Understanding the FTC Regulations for the Debt Industry

Here is a recent video appearance I made with some of my fellow personal finance blogger friends on Financially Fit TV where we discuss new FTC rules covering debt relief services.



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Hi everybody. I’m Nichole Kelly, and this is Financially Fit TV. What is Financially Fit TV? It’s a series of episodes that are designed to help you learn how to manage your finances.

So for this episode, we’re going to be talking about the new FTC regulations. I’m actually very excited about this, because I know that there has been a lot of confusion out there with all the different reports. And we’re going to get to the bottom of what the truth is.

We are joined by a distinguished panel of guests today that I’m very excited about, that are going to help us by asking us questions and telling you exactly what you need to know about the new rules. In studio, I’m joined by Jenny Realo. Hi Jenny.

Hello Nichole. Thanks for having me.

Absolutely. Jenny is the chief product officer for CareOne Services, and has been very supportive of the new FTC rules. So to start off, I’d actually like you to give us a bit of the history of the FTC rules and how it came about. And then, what are the kind of key points that we need to know?

Sure, absolutely. So as we all know, over the last several years, the economy has had significant issues. And we’ve seen a tremendous growth in, in particular, the debt settlement industry. So consumers are in distress financially. They’re looking for solutions. And all of the sudden, we see this huge influx of new settlement providers that are coming in and offering these tremendous ‘opportunities’ and claiming that they can get you out of debt within two years. And these tremendous savings to you. And what ended up happening was these consumers were getting sort of robbed.

So the FTC actually has been looking at this industry for well over a year, and actually began having hearings. So they were pulling in consumers themselves, hearing their stories. They were going out to regulators, trying to understand what they’re hearing from consumers within their states. Actually pulled in settlement providers to get their perspectives. And after a year of sort of pulling all this information together, came out with a ruling late this summer.

There were really five major areas that they honed in on. The number one is these settlement providers are not any longer allowed to charge advance fees. So no longer are they able to charge fees before they’ve actually delivered a service.

The second key point is, the fees have to be 100% success fee based. So they’re not able to have an upfront fee or even a monthly fee. The fees have to be 100% based on what they deliver to you.
Thirdly, they need to be able to provide full disclosures, so consumers are aware 100% of what is going on with the plan. What are the ramifications to them?

Fourth, they are not allowed to have any unsubstantiated marketing claims. So you are aware of what’s out there in the marketplace, hear these wild claims. Those are not allowed anymore by the FTC.

And finally, the consumer needs to have—give their consent for any executed settlements that occur. So the consumer is in full—fully aware of what’s going on with their program.

Very good. Well, thank you so much for explaining that, Jenny. And I know that our panel definitely has a lot of questions, and that brings up a lot of issues. It’s a very big topic. Why don’t we start by actually introducing you to our panel? And Steve, could you kind of tell the audience who you are and why you’re here today?

Yeah, my name is Steve Rhode, and I am a consumer debt expert, and I write about the debt relief industry. So my blog is GetOutOfDebt.org. And on one side, I answer questions for free for consumers that are worried about a debt situation. On the other side, I cover all the news inside the debt relief industry.

Now Baker, why don’t you tell the audience who you are?

Sure. My name is Adam Baker. I go by Baker to most, and I blog at ManVsDebt.com. My blog started out as a personal journey of my wife Courtney and my daughter Milligan and I, and our struggles and successes in getting out of debt. And it’s turned into a hub for personal finance, sort of de-cluttering, travel, passion, on the Internet.

Fantastic. Well, thank you so much for being here. And our next guest is P.T. Could you introduce yourself?

Sure. My name is Phil Taylor, and some people call me P.T. I blog every day at PT Money, that’s PTMoney.com, personal finance. Every day on my site, I talk about saving money, making money, or spending money wisely. Usually one of those four—three topics. I’ve also hit on the fact that I’ve chronicled my success of getting out of about $40,000 worth of car loan and student loan debt in my blog. So I’m here today just to learn about the new rules and talk with the other guys.

Fantastic. Thank you so much for joining us. I think that all of you are obviously very well-versed in the subject of personal finance, and maybe have some of the same questions that many of the consumers have out there. P.T., I know you had a question. Do you want to start us off today?

Sure. Jenny, who makes a good candidate for debt settlement in general? And then, have these new rules changed the type of person that would benefit from debt settlement?

P.T., that’s a great question. You know, just sort of looking at the full realm or full spectrum of solutions, debt management is probably—obviously credit counseling, let’s start out with that—is really about going and getting counseling around your budget, getting control around your finances. But you’re able to keep up with your payments on your credit card. So you don’t need necessarily a structured plan to get out of debt.

See also  The Debt Settlement Good Faith Estimate Guide for the Confused Consumer

Debt management sort of is the next notch, which is really about full repayment of your debts, with reduced interest rates, reduced late fees, re-aged accounts. It allows you to repay your debt over a period of about five years. The credit impact is much less severe than credit settlement—or debt settlement. I’m sorry.

Settlement is really for consumers that are not able to fully repay their debts. So they’ve gone through their budgets. They’ve had some kind of reduction in their income, are just struggling to keep ahead, and are not, unfortunately, able to fully repay.

Settlement then, what happens is you pay money into this bank account, and the provider then negotiates with the creditor to try to get a less than full balance repayment for your debts. And it allows you to get debt-free over a period of about three to five years.

Of course, there are no guarantees that your creditors will actually negotiate with the provider, so you need to know that up front. And the impact on your credit is much more severe.

And then finally, the last notch is bankruptcy, for consumers that cannot afford to repay any of their debt. And it’s really the most severe, and obviously has to be done through a licensed attorney in your state.

Does the FTC—Do the new rules actually make settlement more appropriate? Or less appropriate? It really hasn’t really changed the ballgame. It just has made sure that there is the necessary regulation around settlement.

Steve, I actually know you, on your blog, you talk a lot about debt settlement and the new FTC regulations. And have become certainly an expert in that. Do you have any tips for consumers?

Well, I think right now there’s a big opportunity for companies who have left this no advanced fee space, and who are now simply affiliates of attorney models, who are advertising, “Come to us. You’re represented by an attorney. We can provide you with better service.” In reality, most of those models are simply a way to get around the telemarketing sales rules and still collect money from consumers in advance.

The problem with the advance fee is people are paying tens of thousands of dollars sometimes for debt settlement services, and never receiving the benefit of it. They end up going bankrupt. After having paid the fee, they lose.
That’s absolutely right. It is very scary, the movements that we’re seeing in the industry. Where unfortunately, the unscrupulous players are really sort of scrambling—and we saw this months ago—scrambling to find ways to avoid the FTC guidelines. So you’re absolutely right, Steve. It is very disconcerting.

And like I said earlier, the consumers really need to make sure that they are sort of on their game and aware that, while these regulations came out—and it’s fabulous, it’s going to help clean up a large number of providers—there are still unscrupulous providers out there that are trying to figure out ways to weasel around it.

Also to that point, are their certain questions that they should ask, that we should be asking debt relief providers, to see if they’re following the new rules or not?

Absolutely. You should be asking, “How does this impact my credit? What are the time frames that I should expect? What are you forecasting as far as getting me out of debt? What does it look like?” Really understanding how, for instance, settlement works, versus debt management.

A lot of folks sign up for debt settlement, thinking that their money is going straight into the creditor’s hands from day one, and that’s not how it works. So really making sure that they ask, “What is their BBB rating?” Do some research on the provider.

Make sure you understand, “What kind of support am I going to get actually once I’m on the program?” Are you sort of one-and-done, or do they actually have comprehensive support for me, to get me—sort of rehab my money management skills while I’m on the program.


This is Steve again. The reason this is such a big issue is because consumers are having financial problems, are considered to be a disadvantaged class of consumers, of people, who are easy to fall prey to these scams. Because the sales pitch is some sort of miracle or magic wand that’s going to get people out of debt.

And they think, “If I just do this, my problems will go away.” But I agree with Jenny. She’s absolutely right that people need to do their research. Look at credit counseling. Look at maybe a debt settlement company. Talk to a bankruptcy attorney. Talk to CareOne. And then you can put together at least a more educated decision about what’s right for you.

Again, I have another question for you.

Yeah, sure.

So the new marketing rules went into effect September 27, 2010. Yet we’re still seeing lots of sites that are claiming, “We will slash your debt by 50% or 70%.” How does a consumer know that’s true?

Unfortunately, they don’t. And like I said, we watch this every day. And we actually send around intelligence within our own team about what’s going on in the marketplace. And there actually has been minimal changes. We have seen—the folks that are covered by FTC are making changes to their marketing claims.

But again, 80% of the players out there are non-profit, and they don’t have to follow these rules. And honestly, they’re not. So they are continuing to make these claims. And there’s really, I think, very little a consumer can do. Besides be aware of anything that sounds a little wild and crazy and just sort of outrageous probably is, and is not realistic.

See also  Debt Settlement Companies Caught Violating New FTC Rules Better Prepare to Pay Really Big Fines

So really just sort of be on your toes about what is realistic and actual.

Baker, you’re up next.

Yeah. My question is, who is responsible for protecting consumers from non-profits? If it’s not the FTC, who is going to protect consumers from 75 or 80% of the industry that’s unregulated?

You know, Baker, that’s a fabulous question. And I’m actually going to pull Steve in on this to get his thoughts. The non-profits would say, “Listen, we are highly regulated because of the fact that we are a non-profit. We have to follow the IRS guidelines. We follow the state regulations,” because they are—in most states, they require them to be licensed.

So they would say, “Listen, we are already regulated.” I would argue that, no, they are not nearly regulated enough, and they would be able to sort of project this type of abuse that we’ve seen in the settlement industry if they were to enter the settlement industry. So Steve, what are your thoughts on this?

Well, under the Obama administration, we’ve actually had the creation of a new agency, the Consumer Financial Protection Bureau, which is just coming into force now, and will be fully in effect by July 2011. And the CFPB, as it’s going to be known, while it shares some of the same enforcement activities as the Federal Trade Commission does, they don’t have the loophole, and they can go after non-profit organizations. So that is a game-changer, and it will go into force over the next year.

I have a—I’ll chime in once again. This is Baker. I think that’s great that the FTC is going to be aggressive about this, because I always like to see when they make some rules that they’re actually going to, I guess, bring some justice to people that are not following them.

But going back to consumers, going back to the average consumer. In addition to Steve’s blog, which is one of the first resources I would go to, what are some other resources where people can get on their game?

We’re asking consumers to step up and be on their toes, but how can they be more informed? What are some places they can go to get better information? Or where can they start that process?

Going out to the different blogs. For instance, what you guys have on your blogs. We have a tremendous amount of resources within our community, within our blogs. We spend a lot of time trying to educate consumers. So I think it’s really about going out and exploring on different sites, and being able to seek that information out and soak it all in.

Absolutely. I know that, on the CareOne site, for example, if you go to financiallyfit.tv/blogs, we actually have some posts that will be tagged for today’s show. That will include: things you should ask a debt relief provider; what the rules are about, so you actually ask the right questions when you’re talking to someone; and understanding the advance fee ban, and what that really means for you; and making sure the provider helps.

And Jenny, I know that one of the big questions, obviously, is what can consumers do? If there are so many people that are unregulated, how can they be protected against these unscrupulous providers? And are there any questions that they can ask in order to make sure they’re dealing with a legitimate firm?

Absolutely. I know this is a very overwhelming topic for consumers. This whole thing—first of all, you’re in debt and you’re already overwhelmed, and you feel sort of alone with the struggle. What I would suggest is you actually take the major points that the FTC has attacked with their ruling and flip those around.

And make yourself an informed consumer by flipping those around to questions that you ask the providers. So for instance, you ask them about, “Do you charge any fees up front? Do you have any advance fees?”

“How are your fees based?” So in other words, are they directly linked to the savings that you provide to me?

The third thing is, make sure you understand the program. Ask them the tough questions around, “What is the impact to my credit? How long will this take me to get out of debt? What can I expect with this program?”

Fourthly, make sure you understand, “Listen, I saw this in your ad. How can that be?” And really critique those.

And then finally, make sure that you understand, “Now am I going to be aware of what’s going on with my program? How will I be aware? Are you going to notify me when settlements occur? And are you going to ask for my consent before you withdraw my funds?”

‘Cause they are your funds. That’s very important you understand.

Absolutely. And maybe a good idea at that point is to actually tell the provider what you understand for your plan and see if it’s actually accurate.

Absolutely. That’s great, yes.

Very good. Well, thank you so much for joining us, Jenny.

Thank you, Nichole.

Thank you so much for joining us today. I really hope that you have a better understanding of what the new FTC rules are, and more importantly, what they mean for you.

Remember, if you want more information about the new FTC rules, or anything that we talk about on Financially Fit TV, just go to financiallyfit.tv/blogs. Thanks for tuning in.

Steve Rhode

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