Published:

11/16/2010 05:06pm

FTC to Protect Consumers from Online Debt Settlement Companies: People facing debt should know their rights

The Federal Trade Commission has ruled that starting Oct. 27, 2010, companies that sell debt relief services over the phone will not be able to charge a fee in advance of settling or reducing a client's debt.

Many debt settlement companies promise to settle debt by 50 percent or more, but collect fees up front and frequently aren't able to reduce the debt as promised. In some cases, because of the accumulation of unpaid interest, consumers end up facing more debt than when they started.

Starting Oct. 27, 2010, a Telemarketing Sales Rule will go into effect with the following provisions:
 Debt relief companies must make specific disclosures to customers.
 These companies cannot make misrepresentations.
 These provisions also apply when consumers call debt relief companies in response to their advertising.

Specific requirements state that for-profit debt relief companies may not collect fees until:
 The debt relief company successfully reduces, settles, renegotiates or changes at least one of the customer's debts.
 There is a written agreement regarding the debt, whether a settlement agreement, debt management plan or other similar agreement that the client has agreed to.
 The consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief company.

If a customer has multiple debts, the rules specify how a debt relief company can charge a fee for each settled debt. The company's fee for one debt must be in proportion to the total fee that would be charged if all of the debts were settled. If the fee is based on a percentage of the debt reduction, the percentage charged must be the same for each debt.

The Final Rule outlines how debt relief companies can establish "dedicated accounts" for customers' fees and future payments only if they meet the following five requirements:
 Dedicated accounts are held at insured financial institutions.
 The customer retains ownership of the funds and any accrued interest owed.
 The customer can withdraw the funds at any time without penalty.
 The debt relief company doesn't have any affiliation with the account administrator.
 The company does not pay to or receive any fees from the administrator.

Under the area of disclosure, debt relief companies must disclose the time it will take to have results, what it will cost, information regarding the dedicated accounts if they are to be used, and the possible negative consequences of using a debt relief service. The rules prohibit debt relief companies from misrepresenting their programs, success rates or nonprofit status. Consumers with complaints should visit www.ftc.gov/ftc/complaint.shtm.