The Federal Trade Commission has put new rules into place to protect consumers from certain practices by credit card debt settlement firms. Primarily, the new rules ban all up-front fees by debt settlement firms. However, the intent is to broadly guarantee that consumers don’t have to pay for debt settlement services that are never provided.

However, as a recent article on Bankrate.com warns, there are a couple of limitations that could limit the effectiveness of the rules, so consumers should still be cautious when dealing with debt settlement companies.

Ban on Up-Front Fees Doesn’t Go Into Effect Until October 27

Most of the protections of the new law went into effect on September 27, but the ban on credit card debt settlement companies charging up-front fees has been delayed until October 27.

Any state laws that are stricter than the new federal rule will still apply. 20 states already have rules prohibiting up-front fees and excessive charges for credit card debt settlement services, and those won’t change.

“I would suggest that consumers don’t do business with any debt relief service that asks them to pay a fee in advance before the debt relief is actually achieved,” says Susan Grant, director of consumer protection at the Consumer Federation of America in Washington, D.C.

“Until and unless your debt problems are actually resolved, what are you paying for?”

Rule Only Protects Consumers, But Only During ‘Telemarketing Sales’

The Federal Trade Commission rule is called the Telemarketing Sales Rule, or TSR. It only applies to services sold over the telephone by for-profit companies. Face-to-face sales of debt settlement services are completely exempt from the rule.

According to Allison Brown, a senior attorney at the FTC, both inbound and outbound telephone calls will be covered, so consumers who call for-profit debt settlement firms because they see the number on an ad will be protected by the rule. She also believes that a Web-based chat that relies on telephone technology would be covered, but not communications purely via e-mail or directly on a website.

The rule protects consumers in five ways:

  • For-profit companies promising to help consumers negotiate with creditors cannot be paid unless three conditions are met:

    1. The company must successfully reduce or settle at least one of the consumer’s debts.
    2. The consumer must agree to at least one debt management plan with a creditor.
    3. The consumer must make at least one payment under that plan.

  • Once those conditions are met, a fee can be charged, but it has to be proportional to what would have been charged if the consumer settled all of his or her debts in the same way. That way, the consumer doesn’t have to pay a big, front-loaded fee even though only one of the debts was settled.
  • Debt settlement firms can no longer make some common misrepresentations about their services.
  • The companies can require set-aside accounts but have to comply with new rules on when and how they can access those accounts.
  • The companies must tell the consumers in advance how much the service will cost, how long it will take to get results, how they will manage the debt settlement account, and what negative consequences there could be from settling the debt.

Source: Bankrate.com, “FTC bans upfront debt settlement fees,” Marcie Geffner, October 20, 2010