Ban on Advance Fees Fights Fraud, Helps ConsumersThursday, October 07, 2010

New Rules Protecting Consumers from Debt Relief Scams Going into Effect

ATLANTA, GA — Under new rules from the Federal Trade Commission, consumers have enhanced protection from for-profit companies claiming to be able to reduce or eliminate debt. Most notably, companies that sell debt relief services over the telephone can no longer charge consumers a fee before they settle or reduce their debt balance. This rule goes into effect on October 27.

“This is very good news for consumers,” said Suzanne Boas, president of CredAbility, a national nonprofit consumer counseling and education organization. “We often get calls from consumers who have paid fees to a debt settlement agency and have had no results. In fact, with added fees and interest, some have reported ending up with more debt.”

Other changes to the rule went into effect last week. They are:

• Debt relief companies will be required to make four specific disclosures to consumers:
• How long it will take to see results. Companies must provide a good faith estimate of the number of months, or years, it will likely take to complete the process.
• How much it will cost for the service. A reasonable estimate of what it will cost the consumer to settle the debt is required.
• The negative consequences that could result from using debt relief services—including damage to a person’s credit report and credit score, the possibility that creditors may still pursue collection efforts against them, and the continued accrual of fees and interest that can increase the amount of the total debt.
• Key information about dedicated accounts, if required. Under the new rules, the account dedicated to paying down debt must be owned by the consumer, who can withdraw funds at any time without penalty. The account must also be maintained at an insured financial institution with no affiliation or referral agreement with the debt relief company.
• Debt relief companies will be prohibited from making misrepresentations, such as inflating how much money they have saved for consumers, as well as their success rates, both of which must take into account all consumers who have paid for services. Estimates by the FTC indicate that approximately two-thirds of consumers who pay for these services drop out or fail to complete the program.

The rules apply both to firms making outgoing telemarketing calls as well as incoming calls from consumers responding to advertising on debt relief and settlement services.

CredAbility recommends that consumers seek help with their debt problems from a nonprofit consumer counseling organization. “Consumers should never pay a fee for a counseling session to review their current financial position,” added Boas. Before opting for any settlement program, CredAbility recommends exploring your options with a certified credit counselor.

For many consumers, a Debt Management Program (DMP) may be a better solution, offering favorable repayment terms to consumers and helping creditors receive the money owed to them. In a DMP, consumers can benefit from reduced interest rates as well as avoid added late fees and extra charges from creditors. A DMP also indicates to current and potential creditors that you are working to repay the entire debt, which can have a more favorable impact on your credit history and score, and can help you as you work to rebuild your finances in the future.