New FTC Debt Settlement Rules

Earlier this week, new FTC rules aimed at debt settlement companies went into effect. These rules are aimed at preventing firms from mis-representing themselves to consumers.

Over the past couple of years, as the country sank into recession, the debt settlement industry boomed. This explosion was accompanied marketing campaigns promising to wipe away the majority of your debt with minimal downside.

But is that really the case? As I’ve noted in the past, there are a number of dangers associated with debt settlement, including damage to your credit score, income tax consequences, and the threat of lawsuits. Oh, and don’t forget the fees.

With the FTC’s new rules in place, however, debt settlement companies have to reign in their marketing. Among other things, they’re now required to disclose:

  • How long it will take to see results
  • How much it will cost
  • The negative effect of debt settlement on your credit record
  • Key details related to any “dedicated” accounts that might be used to hold the consumer’s cash during the debt settlement process

They’re also specifically prohibited from misrepresenting their services by, for example, promising to wipe away half your debt with few or no consequences. The FTC is also extending the rules governing telemarketing in this area to include calls inbound calls that you make to the company.

Another major change, effective October 27th, is that debt settlement companies won’t be able to collect advance payment. In other words, they’ll have to actually do something before getting paid instead of skimming their fees off the top before making any payments, negotiating better terms, etc.

All in all, I’d have to say that these rules are a step in the right direction, though some have questioned if they really go far enough.

What do you think? Should the FTC be stepping in to protect consumers from debt settlement companies? If so, do these new rules go far enough?


2 Responses to “New FTC Debt Settlement Rules”

  1. Anonymous

    People get out of debt by spending less than they earn, period. This is the same government that required the banks to disclose their interest rates, which we all happily ignored when we signed up for all of those credit cards and 90 days same as cash deals in the first place.
    I’m not advocating the practices of these companies, but I don’t think it’s the government’s job to save us from these guys. These companies were built because they learned to take advantage of government created loopholes. This just makes another loophole.
    I have friends who used to work in student loans. When the government took that industry over, they either moved to Credit Card Collections or Debt Consolidation companies. Trust me, they would rather have their old jobs back!
    Seems the government would rather we live off food stamps than paychecks.

  2. Anonymous

    I do think these laws are a step in the right direction to help people get out of debt and back on the right track. Companies shouldn’t be able to outright lie to people. But I read that they only apply to telephone debt settlement companies, not online. I don’t understand why there’s a difference. But I do think it should be made perfectly clear to people that the debt that’s forgiven will be counted as income for tax purposes.

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