FTC rule reins in debt-relief firms' fees

Companies selling debt-relief services over the telephone will no longer be allowed to charge up-front fees before they settle or reduce a customer's credit card or other unsecured debt.

For-profit companies offering debt-relief services, including credit counseling, debt settlement, and debt negotiation services are covered. Nonprofit firms are exempted,

Over the past decade, the Federal Trade Commission and state enforcers have filed a combined 259 cases to stop deceptive and abusive practices by debt-relief providers that have targeted consumers in financial distress.

Dean Fortmiller of Consumer Credit Counseling Service in Medford says some people who have had bad experiences with debt settlement companies eventually have turned to the local nonprofit for help.

"The experience we hear is that the bad debt settlement companies leave people in a worse financial situation than when they started," Fortmiller said. "They charge fees up front for services, collecting their fees while the client creditors are not getting paid."

Cable television and radio stations repeatedly air spots promoting debt settlement companies. "I called one as part of my research, and it didn't pencil out after I talked to the guy," Fortmiller said.

He said such abuses led the Oregon Legislature in the spring of 2009 to cap the amount of money a debt settlement or debt counseling agency could charge someone to set up a repayment plan.

Under the FTC's rule, fees for debt-relief services may not be collected until all of the following steps are completed:

  • 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 settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it; and
  • The consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt-relief provider.

The FTC specified how debt-relief providers can collect a fee for each settled debt. The provider's fee for a single debt must be in proportion to the total fee that would be charged if all debts had been settled. Alternatively, if the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer's debts.

For more information, see www.ftc.gov/bcp/edu/pubs/business/marketing/bus72.pdf.

Reach reporter Greg Stiles at 541-776-4463 or e-mail business@mailtribune.com.

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