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New rule prohibits advance fee for debt relief

By Lucy Lazarony · Bankrate.com
Wednesday, October 27, 2010
Posted: 10 am ET

Say so long to hefty advance fees for debt relief help.

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

This new rule comes courtesy of amendments to the Telemarketing Sales Rule issued by the Federal Trade Commission in late July.

And it's welcome relief to folks seeking help for managing heavy credit card debts.

The rule applies to telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services.

According to the new rule from the FTC, a debt relief company may not collect a fee from a consumer until:

  • The company renegotiates, settles, reduces or changes the terms of at least one debt.
  • There is a debt management plan or written settlement agreement between the consumer and creditor, and the consumer has agreed to it.
  • The consumer has made at least one payment to the creditor on the plan or agreement negotiated by the debt relief provider.

According to an FTC fact sheet, this rule does not apply to nonprofit companies offering debt relief services, but it does apply to companies that falsely claim a nonprofit status.

Keep in mind that actual nonprofit firms aren't covered by the new rule.

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.

What do you think of the ban on advance fees from for-profit debt relief companies?

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