Many of us have seen ads by debt-settlement firms promising to reduce our debts for pennies on the dollar. We see this in TV ads as well as in flyers we receive in our mailboxes. For a person in debt, these offers appear to be very enticing.
The reality, however, is that there have been thousands of consumer complaints against these companies. In fact, debt-settlement companies have been charged in more than 250 federal and state false-advertising cases in the last several years. This is a very high percentage considering that there is about an estimated 1,000 debt settlement companies across the country. Thus, the FTC (Federal Trade Commission) has imposed new rules on companies that purport to help borrowers get rid of their debts. These new rules are aimed at addressing the numerous complaints against these companies that charge huge fees but fail to reduce the customers’ debts.
In announcing these new rules, John Leibowitz, Chairman of the FTC, said in a statement announcing the new regulations: “Too many of these companies pick the last dollar out of consumers” pockets and, far from leaving them better off, push them deeper into debt, even bankruptcy”.
There are three major components on the new rules.
The biggest change imposed by the new rules is that debt-settlement companies will be barred from collecting upfront fees. In the past, these companies collected fees and customers ended up without a single negotiated debt agreement. This is now prohibited. Companies may only collect fees after the successful renegotiation, reduction or settlement of debts.
The second change in the new rule is the requirement that if consumers pay into an account as part of a settlement agreement, the account must be in the name of and controlled by the consumer, rather than controlled by the debt-settlement company. In the past, this was a source of abuse. Many consumers would make monthly payments to the debt-settlement company thinking that their debt was being paid. The reality, however, was that the debt-settlement companies were just accumulating the payments in an account without paying a single penny to the creditor. In the end, a lot of consumers became victims when the money in these accounts were absconded with and the consumer left with nothing. The monthly payments they made were gone and they are still left with even more debts, now with additional interest and penalties tacked on.
The third change is that settlement companies will be required to spell out the negative potential consequences of a settlement. It requires companies to disclose how much the process could cost and how long it may take consumers to see results. In addition, advertising claims have also been restricted.
The disclosure rules take effect on September 27 while the new regulations preventing advance payment take effect on October 27. Until these rules take effect, consumers should beware of debt settlement offers that do not give the protection imposed by these new rules.
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com
