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Debt Settlement Rules from the FTC

Although the recession caused the first annual drops in US household aggregate debt in more than 50 years in 2009, 2010 and 2011, according to market research firm IBISWorld, total debt still grew at a an annualized rate of 0.2% over the past five years as the recession halted consumer spending and encouraged them to save.

As the economy slowly improves and consumer confidence returns, however, debt levels are forecast to expand at a faster rate over the next five years, pushing aggregate household debt from $13.62 trillion in 2012 to a record $16.28 trillion in 2017, also according to IBISWorld.

As Americans become more willing to build debt to pay for large assets and projects that they put on hold during the recession, they’ll also be more likely to require debt consolidation services to pay off mounting debt. Fortunately for them, there are many options out there and the Federal Trade Commission continues to act on their behalf.

In fact, amendments to former debt relief regulation have been playing out over the past two years. On behalf of Americans looking to gain control of and reduce their debt through consolidation companies, the FTC issued the Final Rule (provisions if the Telemarketing Sales Rule), which covers for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services.

Taking effect in September and October 2010, the Final Rule includes the following regulations:

Customers are not required to pay an advance fee.

According to the FTC, payment may only be collected after:

  • at least one of the customer’s debt obligations has been renegotiated, settled, reduced or issued new terms
  • a written settlement agreement, debt-management plan or other agreement has been made between the customer and the creditor
  • the customer has made at least one payment to the creditor following the agreement that the service provider negotiated

Once these are achieved, the debt relief provider’s fee for a single debt “must be in proportion to the total fee that would be charged if all the debts had been settled,” says the FTC. Alternatively, if the fee is based on the percentage of what the consumer saves, “the percentage charged must be the same for each of the consumer’s debts.”

Customers are required to put fees and savings in a dedicated account.

In the past, fees and payments went into an “escrow account” or “savings account,” but neither were established at a true bank account. Under the new rules, the FTC stipulates that providers may only require a dedicated account as long as:

  • the account is established at an insured financial institution
  • the customer owns the funds, including any interest accrued
  • the consumer can withdraw the funds at any time without penalty
  • the provider does have any affiliation with the financial institution
  • the provider does not exchange any referral fees with the financial institution

Customers must be made aware of various monetary and program details.

According to the FTC and CreditInfoCenter.com, providers must make several disclosures when marketing their services to customers before they sign up for any debt-relief services. The providers must disclose:

  • how much it will cost and any refund policies
  • how much money customers will need to save up in order to settle
  • any effect on credit, potential of lawsuit or possible tax consequences
  • key information about dedicated accounts
  • whether the provider is a for-profit or nonprofit entity
  • how long it will take for consumers to see results
  • accurate estimates of how much money a consumer will save

In determining potential customer savings, firms must accurately estimate the success rates of their clients, says CreditInfoCenter.com. And “claims about how much money consumers can save must be based on the firm’s actual experience with all clients.”

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