Starting this week, for-profit companies marketing debt-relief services over the telephone are prohibited from charging a fee before they settle or reduce a customer’s debt to the Internal Revenue Service, credit card company, or other unsecured debt.
The new rule by the Federal Trade Commission covers telemarketers of for-profit debt-relief services, including credit counseling, debt settlement, and debt negotiation services. Nonprofit firms are not affected by the rule.
Over the past decade, the FTC and state enforcers have acted on 259 cases in an effort to stop deceptive and abusive practices by debt-relief providers that have targeted consumers in financial distress, according to the FTC.
The rule specifies that fees for debt-relief services may not be collected until:
- the debt-relief service successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer’s debts;
- there is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it; and
- the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt-relief provider.
“At the FTC we strive every day to make sure America’s middle class families get straight deals for their dollars,” Chairman Jon Leibowitz said in July when the final rule was issued. “This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up-front fees. Too many of these companies pick the last dollar out of consumers’ pockets – and far from leaving them better off, push them deeper into debt, even bankruptcy.”
To prevent debt-relief providers from front-loading fees if a consumer has enrolled multiple debts into one debt relief program, the FTC specifies how providers can collect their fee for each settled debt. Providers’ fees for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled. If the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts, according to the FTC.