FTC's New Debt Settlement Protections For Consumers Begin Today

Improved Disclosure Requirements Start Today, Tougher Rules on Fees Begin on October 27

Starting September 27:  New Disclosure Requirements

Starting today, debt settlement firms must disclose to consumers the time it will take to reduce the debt, when the firm will negotiate a settlement with creditors, and how much money consumers must set aside before a settlement offer will be made.  Debt settlement firms also must tell consumers about the negative consequences of not making payments to outstanding creditors, such as being subject to collections or lawsuits, decreased creditworthiness, and increased debt.

Starting October 27:  New Limits on Advance Fees

Beginning on October 27, new rules will go into effect that will prohibit debt settlement firms from collecting fees for their services until they have settled some or all of a consumer's debt.  Under the new rules, a debt settlement company cannot charge any fees until it reaches a settlement on at least one of the consumer's debts that the consumer agrees to in writing.  Fees cannot be collected until the consumer has made at least one payment to the creditor as a result of the negotiated agreement. 

If one portion of the debt is settled, the fee will be limited to a proportion of what the total fee would have been if the entire debt was settled or a percentage of the amount saved by the settlement.

If the debt settlement service requires the consumer to place funds in an escrow account, it must disclose that the fund is owned and controlled by the consumer and that the funds can be withdrawn at any time without penalty. 

While the new FTC regulation will ensure that debt settlement companies only get paid if they help consumers, it does not stop them from charging outrageously high fees.  Consumers Union supports legislation to cap debt settlement fees to a reasonable percentage of the actual savings for consumers.  

"The FTC's new rules will put an end to advance fees but more needs to be done to limit the amount of fees that can be charged for debt settlement services," said Pamela Banks, Policy Counsel for Consumers Union.  "Lawmakers should cap fees so consumers who are already drowning in debt don't have to pay a steep price to get a fair debt settlement."