Debt settlement companies generally charge consumers a percentage of their debt, often credit-card debt, in exchange for negotiating with lenders on the customers’ behalf. Some companies advertise aggressively, promising to cancel half of a customers’ debt or more. But, often, consumer advocates and the Better Business Bureau say, consumers going through debt settlement end up deeper in the red.

Starting Oct. 27, debt settlement companies that speak with clients over the phone will no longer be able to charge upfront fees. They need to better inform consumers about their fee structure, how long it might take to negotiate debts and possible bad outcomes. Additionally, any savings accounts that debt settlement companies ask customers to pay into (rather than paying their bills) need to remain in the customers’ name, in an independent bank, with the funds always accessible to the customer.

Consumer advocates applauded the change. “We commend the FTC commissioners for exercising their authority to lay down common-sense rules in the debt settlement arena, where unfair and deceptive practices are rampant,” said Michael Calhoun, the head of the Center for Responsible Lending. “Until now many debt settlement companies have required hefty fees — usually based on the size of the debt — at the beginning of a client relationship, before any of  the customer’s debts are settled. Far too often these companies never perform the task they were paid to do.”

The FTC plans to fine companies that violate the rules $16,000 per infraction. It also said it will go after companies posing as nonprofits.

Consumer credit card debt is approaching $1 trillion. (Flickr: doyoubleedlikeme)

Earlier this month, during the only vice-presidential debate of the year, Alaska Gov. Sarah Palin gazed into the camera and offered U.S. consumers some economic advice for confronting the financial crisis:

“Let’s do what our parents told us before we probably even got that first credit card,” the GOP hopeful said. “Don’t live outside of our means. We need to make sure that, as individuals, we’re taking personal responsibility through all of this.”

Consumers, it seems, are listening. For the first time in 17 years, retail sales have dropped for three months straight. Both for households and individuals, the trend might be good news: Many economists and consumer advocates have, for years, encouraged low- and middle-income people to pay down debts and save for stable futures.

Illustration by: Matt Mahurin

The trouble is, in an U.S. economy that’s overwhelmingly dependent on consumer spending — it accounts for 70 percent of gross domestic product– the reluctance of shoppers to open their pocketbooks only enhances the downturn.

“For any one household, that sounds like a good idea,” Steven Pearlstein, the Pulitzer Prize-winning business columnist for the Washington Post, wrote last month of families living within their means. “But if everyone cuts back at roughly the same time, a recession is almost inevitable.”

The genius of the U.S. economy has been this: It allowed people to buy things they couldn’t afford. More than three-quarters of U.S. households have credit cards. In May, the Federal Reserve estimated total debt on those cards to be $943 billion.

In recent years, the housing boom has been the primary driver of credit spending. Under the delusion that the price of homes would rise forever, homeowners refinanced, grabbed the equity and raced off to the islands or the mall. When the bubble burst, those dollars suddenly disappeared.

“It’s bad news for the economy because that’s what’s been fueling it,” Dean Baker, co-director of the Center for Economic and Policy Research, said of the housing boom. “There’s really nothing that can fill that gap.”

Nothing, many experts say, except another enormous federal intervention to get Main Street spending again. Heidi Shierholz, economist at the Economic Policy Institute, said such a package, to be effective, would have to create jobs, help states struggling with budget crunches and enhance safety-net programs like food stamps and low-income heating. She pointed to a figure, calculated by the American Society of Civil Engineers, that the nation’s infrastructure requires $1.6 trillion over the next five years just to get it into good condition.

“These are projects that need to be done anyway,” Shierholz said. “It’s the perfect opportunity for the government to step in and get it done. This is [its] role.”

Last month, House Democrats pushed a second stimulus package through the lower chamber. The $58-billion bill included an extension of unemployment benefits, billions of dollars for infrastructure projects and expanded funding for social services programs like food stamps and Medicaid. President George W. Bush had threatened to veto the bill but never got the chance. Senate Republicans killed it first.

Experts say that bill would fall far short of what’s necessary to jump-start the economy. “It doesn’t even approach the size of what we need,” Shierholz said. Both Shierholz and Baker estimated it would take between $300 billion and $400 billion in targeted new federal spending to do the job.

If trends continue, Congress may not have a choice. Retail sales fell 1.2 percent in September, the Federal Reserve reported this week — the steepest drop in three years. That marks the third consecutive month of decreased retail sales — the first quarter-long slump since 1992. Whether out of fear, prudence or poverty, Americans are spending less than they have in years.

Many observers blame the Bush administration for encouraging spending that families couldn’t afford — not without evidence. In September 2001, for example, with the nation just attacked and Americans scouring for ways to lend a hand, Bush took a podium in Chicago and told Americans to “get down to DisneyWorld in Florida. Take your families and enjoy life, the way we want it to be enjoyed.”

In December 2006, before the housing bubble burst and the credit markets froze, he made another simple request to American consumers: “A recent report on retail sales shows a strong beginning to the holiday shopping season across the country,” Bush said, “and I encourage you all to go shopping more.”

Messages like those have confused consumers — not sure if they should save for the sake of their families or spend for the sake of U.S. economy.

In a policy paper issued last month by the New America Foundation, researchers Reid Cramer, Rourke O’Brien and Alejandra Lopez-Fernandini summarize the trend: “Millions of low-income Americans,” they wrote, “are hearing two conflicting messages from their government: Save and Don’t Save.”

Democratic leaders have vowed to return to Washington after the elections to take another shot at passing a second economic stimulus bill. Many experts predict they’ll have to pass something, if only to create the appearance that they’ve taken on the crisis before Congress adjourns for the year. The White House remains resistant to the approach, but some observers anticipate Bush will abandon his reservations if the economy continues to tank.

“He’s already hugely unpopular,” said Baker. “I don’t think he wants to make matters worse.”

The percentage of credit card delinquencies rose in the first quarter to 4.51 percent, up from 4.41 percent a year earlier, The Journal said. Revolving debt, which mainly consists of the balances on credit cards, rose in July at a 4.8 percent clip, a jump from June’s 3.5 percent jump.

Credit card companies, in turn, are trying new tactics to get their money, even to the point of going after people late on just one payment,

The Journal said:

For their part, banks are under tremendous pressure to shore up their balance sheets amid an onslaught of bad loans and mortgages. Financial institutions are responding by working past-due accounts more aggressively. They are putting their best collectors on their toughest-to-collect accounts (those that are at least 60 or 90 days past due), hiring outsourcing firms to supplement their internal efforts and putting new hires on accounts that are in the early stages of delinquencies.

These moves comes are banks are being stung by losses on bad loans and mortgages. It’s another example of how the credit crunch is becoming something consumers are dealing with in their everyday financial lives.

As we explained in our story today, both presidential candidates so far have avoiding dealing with the credit crunch as a campaign issue. With more people having trouble paying their credit card bills, and facing newly agressive collections efforts because of it, they may not be able to for much longer.