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 fees
The 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 exempt
The 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.”
A Web-based chat function that used some telephone technology would be essentially equivalent to a telephone call, Brown says. But if a consumer responded and signed up entirely through a website, the protections of the new rule likely wouldn’t apply.
In-person solicitations also are exempt.
“There is an explicit exemption for face-to-face transactions in the TSR, so if they get together with the consumer face-to-face and give a sales presentation, that takes it out of the rule,” Brown says.
The face-to-face exemption is useful for attorneys who may get clients through referrals and negotiate with credit card companies on the client’s behalf, but don’t use telemarketing to solicit business. There is no exemption for companies that arrange a partnership with an attorney and then use telemarketing to obtain customers.
“To the extent that attorneys are doing telemarketing covered by the rule, there is no attorney exemption,” Brown says.
Consumers should be cautious
The rule took effect Sept. 27, except for the ban on upfront fees, which will be delayed until Oct. 27.
State laws that are stricter than the federal rule will still apply, according to Brown. For instance, some 20 states have a cap on the fees that debt settlement companies can charge. Those fee caps and other restrictions aren’t affected by the new FTC rule.
Despite the new protections, Grant nonetheless offers a “bottom-line warning” that consumers should avoid any debt settlement company that charges upfront fees.
“Regardless of whether the company’s business methods come under the telemarketing sales rule or not, I would suggest that consumers don’t do business with any debt relief service that asks them to pay a fee in advance before the debt relief is actually achieved,” she says. “Until and unless your debt problems are actually resolved, what are you paying for?”