Good news for those struggling to pay their bills: all of the new Federal Trade Commission regulations to help protect financially-desperate families from deceptive offers for debt relief will go into effect on October 27. While the new rule will have a significant impact on reducing predatory debt relief, BBB advises consumers that they still need to use caution when enlisting the help of a third party to get out of debt.
Since the start of the recession in December of 2007, BBB has received more than 6,000 complaints from consumers about debt relief or debt settlement companies. Typically, complainants say they were charged large up-front fees in exchange for the empty promise that the company would significantly reduce or eliminate their debt. Remember the commercials – “we can reduce your debt by 50-60 even 70 percent”!!! False promises hurt!
Here’s a story from a Maryland resident who used a California based Debt Settlement Firm:
“I contacted the company to help me with my bills. They informed me that they could help me. I had to pay them $3,910.64 before they could help me and I had to stop paying my bills that I was current with. They stayed in contact with me and kept me happy until they received their money. In April 2009, I received my first offer that I had to make four payments of 975.00 plus 200.79 for their commission. I was able to make the first payment but I was not able to make the rest. I notified the company that the amount was too much to handle. In August 2009, the company came up with three offers at the same time. This was great but too late. All the settlement offers I received were more than what I could afford. One of the offers from Chase was $5,000.00 a months for 4 months. This did not include the commission for the company. Since the bills were mounting and the company was not helping me, I have filed for Bankruptcy. the company did not deliver what they promised me. They took $3910.64 from me and I never was able to pay one credit card off.”
(1) Under the new rule, any company that solicits debt relief services over the phone—including taking incoming calls from new customers—will not be able to charge upfront fees until:
- 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; and
- the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
(2) Additionally, debt relief providers cannot require that consumers set aside payments in a “dedicated account” unless:
- the dedicated account is maintained at an insured financial institution;
- the consumer owns the funds (including any interest accrued);
- the consumer can withdraw the funds at any time without penalty;
- the provider does not own or control or have any affiliation with the company administering the account; and
- the provider does not exchange any referral fees with the company administering the account.
(3) Finally, before the consumer signs up for any debt relief service, providers must disclose fundamental aspects of their services, including how long it will take for consumers to see results, how much it will cost, the negative consequences that could result from using debt relief services, and key information about dedicated accounts if they choose to require them.
Before enlisting the help of a business to settle or negotiate your debt, BBB offers the following advice for consumers.
- Contact your lender first. Try to work out an agreement directly with your lenders before enlisting outside help.
- Seek help from a non-profit credit counseling center – Credit counseling centers can provide guidance for little or even no cost. You can find a credit counseling center near you at the National Foundation for Credit Counseling, www.nfcc.org.
- Consider debt settlement only as a last resort before filing for bankruptcy. The debt settlement process can take years and have a severely negative impact on your credit rating and can limit your access to future credit. In the meantime, your credit card company or other creditors can decide to take you to court and garnish your wages. It is best to avoid these potential consequences if you have other workable alternatives to dealing with your debt.
- Research the debt settlement firm with BBB first. Find out how many complaints it has received, how the firm responded to complaints and whether or not there are any recent government actions or lawsuits against the company.