By Andrew Housser
Andrew Housser is co-CEO of Freedom Financial Network, LLC and its subsidiary, Freedom Debt Relief, a national consumer debt resolution firm that has served more than nearly 100,000.
New Federal Trade Commission rules regulating the debt relief industry took effect in late October. The FTC first announced the rules in July, after more than a year of study. The new regulations aim to help consumers who are struggling with debt make sure they are working with a legitimate, reliable debt-relief company.
Many of the new regulations impact the debt settlement industry in particular. Debt settlement is a form of debt relief where specialists negotiate directly with creditors on the consumer’s behalf to resolve the individual’s debt balance. Debt settlement offers an alternative to credit counseling, debt consolidation and bankruptcy by helping qualified clients fully resolve their debts. The process commonly takes two to four years to complete.
Debt settlement usually works best for people who have more than $15,000 in debt and are having trouble making even minimum payments. If you are thinking about getting help from debt settlement, you should know about the FTC rules before you begin interviewing companies:
1) Companies must not misrepresent their services
This rule specifically states that companies can’t imply that their plan is nonprofit or is sponsored by the government. (There are no government-sponsored debt relief plans, or debt relief plans offered by President Obama, despite some advertising to the contrary.) Companies making savings claims must base their claims on the experience of all consumers in their programs, and must take into account fees those consumers pay.
2) Debt relief companies must make specific disclosures
The new rules require debt relief businesses to explain basics about their services before consumers sign up. These include how long it will take to get results, as well as total costs and potential negative outcomes.
3) The Telemarketing Sales Rule now governs calls consumers place to debt relief companies
This rule has always covered outbound sales calls. Now it also applies when consumers call debt relief firms in response to debt relief advertising, such as TV ads or direct-mail promotions.
4) Companies may require customers to keep funds in a dedicated settlement account
Customers in a debt-settlement program can significantly increase their probability of succeeding if they open a separate account dedicated to settlement savings. The new FTC rules allow for this practice to continue as long as certain conditions are met, including ensuring that the account is located at an insured financial institution, and that the entity administering the account is not owned or controlled by the debt settlement company.
5) Companies must not charge fees before they provide services
The most significant change is the FTC mandate that no debt relief company charge any fees whatsoever until and unless it resolves a debt for a client. While this creates a serious working capital challenge for debt-relief companies, the benefit to consumers is significant in that they no longer need to worry about paying large upfront fees that may or may not lead to results.
The new regulation also provides a bright-line test that can help consumers separate good companies from bad. Any company that charges fees before obtaining results is either violating the FTC’s regulations, or operating under a loophole in the rule. Either way, think twice before enrolling in a company not abiding by the FTC’s fee restrictions.
The FTC rules are a step in the right direction. They protect consumers from predatory businesses that seek to take advantage of people who are working to get out of debt. Ultimately, these regulations will help consumers distinguish the companies that get results for their clients from those that don’t.
If you are considering using debt settlement to get help with debt problems, take these rules into account. Ask the companies you talk to how they comply with the rules. They should be easily able to provide you with details about how they work.