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Debt settlement companies dodge FTC rule prohibiting fees

By Lucy Lazarony · Bankrate.com
Tuesday, December 21, 2010
Posted: 8 am ET

Looking for help settling credit card debt?  Watch out for fees.

A consortium of nonprofit credit counseling agencies filed a joint complaint letter to the Federal Trade Commission, claiming that some debt settlement companies are skirting new federal rules and charging excessive upfront fees.

The letter was signed by the chief executives of 11 prominent nonprofit credit counseling agencies.  According to a press release, many of their current clients are "refugees" of debt settlement programs that quickly exhausted their financial reserves through excessive upfront fees and other charges, while providing little or no services.

"The worst offenders are continuing to pillage the dwindling bank accounts of desperate consumers in broad daylight, daring the FTC and state attorneys general to take action," wrote Christopher Viale, chief executive officer of Cambridge Credit Counseling, in a press release.

As of Oct. 27, 2010, all for-profit companies that sell debt relief services over the telephone could no longer charge a fee before they settle or reduce a customer's credit card debt or other unsecured debt.

This rule was part of the amendments to the Telemarketing Sales Rule issued by the FTC in late July.  It applies to telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services.

Previous FTC provisions aimed at protecting consumers seeking debt help, including telemarketing disclosures and the handling of a “dedicated account” for fees and savings, took effect on Sept. 27.

According to the complaint letter, some debt settlement companies are using schemes and deceptive tactics to evade the new FTC rules and charge consumers exorbitant upfront fees.

Schemes some debt settlement companies are using to deceive consumers include:

  • Saying they are a law firm and claiming they are not governed by the FTC.
  • Contacting consumers via text message in the guise of a survey company.
  • Using Internet chat to arrange settlement plans.
  • Using offshore call centers.

If you are feeling overwhelmed with credit card debt and are considering debt settlement, be sure to choose help carefully.

And if you feel that a debt settlement company has treated you unfairly, contact the FTC or your state’s attorney general.

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