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New Debt Settlement Rules Take Effect

September 28th, 2010 · 10 Comments · Debt Settlement

by Kristy Welsh

(Last Updated On: March 31, 2011)

We’ve all been waiting for this! After listening for years to debt settlement horror stories, I think the nightmare is coming to an end. The FTC put together new “Debt Relief Rules” which took effect Sept 27, 2010. The regulations are very comprehensive – here are the key protections it offers:

Upfront Disclosures

  1. 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.
  2. 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.
  3. 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.
  4. 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.

In addition to the upfront disclosures, debt settlement firms face a number of other restrictions.

No Lying
Well, yeah. But the FTC gets pretty specific about what it considers a lie. 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. Ever seen a TV commercial where a debt settlement company promises it has saved its customers 30% to 65% of credit card debt? They could be only counting the customers that didn’t drop out of the program, which isn’t a fair representation. Experts have estimated that about 60% of customers end up ditching the program before it’s over.

Dedicated Savings Accounts
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, those accounts must be maintained at an insured financial institution. In addition, clients must have total control over the money and the ability to withdraw it at any time, and the debt relief company can’t receive or pay referral fees from or to the company that administers 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
  • the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

I’m very interested to know what effect this will have on the debt settlement firms and what evil schemes they will develop to get around the rules.

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10 Comments so far ↓

  • Celodea

    How can I get a copy of a 2003 Capital One Agreement? I have my first statement, but not the original signed copy (if there is one). The Attorney (the collection agency) representing Capital One sent me a copy of 2005 as part of their proving I owed the debt, when I actually signed up for the card in 2003. I have a court date in 2 mos.

  • Per Ingenium Supero

    I am assuming, correct me if I am wrong, that you: 1) requested a validation of the debt, of which a signed 2003 copy of the carholder agreement would be “part of the proof required.” and 2) that you did request the original contract to defend against a judgment in court. With that being said, a blank 2005 cardholder agreement is NOT proof of a contract between you and Capital Dumb.

    If they can’t produce the signed cardholder agreement, they can still argue, via account statements, that you owe money to Capital One. But that can’t prove that you owe the collection agency anything. You never signed a contract with the collection agency, did you? Didn’t think so. Without the signed original contract you could argue, as an affirmative defense, a Lack of Privity: that no legal relationship exists between you and the collection agency. you could also argue the Statute of Frauds: that there is no contract to serve as proof of debt.

    *Disclaimer: I am not a lawyer, and this is not legal advice. I am a lay person. Please contact a lawyer for any and all advice in this matter.

    After that being said, most of the civl “debtor” side lawyers will provide a free initial consultation. Why not pick their brain? And as for the CAs for Capital Dumb, they have a responsibility to validate the contract, the amount of money owing, and that the principle, interest, collection fees, and attorney’s fees are all correct, agreed to in your SIGNED cardholder agreement, and lawfully charged.

  • Debt Consolidation

    We’re disappointed that the FTC came out with this ruling, especially with regards to the advance fee ban,” Leuthold said in a telephone interview. “It’s just a fact that companies need revenue coming in prior to the actual settlement being made.”

    He said creditors normally “won’t agree to a settlement unless that money can be paid” all at once or within a short period following the negotiation. “Most of our clients don’t have any money saved up..Please correct me if i am wrong.thanks.

  • Kristy Welsh

    Debt Consolidation – I’d venture to guess your real dissapoint is that you can’t rake in the cash you are used to.

  • Christine

    If I have a billing statement (haven’t made a payment to them in 12 months) from Capital One dated 10/21/2010 and a letter from a “debt collector” dated 10/25/2010 and both are asking for the same amount of money for debt with the original creditor (Capital One), who do I negotiate a settlement with? I sent a validation letter in July to a different “debt collector” and received no response. It appears Capital One has sold the debt again. Do I try to settle with Capital One or do I go the debt validation route again?

  • Christine

    Actually, I didn’t send a validation letter in July, I sent a settlement letter in July to the OTHER “debt collector”. They didn’t respond. My next contact was the October statement from Capital One followed by the “debt collector” letter. Sorry for the confusion. Thanks again.

  • Stephanie

    Celodia, Is there any way you can email/send me a copy of that 2005 contract? Ive been asking Capital One for one and still haven’t been able to get one.

  • Celodea

    I would be happy to send you the Customer Agreement dated 2005 that the attorney sent me. Where do I send it to?

  • confused

    I have unpaid medical bills one collector im in the process of settling. BUT what kid of wrtten agreement should I get so they dont come back at me later trying to collect the remaining amt of a settle agreement? and im in california i am being charged intrest… an extra 31 dollars a month on each account! is this legal!?

  • m.sola

    Celodea, Did you finally got the 2003 Agreement?

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