FTC to Limit Debt Settlement Companies
Debt settlement firms saw the Federal Trade Commission step in make some significant changes to the debt relief industry. For the first time, the FTC has promised to impose new regulations that will prohibit most for-profit debt relief companies from charging a fee before they have reduced a client’s unsecured debts. The FTC says the new debt settlement program with the new rules will take effect Oct. 27. The new FTC law will prevent consumers from paying large up-front fees for debt settlement and debt negotiations that are not fulfilled. They do not limit the size of fees, only their timing.
Will the New Debt Settlement Rules Kill the Debt Relief Industry?
The debt settlement industry says the rules will force most debt relief firms out of business because it will take at least a year to collect any fees. “There are not a lot of debt settlement companies that can afford to spend month after month after month servicing clients without any money coming in,” says David Leuthold, executive director of the Association of Settlement Companies.
In a typical credit card debt settlement contract, the consumer stops paying his unsecured debts, such as credit card and medical bills, and starts putting money into a savings account that he controls. When there is enough funds in the account to settle one debt, typically after a year or more, the company negotiates with that creditor to accept less than the amount owed. This continues until all debts are settled, which in most cases takes eighteen months to three years. Today, most debt settlement companies charge clients a percentage of the debt they bring into the contract; 15 % to 20 % is common. Some demand the entire fee up front; others spread it over the first half of the contract period. If the client drops out before completion, and most do, he is out the fee and often deeper in debt. Instead of charging in advance, a few companies charge a portion of the debt reduced, typically 10% to 50%.
