FTC Bans Advance Fees for Debt Relief Firms

The new Telemarketing Sales Rule of the Federal Trade Commission is set to give a tough fight to the menace of debt relief scams from September 2010. Growing debt relief scams have become a severe threat to distressed consumers looking for some solution to their debt problems. Numerous consumer complaints lodged with the FTC state how shady debt relief companies coax the debt-stricken consumers into their programs over the telephone and promise to make them debt-free in exchange for a lump sum upfront fee.

Over time, the consumers scrape up their last penny to meet the fees but do not receive the promised services. The situation takes the worst turn when the consumers land up in deeper debt, face lawsuits, and fail to retrieve the money from the debt settlement company.

Over the past decade, the FTC and state enforcers have brought a combined 259 cases to fight the malpractices by debt relief providers that have targeted financially strapped consumers. The new FTC rules are primarily formulated to deal with such debt relief malpractices effectively.

The rules will:

  • The debt relief companies must be transparent in their dealings and make all the required disclosures to their clients.
  • Stop them from misrepresentation, especially regarding the savings consumers expect from a debt relief service.
  • Include the calls that consumers make in response to debt relief advertisements.
  • Prohibit the companies from charging any upfront fee for their debt relief services. While the first three regulations will take effect on September 27, 2010, the last provision will take effect in October this year and apply specifically to for-profit companies.

The Ban On Upfront fee The ban on upfront fees holds the maximum significance. It elaborately outlines the specific requirements and conditions that the debt relief providers need to abide by while collecting the fees for their services.

  • Firstly, a debt relief company will not be allowed to collect a fee until and unless.
  • The company completes the debt relief service.
  • There is a formal agreement between the creditor and the consumer regarding the debt relief plan, and the consumer has agreed to it.
  • The consumer has made at least one payment to the creditor per the agreement arbitrated by the debt relief company.
  • Secondly, the debt relief provider must not charge an exorbitant amount; the service fee must be proportionate to the outstanding debts settled.
  • If a provider bases its fees on the percentage of the settled amount, then that percentage must be the same for every debt settled for a particular consumer.
  • The rule also sets regulations on "dedicated accounts" that the consumers must make to set aside their fees and savings.

A debt relief provider can require the consumer to have a dedicated account, provided:

  • The account is at an insured financial institution.
  • The consumer owns the funds (interests included) and can deal with them anytime without penalty.
  • The debt relief provider does not have any affiliation with the institution that maintains the account.
  • The debt relief provider does not exchange referral charges with the institution holding the account.

The Pros and Cons The new rules have been warmly supported by the consumer groups, and they indeed assert FTC's yet another attempt to ensure straight deals for the debt-stricken consumers. But a hitch still lies.

Despite the emphasis given to proportionate service fees, the services charges are still exposed to the discretion of the debt relief provider.

Some stringent measures need to be taken to limit the service fees to an amount that is affordable to American middle-class consumers. Another snag that questions the fruitfulness of the provision prohibiting advance fees is that it is applicable only in cases where the consumer makes calls in response to some debt relief advertisement or the debt relief provider persuades the consumer on the telephone.

Situations where agreements are made online or face-to-face are not addressed by the new Telemarketing Sales Rule.

Nevertheless, the new Telemarketing Sales Rule comes as a great hope for the consumers, who expect some positive changes in the business approach of the American debt relief industry.

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