New Debt Settlement Rules

New debt settlement rules from the Federal Trade Commission (FTC) will help consumers who are struggling with their debt and considering debt negotiation as an option to get out of debt.

When done right, debt settlement can help consumers get out of debt faster by lowering the outstanding balances on their credit card accounts. Unfortunately however, there are a lot of bad apples in the settlement industry that are more interested in making money off of consumers’ financial woes than in helping them resolve their debts. As a result, settlement has been a financial nightmare for many consumers -- not the answer to their prayers -- and many consumers have ended up in worse shape than they were before.

A recent Government Accounting Office report about the settlement industry identified allegations of fraud, deception and other questionable activities involving hundreds of thousands of consumers.

Given the problems in the settlement industry, the Federal Trade Commission (FTC) recently took action to protect consumers by making some important changes to the federal Telemarketing Rule. The changes, known as the FTC Debt Relief Rules, apply to for-profit settlement firms that sell their services by telephone.

They will be implemented in two phases. Most of the changes take effect on September 27th, with the new prohibition on advance fees implemented a month later on October 27th.

Here is an overview of the new debt settlement rules:

Before consumers sign up for their settlement services, debt settlement firms must provide them with the following information:

• How long it will take for consumers to see results
• The cost of their services
• The negative consequences that could result from settling debt
• The required information about dedicated accounts if the firms require consumers to set up such an account. The next section of this article discusses dedicated accounts.
  

Settlement firms cannot misrepresent anything about their services -- their success rates, for example.

Although settlement firms can require that consumers deposit into dedicated accounts the fees that the consumers must pay to the firms as well as the money the consumers will use to fund the settlements the firms negotiate for them, they can only impose this requirement on consumers if a dedicated account meet five criteria:

1. The account must be maintained at an insured financial institution.
2. The money in the account as well as any interest the money earns must be owned by the consumer who funded the account.
3. The consumer must be able to withdraw the money from the account at any time.
4. The firms cannot own, control or have any affiliation with the financial institution administering a dedicated account.
5. The firms cannot exchange any referral fees with the financial institution administering an account.
   

Settlement firms may no longer charge consumers upfront fees for their services and they cannot collect any money until all of the following has happened:

• They’ve provided a consumer with a written settlement agreement, and the consumer has agreed to it.
• They’ve successfully settled at least one of the consumer’s debts.
  
• The consumer has made at least one payment to the creditor as a result of the settlement agreement
  

When settlement firms do charge a fee, their fee for settling a single debt for a consumer must be in proportion to the total fee they would charge if the firm settled all of the consumer’s debts. However, if the firm bases its fee on the percentage of what the consumer saves as result of using its settlement services, that percentage must be the same for each of the debts it settles.

Note: We will be posting a podcast that explains the new debt settlement rules to our debt settlement podcast page soon.

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