Starting Monday, you may not hear as many of those annoying ads promising you can “settle debts for pennies on the dollar,” or pitching a “government bailout program” for consumers with credit card debt.
That’s when the FTC’s new “Debt Relief Rule” goes into effect. Here are the key protections it offers:
Proposed Fees must be disclosed along with refund policies. Guestimates or ranges (“as little as”) don’t count. Instead, the proposed fees must be must be based on results the firm expects to get based on experiences with that consumer’s individual creditors.
Estimated Time Frame: Debtors must be given a good faith estimate describing how long it is likely to take to settle their debts based on their debts, and their ability to save money to settle.
Savings Required: Firms must estimate how much money prospective clients will have to save up in order to settle. Again, this has to be based on what kinds of settlements creditors are actually accepting.
The Downside: Consumers must be given warnings that include the likely damage to their credit reports, the potential risk of lawsuits, and possible tax consequences.
This is the part that should stop those misleading ads. Claims about how much money consumers can save must be based on the firm’s actual experience with all clients, not just the “best” examples. That means they have to include clients who dropped out when calculating success rates. And firms must subtract out fees from promised savings.
Dedicated Savings Accounts
With settlement, consumers typically stop paying their debts, then put that money into a savings account. If the debt relief company directs clients to save money in a “dedicated account,” those accounts must be maintained at an insured financial institution (for example, an FDIC-insured bank); clients must have total control over the money and the ability to withdraw it at any time, and the debt relief company can’t receive or pay referral fees from or to the company that administers the account.
Upfront fees will be banned October 27, 2010.
You’ll find more details in our Consumer Guide to FTC Rules, and you can use our revised guide, Fourteen Questions to Ask a Debt Settlement Company to help you choose a debt negotiation company.
I am no so naïve as to think that this will weed out all the bad actors. After all, fourteen years ago this month the President signed the Credit Repair Organizations Act to stop fraudulent credit repair schemes, yet state and federal regulators are still cracking down on credit repair scams.
But this isn’t a bad starting point at all.
Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.