California is very close to passing new regulations regarding debt settlement services. Below you will find the meat of the regulations. You can read the latest version of AB350 Debt Management and Settlement act here.
An interesting new twist in this regulation from California is the sentence “The provider’s total fees must be spread over at least half the length of the program or until offers of settlement by creditors are obtained on at least half of the debts enrolled to the provider.” This would leave debt settlement companies unable to earn any fee, except a setup fee, for probably several years into a debt settlement program. But based on the success rate of debt settlement programs this actually probably serves to eliminate debt settlement companies from collecting any fee since most clients will fail before they are able to collect a fee.
In an article by Kathleen Pender in the San Francisco Chronicle about this bill, Gail Hillebrand of Consumers Union comments on another provision of the bill that should be better defined.
The bill requires companies to make sure clients are “qualified” for the program by enrolling them. “We think that is too weak of a standard,” Hillebrand says. “It could be like saying if you have a pulse you are qualified.” Her group wants companies to make sure a consumer is “suitable,” or able to benefit from the program. Source
I was also concerned about another section of the bill that implies that there is no tax liability due to the consumer if the consumer is insolvent. It is a point I have written about before.
It is true that a consumer could make a claim that they do not have to pay the tax due to forgiven debt by filing IRS form 982 and claiming they were insolvent. “However, the exclusion applies only up to the amount by which consumers are insolvent. That means if $5,000 in debts were forgiven and liabilities exceeded assets by $2,000, then the $2,000 would be excluded as income. “The remaining $3,000 would be reported under other income,” says H&R Block’s Flores.” Source (See Comments)
Language From the Bill
A provider that is required to be licensed under this division shall maintain a toll-free communication system, staffed at a level that reasonably permits an individual to speak to a
customer service representative, as appropriate, during ordinary business hours.
(a) Before an individual assents to an agreement to engage in a program, the provider shall do all of the following:
(1) Prepare and provide a written financial analysis specific to the individual.
(2) Provide a written good faith estimate of the length of time it will take to complete the program and a statement of the total amount of debt owed to each creditor included in the program. The estimate shall include a statement of the monthly savings goals for the individual to complete the program.
(3) Based upon the completed financial analysis, make a determination that the individual is qualified for a debt settlement program and that the individual can reasonably meet the
requirements of the program.
(4) Inform the individual in writing of all of the following:
(A) The name and business address of the provider.
(B) That some programs are not suitable for some individuals.
(C) That the conduct of a program may negatively affect the individual’s credit rating or credit scores.
(D) That nonpayment of debt may lead creditors to increase finance and other charges or undertake collection activity, including litigation.
(E) That unless the individual is insolvent, if a creditor settles for less than the full amount of the debt, the program may result in the creation of taxable income to the individual, even though the individual does not receive any money.
(F) That specific results cannot be predicted or guaranteed.
(G) That a program requires an individual to meet certain savings goals in order to maximize settlement results.
(H) That a provider, who is not otherwise authorized or professionally licensed, does not provide accounting or legal advice to individuals.
(I) That a provider does not receive compensation from an individual’s creditors, banks, or third-party collection agencies.
(J) That a provider cannot force negotiations or settlements with creditors but will advocate solely on behalf of an individual.
(K) That if an individual terminates an agreement pursuant to paragraph (1) of subdivision (b) of Section 60019, no additional fees will be due.
(L) That the use of debt settlement services may not stop a creditor from filing or pursuing a lawsuit against an individual.
(M) That the consumer may owe fees upon signing an agreement whether or not any debts are reduced under the program.
60021. (a) The total of all fees charged by a provider shall not exceed 20 percent of the principal amount of debt which includes a maximum total set up fee specific to the individual of up to 5
percent. The provider’s total fees must be spread over at least half the length of the program or until offers of settlement by creditors are obtained on at least half of the debts enrolled to the provider. In no case shall total fees exceed 20 percent of the principal debt, and the total fees plus settlements cannot exceed the principal amount of the debt. However, this section shall not preclude an individual from voluntarily prepaying fees earned by the provider.
(b) A provider shall not impose, directly or indirectly, a fee or other charge on an individual or receive money from or on behalf of an individual for debt settlement services except as permitted
by this section.
(c) A provider shall not impose charges or receive payment for debt settlement services until the provider and the individual have signed an agreement that complies with Sections 60016, 60019,
(d) If a payment to a provider by an individual under this division is dishonored, a provider may impose a reasonable charge on the individual, not to exceed fifteen dollars ($15). Any charge pursuant to this subdivision shall be limited to one per payment due.
(a) If a provider imposes a fee or other charge or receives money or other payments not authorized by Section 60021, the agreement is void and the individual may recover as provided
in Section 60032.
(b) If a provider is not licensed as required by this division when an individual assents to an agreement, the agreement shall be void.
(c) If an agreement is void pursuant to subdivision (a) or (b), the provider shall not have a claim against the individual for breach of contract or for restitution.