New FTC Rules for Debt Settlement Firms Provide Greater Transparency for Clients

New FTC Rules for Debt Settlement Firms Provide Greater Transparency for Clients

New FTC Rules for Debt Settlement Firms Provide Greater Transparency for Clients

September 27 marked the first day of new FTC regulations regarding the operating procedures of debt settlement firms.  As the number of Americans facing substantial debt has continued to rise over the past decade, the promises made by debt settlement firms to reduce a consumer’s debt by a significant amount have led many to enlist in programs that oftentimes fail to deliver.

The new rules will aim to curb some of the deceptive tactics debt settlement firms use to entice consumers looking for debt relief.  The FTC says that over the years these firms have collected millions of dollars in fees while their clients rarely get the level of relief they were promised.  Most of these firms advertise being able to reduce clients debts by negotiating a settlement with creditors, however they fail to inform them of the impact this system can have on their credit until after clients have signed up for the service. 

One of the biggest problems the FTC has with the firms is that they often take their fees over the first half of the contract and inform clients to stop paying bills.  While the clients stop paying bills, they put money into an escrow account, which is used to settle debt for a reduced amount once there is enough money to cover a settlement.  However, by taking their cuts over the first half of the contract, debt settlement firms often collect all of their money before any of the client’s debt has been settled.  Compounding the problem is the fact that, according to the FTC, nearly two-thirds of consumers in debt settlement programs drop out of the programs within three years and never receive the debt relief they have already paid for.

The new rules would make it mandatory for debt relief firms to be clear about how long it will take a client’s settlement to occur, when they will be negotiating debt settlements with creditors, and inform clients of the negative impact on their credit that not paying their debts while enrolled in the program will have. 

Additional rules go into effect on October 27 that will require debt settlement firms to have settled some or all of a client’s debt prior to collection any fees.


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