FTC bans upfront debt settlement fees
- Debt relief companies must settle at least one account before they get paid.
- Rule applies only to for-profit companies and telephone sales.
- Attorneys aren't exempt from the new debt relief telemarketing rules.
A new federal government rule will offer additional protections to consumers who are overburdened by debt; however, caution is advised since two limitations could undermine the rule's effectiveness.
The rule, which bans certain upfront fees for debt settlement services, is intended to ensure consumers won't have to pay for services that are promised, but never delivered, according to Susan Grant, director of consumer protection at the Consumer Federation of America in Washington, D.C.
"The new rules will ensure they don't pay anything until and unless a mutually agreeable settlement has actually been reached," she says.
The catch is that the new protections come only as part of the Federal Trade Commission's Telemarketing Sales Rule, or TSR, which applies only to for-profit companies and services that are sold over the telephone.
Ban on upfront debt relief feesThe rule contains five main protections:
- Debt settlement companies cannot charge a fee until three conditions are met: The company must renegotiate, settle, reduce or otherwise alter the terms of at least one of the consumer's debts. The consumer must agree to at least one written debt settlement or debt management plan or other agreement between the consumer and a creditor, and the consumer must have made at least one payment to the creditor as a result of the agreement.
- If those conditions have been met, a fee can be collected, but the amount must be proportional to what would be charged if all the debts were similarly settled. That means the company can't front-load its fees if the consumer has enrolled multiple debts in the program.
- Debt settlement companies are prohibited from making certain common misrepresentations about their services.
- Debt settlement companies may require set-aside accounts, but must comply with new restrictions on access to the funds.
- Debt settlement companies must disclose how long it will take to get results, how much the service will cost, what the negative consequences could be and how the debt settlement account will be managed.
Face-to-face sales are exemptThe new rule applies to inbound as well as outbound telephone calls. That means a consumer who receives a call from a debt settlement company or calls such a company in response to the company's advertising will be protected by the new rules, according to Allison Brown, a senior attorney at the FTC in Washington, D.C.
"There is a broad definition of telemarketing," she says. "If the consumer sees a billboard or a radio ad or a website with a toll-free number, and the consumer makes that call, and then the service is sold over the telephone, that qualifies as telemarketing."