The Federal Trade Commission (FTC) this week put in place new rules to address deceptive practices by debt settlement firms.

Recent economic conditions have caused more consumers to seek assistance from debt settlement companies to solve their financial problems. Rather than reducing consumers’ debt burdens, debt settlement firms often charge hefty fees and fail to leave consumers in healthier financial positions.

With the new FTC rules governing debt settlement firms, consumers could start to see some better results in the search for debt relief.

Consumers were advised by debt management firms to fund special savings accounts designed for negotiations toward debt settlement. These deceptive practices by debt settlement firms included withdrawing money from these savings accounts to cover fees despite never having reached a settlement agreement.

New Disclosure Requirement

The new rules that went into effect this week are very similar to the new credit card laws that increase transparency on how these companies operate.

Debt settlement companies are required to inform consumers of how long it will take to reduce the debt, when the firm will enter settlement negotiations with creditors, and how much money consumers should set aside before making a settlement offer.

Also, debt settlement firms have to tell consumers the negative consequences of failing to making payments to outstanding creditors.

New Limits on Advance Fees (beginning October 27)

Debt settlement companies will be prohibited from collecting fees for their services until at least part of the consumer’s debt has been settled. No fees may be charged until a settlement is agreed upon in writing with the consumer. Furthermore, fees may not be collected until the consumer makes a payment toward the negotiated settlement agreement.

The fees that the debt settlement agency may collect are determined in proportion to the amount of debt that is settled. If a firm is expected to charge $100 to reduce $2,000 from a $10,000 balance but was only able to reduce the balance by $1,000 (50% of $2,000), the consumer will pay a $50 fee (50% of $100). If a debt settlement agency requires the consumer to establish an escrow account, it must inform the consumer that he or she maintains ownership and control of the account and has every right to withdraw from it at anytime.

Although these new FTC rules may represent a step forward, nothing is stopping debt settlement firms from charging absurdly high fees for their services. Legislation that would cap debt settlement fees is still in the works after being proposed by consumer advocates.

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