FTC Restricts Debt Settlement Industry

Today, the Federal Trade Commission announced new restrictions for for-profit companies that consolidate, reduce and eliminate debt on consumers’ behalf.

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.