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New Debt Settlement Regulations

Written By:
September 29, 2010 at 11:37 AM

The Federal Trade Commission (FTC) initiated new regulations for debt settlement companies on Monday, September 27, 2010. In the past, when consumers called a debt settlement company, the firm could promise to make substantial cuts in consumers’ debt without disclosing fees and charges upfront. This all changes as debt settlement companies are now straddled with new regulations that require a more open, up front relationship with the consumer.

According to industry settlement group, Association of Settlement Companies, companies have managed approximately 154,000 customers’ debt to the tune of $4.9 billion. Debt settlement business has boomed since the beginning of the Great Recession as many debt settlement companies have helped consumers slash their debt to more manageable levels.

Typically, the debt settlement company works with the consumer’s creditors to arrive at a reduced total amount, monthly payment or lower interest rate. In turn, consumers pay the debt settlement company fees for their services.

Past issues arose because consumers weren’t prepared or aware of the fee amounts or were told that their debt would be reduced by a certain amount—either cut in half or more.

Due to mounting consumer complaints and confusion, the FTC developed a new set of regulations that apply to all debt settlement companies. These rules, while promising to make a strong impact, are an amendment to the Telemarketing Sales Rule (TSR) and apply only to over the phone sales and solicitations.

Rules that went into effect on Monday, September 27:

  • Specific disclosures created by the FTC must be furnished by the debt settlement company prior to forging a relationship with the consumer. These disclosures include disclosing the amount of time it will take to see results; the possible negative impact debt settlement can have on the consumer’s credit rating, vital information about “key accounts” (possibly required by the individual company) and the creation of a “dedicated account” for fees and charges to eliminate the advanced fee issue.
  • If the consumer creates a “dedicated account” the debt settlement provider must prove that the company is not affiliated or controlled by a financial institution, the consumer owns the funds, the account is maintained in an FDIC account, funds can be withdrawn without penalty at any time and the debt settlement firm does not pay the financial institution a referral fee.
  • Truth in service delivery must be up front. While effective for marketing purposes, debt settlement companies can no longer make promises they can’t deliver or misrepresent their services during their phone discussion with the client. 
  • Debt settlement companies are required to provide factual, tracked results. Regardless of its sales and success record, the company must furnish at least two years of specific results in an effort to help the consumer make an informed decision.
  • Disclosures must be made during telemarketing calls to consumers and by consumers to the debt settlement provider.

In addition to regulations enacted immediately, another rule may be applied in late October. Scheduled to take effect on October 27, debt settlement companies will no longer be able to sell services over the phone and charge fees in advance of settling the consumer’s debt.

New Regulations are Win-Win for both Consumers and Debt Settlement Companies

Debt has become American quick sand for many, requiring them to seek alternative ways to pull themselves to safety. Debt settlement companies have been a safe haven for many; allowing them to avoid bankruptcy and further damaging their credit. While many debt settlement companies have disclosed fees and strategies up-front some have left its customer’s in the dark which fueled additional despair and frustration.

The new regulations are designed to help consumers build more trust with debt settlement companies and open the door for more honest dialog and realistic relief. While candid phone discussions will help to solidify trust, some consumer groups want deeper regulations.

According to Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group, new rules and regulations will help the industry to weed out the bad apples. "Preventing the companies from collecting fees in advance of providing help will rein in the worst offenses. But Congress will still need to step in to go after other forms of marketing than telephone calls."

Because face-to-face and online sales are exempt from the new rules, Congress may have to go back to the drawing board again in the future to create a more detailed arrangement that touches on other areas of how debt settlement companies market and advertise services.





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