Consumers facing debt problems continue to look for debt relief, and based on the latest statistics, some are finding it. According to a recent Wall Street Journal article, US families have a lower debt burden than at any time in the last six years.
Good news? Not necessarily. That debt reduction is largely the result of a combination of settlement agreements, write-offs from lenders and defaults on mortgages and credit cards. In addition, some unscrupulous debt relief companies continue to try to take advantage of consumers facing a difficult financial situation.
In October 2010, the FTC acted to remedy the situation with new rules targeted at unethical debt relief companies, dramatically changing the nature of the entire industry. The new FTC rules prohibit debt relief companies that sell services over the phone from charging an advance fee. In addition, the new provisions prohibit debt relief companies from making misrepresentations, require specific disclosures to be made to consumers, and extend the Telemarketing Sales Rule (TSR) to cover calls consumers make to debt relief service firms in response to advertisements.
Government’s Covert Investigation Highlights Unscrupulous Debt Relief Companies
Legitimate debt relief programs will get a boost from the new measure, especially after a Senate committee requested that the US Government Accountability Office (GAO) conduct a covert investigation into allegations of fraud and deceptive practices. As part of the investigation, the GAO called on 20 companies, posing as debt-laden consumers. According to the GAO report, most of the debt relief programs chosen as part of the investigation focused on collecting advance fees, and encouraging consumers to stop payments to creditors.
Of the 20 firms investigated, 17 collected advance fees before any debts were settled. Of those 17, several noted that the consumers’ monthly payments would go entirely towards the debt relief company’s fees for up to the first four months, before any money at all was put aside for debt repayment. Only one of the 20 collected its fees after the debt had been reduced.
Beware of Debt Relief Services that Request Advance Fees
Legitimate debt relief companies seldom ask for advance fees. Now the new FTC rules prohibit the practice entirely, a sweeping measure that will put the majority of unscrupulous debt relief companies out of business, or at least force them to change their ways.
The rule mandates that the debt relief service cannot collect any payment until:
- The debt relief company has been successful in negotiating at least one of the consumer’s debts.
- A written agreement has been executed between the consumer and creditor.
- The consumer has made at least one payment to the creditor as a result of the new agreement.
The law also states that the fees for a single debt have to be in proportion to the total fee for all debts, so that the debt relief service cannot charge a full fee after settling just one debt.
“Stop paying your bills!” Is it sound debt relief advice?
Many unscrupulous debt relief companies investigated in the GAO report encouraged consumers to stop paying creditors before starting on the debt relief program, including payments that were current. The advice of the questionable debt settlement companies focused on putting money aside every month in an account maintained by the service provider (which only went toward debt settlement after the fees had been collected). While unsavory firms offer such advice, legitimate debt relief companies typically offer more reasonable measures.
Stopping payments (and putting all funds into an advance fee) will have two major repercussions. First, it will make a bad situation worse by lowering the consumer’s FICO score. A consumer calling on a debt relief agency is very likely to already have a low credit score; intentionally falling further behind, and stopping payments on current accounts, will only lower it further and make recovery even more difficult. Second, it increases the likelihood of legal action being taken by creditors.
Rather than stopping all payments and communications with creditors for a period of several months, legitimate debt relief companies encourage an open dialog between the service company, the consumer and the creditors; and a quick agreement on a reasonable payment schedule.
Consumers Still Need to Protect Themselves
The new FTC rule provides some welcome relief to consumers burdened by excessive debt, but due diligence must still be practiced when engaging a debt relief service. The final rule only covers for-profit firms; many debt settlement agencies claim non-profit status to circumvent rules.
The FTC has been aggressive about pursuing abusive debt relief providers, having brought 259 cases over the past decade. With continued action on the part of the FTC, the new rules, and proper due diligence, a consumer will be able to leverage the services of a legitimate debt relief agency and successfully work towards creating a new and more successful financial profile.
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