New FTC Rules for Debt Settlement Firms
This year, the FTC passed new rules that change the way many debt settlement firms operate. The new rules are intended to provide protection for consumers to ensure they are not taken advantage of in the debt settlement process. These rules do not apply to non-profit debt settlement companies. But, for-profit debt settlement firms engaging in interstate telemarketing must follow the new rules.
Debt Settlement Telemarketing Rules
Interstate telemarketers who sell debt settlement services have to disclose certain information to consumers. This includes:
- The amount of time necessary to achieve the represented results.
- The amount of savings needed before the settlement of a debt.
- A warning of any potential damage done as a result of not making timely payments to a creditor.
- Details and rights about a dedicated bank account used by the consumer.
Debt settlement firms can’t lie about or misrepresent their services, success rate, or entity status.
Rules for Advance Fees
One of the things that prompted the FTC to pass these new rules was consumer complaints about advance fees. Unless they are not subject to the new FTC rules, debt settlement companies now have to follow certain rules when collecting fees for their services. First, the settlement firm can’t collect a fee until at least a debt has been settled, reduced, or renegotiated. Second, there must be a written agreement by the original creditor and the consumer has to agree to it. Finally, at least one payment by the consumer must be made to the creditor based on the terms of the new debt settlement agreement.
Often consumers have multiple debts they want to settle. The settlement firm is not allowed to collect a fee for all these debts even after the first debt has been settled. The fee for each settled debt paid by the consumer to the settlement firm must be proportional to the total fee that’s due when all debts are settled.
Rules for Dedicated Accounts
Creditors typically require a debt settlement to be paid in a lump sum. Unfortunately, few consumers have enough money on hand to pay this lump sum. In that situation, money is accumulated in a dedicated account and then paid out to the creditor when the account balance reaches the settlement amount.
The FTC has created new rules that debt settlement firms must follow if they require a consumer to set aside in a dedicated account the debt settlement firm’s fees and creditor payments. All five of the following must happen be true:
- The account must be held at an insured financial institution.
- The consumer owns the funds (including any interest accrued), controls them and can withdraw them at any time.
- The debt settlement firm does not own or control the company administering the account or have any affiliation with it.
- The debt settlement firm does not split fees with the company administering the account.
- The consumer can stop working with the debt settlement firm at any time without penalty. If the consumer decides to end the relationship with the debt settlement firm, the debt settlement firm must return the money in the account to the consumer within seven business days (minus any fees the debt settlement firm has earned from the account in compliance with the new FTC rules).
You can complain about debt settlement firms to the FTC at FTC.gov and/or to the Better Business Bureau at www.bbb.org.