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FTC Debt Consolidation Company Rules and Regulations

Written by: Kristy Welsh

Last Updated: July 14, 2017

While many Americans struggle to pay their credit card bills, a lot of them turn to businesses offering debt relief services. These are for-profit companies that say they can renegotiate what consumers owe or get their interest rates reduced. In response to this growing business model, the FTC (Fair Trade Commission) put together the Debt Relief Rules which took effect October of 2010. The regulations are very comprehensive and are aimed to curb deceptive and abusive practices associated with debt relief services offered by debt consolidation companies.

For-Profit Companies Required to Give Upfront Disclosures

  • Proposed fees must be disclosed along with refund policies. They can't get away with estimates or potential ranges of fees. Instead, the proposed fees must be must be based on real results based on experiences with individual creditors.
  • Time to get through the program. Just as in a mortgage, consumers must be given a good faith estimate describing how long it is likely to take to settle their debts based on their debts, and their ability to save money to settle.
  • Savings required. Firms must accurately estimate how much money prospective clients will have to save up in order to settle. The figures must be based on actual settlements they have made for other clients.
  • The negative effect on credit. Consumers must be given warnings that include the likely damage to their credit reports, the potential risk of lawsuits, and possible tax consequences.

Accurate Estimate of How Much Money a Consumer Will Save

  • Claims about how much money consumers can save must be based on the firm's actual experience with all clients, not just the "best" examples.
  • Experts have estimated that about 60 percent of customers end up ditching the program before it's over. Firms must accurately estimate the success rates of their clients.

Savings Accounts Must be Held in an Insured Financial Institution

In times past, payments consumers make to the debt settlement firm went into an escrow account, though many firms labeled it as a savings account, a misleading term since there was no savings account opened at a real bank. Under the new rules:

  • 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.

No Upfront Fees

The debt settlement firm must wait until one of the following occurs before they collect any fees.

  • 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, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it; and/or
  • The consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

If you do find yourself signing up with a firm and they are not following these regulations, do not hesitate to report them to your state attorney general's office or file complaint with the FTC.