New rules for debt set­tle­ment in­dus­try: no more up­front fees, more dis­clo­sures

Austin American-Statesman - - BUSINESS - By Candice Choi

NEW YORK — Com­pa­nies that prom­ise to re­duce or elim­i­nate credit card bal­ances and other debt for cus­tomers will no longer be al­lowed to charge an up­front fee.

The Fed­eral Trade Com­mis­sion said Thurs­day that the new rule is in­tended to crack down on the debt set­tle­ment in­dus­try, which has flour­ished in the down­turn as bor­row­ers strug­gle to pay their bills. The rule goes into ef­fect Oct. 27. Since the start of the re­ces­sion in De­cem­ber 2007, the Bet­ter Busi­ness Bureau has re­ceived more than 3,500 com­plaints about debt set­tle­ment com­pa­nies. Cus­tomers who hired the com­pa­nies com­plained that they ended up deeper in debt or sued by cred­i­tors.

Debt set­tle­ment com­pa­nies of­ten charge an up­front fee, typ­i­cally a per­cent­age of the cus­tomer’s out­stand­ing bal­ance. In ex­change, the com­pany prom­ises to ne­go­ti­ate with cred­i­tors to re­duce or elim­i­nate the debt, some­times by as much as half.

In ad­di­tion to the up­front fee, cus­tomers are of­ten re­quired to set aside money in a sep­a­rate ac­count main­tained by the debt set­tle­ment com­pany. This money is in­tended to even­tu­ally pay off any re­main­ing debt.

Un­der the new rule, how­ever, com­pa­nies will only be able to re­quire such an ac­count if it’s main­tained at an in­de­pen­dent fi­nan­cial in­sti­tu­tion un­der the cus­tomer’s name.

The cus­tomer must also be able to with­draw the money at any time with­out penalty. And cus­tomers can only be charged a fee once their debt has been re­duced, set­tled or rene­go­ti­ated.

Debt set­tle­ment com­pa­nies will also have to dis­close to cus­tomers how long it will take to get re­sults, how much it will cost, and any

neg­a­tive con­se­quences that could come from the process.

For ex­am­ple, cus­tomers can get buried deeper in debt when they hire a debt set­tle­ment com­pany. This is be­cause cus­tomers stop mak­ing pay­ments on their loans, and late fees and in­ter­est charges can con­tinue to pile up.

Debt set­tle­ment com­pa­nies that run afoul of the new reg­u­la­tions will be sub­ject to a $16,000 fine per vi­o­la­tion. The FTC’s rules ap­ply only to for-profit com­pa­nies, but the agency warned that it would go af­ter com­pa­nies that pose as non­prof­its as well.

Reg­u­la­tors cau­tioned cus­tomers to be wary of any or­ga­ni­za­tion that charges a steep up­front fee and makes prom­ises that sound too good to be true.

By com­par­i­son, non­profit credit coun­sel­ing agen­cies of­ten charge a com­par­a­tively small nom­i­nal fee for help man­ag­ing debt. The agen­cies ad­vise bor­row­ers to try ne­go­ti­at­ing di­rectly with cred­i­tors, rather than en­list­ing a debt set­tle­ment com­pany, es­pe­cially if they only have one or two loans.

Non­profit credit coun­selors can be lo­cated on the Na­tional Foun­da­tion for Credit Coun­sel­ing’s web­site (

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