The Federal Trade Commission (FTC) has issued new rules for Debt Relief Service companies, effective October 27, 2010. These new rules will change the way many do business, and many will no longer be able to do business under the new rules.
A Debt Relief Service company covered under the new rules is a for profit company that engages in the business of offering or implying to offer to reduce, renegotiate or otherwise change the terms of a consumer’s debt repayment with an unsecured creditor. Most debt relief services work as follows, a consumer will begin to pay money into an account controlled by the debt service company, in lieu of a monthly payment to their credit card company. Once a sufficient amount of money is paid, the debt service company will attempt to reconcile the debt with the creditor for a lowered amount, or reduced interest or fees. The debt service company will receive a fee from the amount paid by the consumer.
The type of services covered under the new rules are companies that promise to 1) work with a creditor to settle the debt for a lesser amount than is owed, (debt settlement companies) 2) work with all of a consumer’s unsecured creditors to promulgate a debt management plan to vary the terms of all such debts, under a debt management plan (debt management companies) and 3) negotiate with a creditor to lower the interest rate of the outstanding debt and/or waiver of certain debt fees, such as late fees or over the limit fees (debt negotiation companies). Not for profit companies are exempt from the new rules, and the new rules only apply to those companies that deal in interstate telemarketing.
The major rule change is the inability of the company to charge fees before settlement is successful. In the past, it was common for debt relief service to collect fees up front, in part to insure the client was serious about continuing with a debt plan, whether it was a settlement, a debt management or debt negotiation plan. Now, debt relief service can no longer charge up front fees, and can only charge a fee when a plan is successful. How many companies will be willing to engage in business in this manner is unknown, but surely many will cease to do business.
In addition, the new rules will require the debt service company to segregate the funds of the client in a separate account, owned by the client, in which the client has the absolute ability to withdraw the funds. Though most debt relief service already use separate accounts for client funds, the ability of the client to withdraw funds from the account will hinder many debt plans. Without funds on hand to negotiate with a creditor, the debt service plans may become useless. In addition, should the consumer withdraw their money, the debt service company would not be paid a fee, regardless of the work they had performed.
Debt relief services will also be required to make certain disclosures to consumers. They will be required to disclose how long the process may take, that creditors may proceed with further collection efforts, that interest and fees may continue to accrue on their credit accounts, and adverse consequences on their credit scores, if any. Since most debt relief service providers will disclose these things anyway, it may not have an adverse effect in the manner in which they do business.
The rules on fees and ability of the consumer to have total access to a debt service account may prevent some companies from doing further business, thereby limiting options of distressed consumers with credit repayment options. Because some companies would not be able to wait for their fees until final resolution of matter, or worse, not be paid at all if the consumer prematurely withdraws their funds, many will no longer be able to do business.