"Are you having trouble paying your mortgage, car loan or credit cards? There are organizations that can help. Some will help make your situation better. Some will help make it worse."
This was the opening paragraph of a column I wrote last year. I'm happy to report that the Federal Trade Commission has passed new regulations targeting the companies whose "help" would only make your financial situation worse.
Since the recession started, Better Business Bureaus have received thousands of complaints from consumers about debt relief companies. Many paid large upfront fees in exchange for the empty promise that the company would significantly reduce or eliminate their debt.
In my column, I talked about a company that charged a California man $4,800 to save his house from foreclosure; he ended up losing his money and his house. The company's headquarters was a mailbox in Cordova, Tenn.
The new FTC regulations specifically cover telemarketers of for-profit services that go by a variety of names -- debt relief, debt settlement, debt renegotiation and so forth. It does not cover nonprofit credit counselors or businesses, such as some attorneys, that contract with customers in face-to-face meetings.
Before a consumer signs up with a debt relief company, it must disclose fundamental aspects of its services. These include how long it will take for consumers to see results, the cost, and the negative consequences that could result from using the service. There are also rules governing the administration of dedicated bank accounts that the debt relief provider requires for collecting payments from clients. In particular, the client must own the account and be able to withdraw the funds at any time without penalty.
Perhaps the most important provision of the new rules is the ban on upfront fees. Fees for debt relief services may not be collected until:
The debt relief service successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of the consumer's debts;
There is a written agreement between the consumer and the creditor; and
The consumer has made at least one payment to the creditor as a result of the agreement.
The rules prevent the front-loading of fees after providing minimal services. The fee for a single debt must be in proportion to the total fees that would be charged if all debts had been settled, or be based on a uniform percentage of what the consumer saves as a result of using the debt relief services.
These new rules will go a long way toward protecting people who are struggling to pay their bills, but consumers still need to use caution when enlisting the help of a debt relief service. The debt relief industry has flourished in the current economy, and you can bet that many unscrupulous companies are feverishly trying to figure out ways to get around the new laws, such as relying less on telemarketing to solicit new customers.
Check out any debt relief company with the BBB. It will not get a passing grade unless it submits documentation to us that proves it complies with the FTC rules, including the ban on upfront fees and substantiation for advertising claims about its rate of success in reducing its clients' debts.
Randy Hutchinson is the president and CEO of the Better Business Bureau of the Mid-South. Reach him at rhutchinson@bbbmidsouth.org.
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