The economic downturn has led more consumers to seek assistance from debt relief companies. These companies help consumers negotiate their debts with creditors in an effort to reduce the amount owed. They frequently charge consumers several hundreds and even thousands of dollars for their services, in addition to monies the consumer is usually required to put into a fund offered as part of a settlement with a creditor. As demand for these services increases, some unscrupulous companies have entered the market and have been reported to charge excessive fees, fail to negotiate settlements or take consumers' money without delivering services promised. The Federal Trade Commission (FTC) instituted a new set of rules in July 2010 to crack down on these practices and protect consumers.
Bans Upfront Fees
The FTC's new rules forbid creditors from charging any fees to consumers until a settlement is reached. The rules state a company cannot impose or collect fees from a consumer until a settlement between the creditor and consumer is accomplished that revises the terms of at least one debt obligation; an agreement (i.e., debt management plan) is reached between the creditor and consumer; and at least one payment toward the debt is made. Furthermore, the rules now state the fee charged to a consumer when a settlement is reached for one debt must be in proportion to the entire fee otherwise charged if all debts were settled. In cases when the provider's fee is determined by the percentage of the consumer's savings from the settlements, the percentage levied must be the same for each of the consumer's debts. This rule change is to deter debt relief providers from charging fees upfront for multiple debts in a single debt relief program.
Expands Disclosure Requirements
The FTC rules also mandate debt relief companies to disclose certain information to consumers. Beginning in September 2010, debt relief companies must provide consumers information about the cost to enroll in the debt relief program. In addition, debt relief companies must relay to consumers how long it takes to negotiate a settlement as well as any potential negative repercussions a consumer may sustain using their services. Companies must also supply information about their practices related to dedicated accounts for holding deposits for settlement agreements, if required of the consumer. The debt relief company is required to disclose this information before enrolling a consumer in their program.
Prohibits Misrepresentation of Services
Under the new rules, a debt relief company is prohibited from making unsupported or bogus claims about the services it proposes to provide consumers. This rule as well as the other two rules, ban on upfront fees and expansion of disclosure requirements, applies to sellers of debt relief services as well as telemarketers hired by debt relief companies to push their services.
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