.
Thomas Fox: Steve won bankruptcy in 1991 after the economy unraveled and his real estate company failed. After living through tough money trouble, Steve founded a nonprofit organization in 1994 to help people find a path through their financial troubles. At that time the group was called Debt Counselors of America, which later became Myvesta.
New FTC Rules on Debt Settlement
Thomas Fox: The Federal Trade Commission handed down some new rules. And I was very happy to hear that you were present actually at the White House when they unveiled these.
Steve Rhode: It was a great event. Not only was I asked to go to the White House but I managed to get a press pass. I got to go all behind the scenes and take photos and interview people. I was six feet from Vice President Biden taking pictures. It was a tremendous event but it’s only the first little step of all the stuff that’s soon to come as a result of the new Federal Trade Commission telemarketing sales rules that cover debt settlement.
Steve Rhode: The most damaging part is that the Federal Trade Commission in their report labeled it as an industry that needs regulation because of its abusive and deceptive practices.
What Debt Settlement Companies Really Do
Steve Rhode: Through my site GetOutOfDebt.org, I hear from insiders all the time. I’ve heard from insiders of more than one debt settlement company who tell me that the mission is not to provide good service. It’s to sign people up, collect the first initial payment, provide really bad customer service, and hope they drop out because then they can keep the money.
Laval Smith: The FTC’s 229-page report meticulously tore apart any potential argument the debt settlement companies made. Every time an industry association made a statement, the FTC took two pages to explain why it was incorrect.
The Advance Fee Ban
Steve Rhode: After the new telemarketing sales rules, debt settlement companies are prohibited from collecting any money from you in advance of actually receiving a written settlement agreement that you accept between you and your creditor. So you don’t actually have to pay until the service is rendered.
Steve Rhode: The debt settlement industry says that’s horrible, that’s anti-competitive. But that’s how most business in America works. I don’t know anybody who pays their realtor before their house is sold.
Steve Rhode: The debt settlement industry says the advance fee ban is going to put them out of business because they won’t get paid for five years while people save money. The reality is, if you have to have a client on the books for five years before they can settle debt, you’re enrolling the wrong client.
The Lies Debt Settlement Companies Tell
Steve Rhode: One of the most particular statements I’ve heard in an undercover call was a settlement sales representative who told me, “We actually want the creditors to call you as much as possible in the first three months because if we can document those calls, the creditor will be more likely to settle with you.” Lie, lie, lie.
Steve Rhode: When consumers are told “sign up with us and we’ll make collection calls stop,” that’s a lie. When they’re told “we’ll prevent you from getting sued,” that’s a lie. When they’re told “if you do get sued it’s nothing to worry about,” that’s a lie.
What a Good Debt Settlement Company Looks Like
Steve Rhode: A good debt settlement company, and there are a handful of them, is a company that will charge you based on performance. If they settle a debt for you, your fee will be related to the amount of savings you experience. These fees range from about 10% to 33%.
Steve Rhode: The best consumer for debt settlement is someone who has the cash on hand to make an offer now to their creditors. Not people that need to save for five years by not paying their creditors. That’s just going to get you sued.
The Ponzi Scheme Model
Steve Rhode: The first three months of payments that someone makes into a debt settlement program go specifically towards fees. Fees mean marketing costs. They don’t go towards anything other than paying for the ads and the salespeople. For the remainder of the first half of the program, only half of your money goes into savings to settle your debt.
Steve Rhode: These companies have operated no differently than a giant Ponzi scheme. Money from the client who enrolled a month ago and paid fees was not escrowed. Those fees were spent on marketing and operational costs. So all the past clients who paid fees, most of that money is already gone.
The Boiler Room Sales Culture
Steve Rhode: When you call a debt settlement company, you’re not talking to a financial advisor. You’re talking to a commission salesperson. Court records show it is not uncommon for these salespeople to be paid 100% commission. These commissions can range up to about 75% of the fees collected. One example I saw yesterday: the company said when they collect $5,000 in fees from consumers, your commission for that is $3,500.
Steve Rhode: Many of these salespeople have no financial experience at all. Many came from the subprime mortgage area where they were pushing all these bad loans before. Now they’re just pushing some new product.
The Real Numbers
Steve Rhode: In all the reporting I’ve done on the industry, I would say actually less than 1% of people actually have settled all of their debt through a debt settlement company. The Illinois Attorney General found that debt settlement companies helped less than 10% of consumers resolve any debt. They also found that 65% of people who initially enrolled dropped out.
Thomas Fox: Those people received $58.1 million in savings but paid fees in excess of $56 million. It was basically a wash.
The Future of Debt Settlement
Steve Rhode: Some debt settlement companies will go out of business in the next few months. Most are going to run to the attorney model. The trade associations are going to sue the government. I expect the lies and marketing are going to really ramp up before October 27 because settlement companies are going to want to cram as many people as possible into programs.
Show Wrap-Up
Laval Smith: To our listeners out there, go to GetOutOfDebt.org and check Steve Rhode out. Steve, thanks for being on the show.
Steve Rhode: My pleasure, gentlemen. Thank you.
Frequently Asked Questions
What are the new FTC rules on debt settlement?
The Federal Trade Commission's new telemarketing sales rules prohibit debt settlement companies from collecting any fees before they actually settle a debt and you accept the agreement in writing. Companies must also provide truthful data about their actual success rates and cannot mark up escrow account fees.
What percentage of people succeed in debt settlement programs?
Less than 1% of consumers who enroll in debt settlement programs have all their debts settled. The Illinois Attorney General found that 65% of enrollees drop out and only about 10% get any debt resolved at all.
How do debt settlement company salespeople get paid?
Most debt settlement salespeople work on 100% commission, with commissions as high as 75% of fees collected. This creates strong incentive to sell programs to consumers who may not be appropriate candidates.
What does a legitimate debt settlement company look like?
A legitimate debt settlement company charges fees based on performance, meaning they collect a percentage of the savings they actually achieve for you, typically 10% to 33%. They do not charge advance fees and they work with consumers who already have cash on hand to make settlement offers.
Can I settle my debts without a debt settlement company?
Yes. If you have at least 50% of your debt value in cash, you can contact your creditors directly and negotiate. Many creditors prefer dealing directly with consumers rather than through debt settlement companies.
What is the difference between credit counseling and debt settlement?
Credit counseling through nonprofit agencies like Cambridge Credit Counseling puts together a payment plan that creditors accept. Debt settlement instructs you to stop paying creditors and save money to negotiate lump-sum settlements for less than you owe, which damages your credit and risks lawsuits.
