Advance-Fees Banned for Debt-Relief Agencies

Consumers will soon be protected from paying advance fees to telemarketing companies who promise to help alleviate debt problems, the Federal Trade Commission reported on Thursday.

The FTC’s new rules apply to for-profit companies that sell their services over the phone, and also extends the Telemarketing Sales Rule to apply to inbound calls from consumers when consumers respond to advertising by the debt-relief companies. Credit counseling, debt settlement, and debt negotiation companies that aim to reduce consumers’ credit card and other unsecured debt are affected by the new rules.

The rules ban companies from charging fees to consumers before they actually receive services of reduced debt or debt settlement, starting on October 27, 2010.

And starting a month earlier on September 27, 2010, companies will be barred from making misrepresentations that have been common in the industry, such as success rates and whether or not the company is a for-profit agency.

Debt relief companies will also be required to disclose specifics to the consumer about the level of service they will be receiving, including how long it should take for consumers to see results, the cost involved in using debt-relief services, the negative consequences of using debt-relief services, and key information about using “dedicated accounts” if they choose to require them.

Debt-relief companies won’t be allowed to charge fees in advance, but they will be allowed to require customers to set aside fees and payments to creditors in a dedicated account as long as the following conditions are met: the account is held at an insured financial institution, the consumer owns the funds and any interest earned, the consumer can withdraw the funds at any time without penalty, the provider does not own, control, or have any affiliation with the company administering the account, and the provider does not exchange any referral fees with the company administering the account.

And to prevent debt-relief companies from front-loading their services with fees if a consumer enter multiple debts into one debt-relief program, the FTC rules also spell out how debt-relief providers can collect their fee for each settled debt. The provider’s fee for a single debt must be in proportion to what it would have been if the provider had settled all the debts for the consumer.

And if the debt-relief provider charges a percentage of what the consumer saved by using the debt-relief services, the percentage charged must be the same for each of the consumer’s debts.

According to information released in an FTC report, nearly two-thirds of consumers who paid in advance for debt relief services dropped out of the program within the first three years and never received the services they paid for. And the consumers’ cost for these services may range from several hundred to several thousand dollars, depending on their level of debt and the laws of the state they live in.

“At the FTC we strive every day to make sure America’s middle class families get straight deals for their dollars,” Chairman Jon Leibowitz said. “This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up-front fees. Too many of these companies pick the last dollar out of consumers’ pockets – and far from leaving them better off, push them deeper into debt, even bankruptcy.”

These new protections are an important step in making sure consumers are getting the facts about the kind of service they can expect from a debt-relief company, while preventing for-profit agencies from taking advantage of somebody who already has financial troubles.

But before even considering using the services of an agency, keep in mind that they are a business out to make money, and that there is nothing they can do that you can’t do for yourself for free. They simply act as a middle-man to tell your creditors that you can’t pay in full and that you need your creditors to work with you. There’s no reason why you can’t tell your creditors that yourself - if you haven’t paid your debts to them yet, you’re not going to be telling them anything they don’t already suspect.

And by calling them yourself, you are showing that you are a responsible individual who wants to take care of your finances. You may get just a little more empathy for that reason alone, as long as you fully intend to follow through on your promises to pay.

For more information on how to proceed without the use of a debt-relief agency, hit the link below for the related article on Debt Settlement.


Source:
Federal Trade Commission