The first phase of new federal regulations protecting consumers from unscrupulous debt settlement companies takes effect September 27, part of the government's effort to corral the scam artists who dominate the industry.
Debt settlement companies often promise desperate consumers they can reduce their credit card debt, but charge a large upfront fee. Little or no effort is made to settle the debt and the consumer is left in worse shape than before.
The initial changes in the Federal Trade Commission regulations govern how debt relief products are marketed to consumers.
Specifically, the new rules prohibit debt services providers from misrepresentations regarding their program, success rates or any material program features. Companies are also required to disclose potential negative consequences of a settlement and how long it might take for a consumer to realize results.
"This is really a best case scenario for consumers," said Brad Stroh, CEO of Bills.com, an online financial resource. "Consumers will now have substantial and important protections in place to ensure that they are not taken advantage of by predatory debt relief providers. At the same time, responsible providers will be rewarded for their efforts and can stand apart from less reputable companies - making it even easier for consumers to find help from the good actors in the debt relief industry."
Phase two
The second sets of changes take effect on October 28, 2010. This second step will restrict debt relief companies from charging any fees until the consumer has received either interest rate or principal reductions from their creditors.
This addresses one of the most-often criticized aspects of the industry, where a debt relief company could collect up-front fees without having to resolve any consumer debt. With these changes, consumers are protected from unscrupulous providers.
"The timing of these changes is important because the still struggling economy means that many Americans and families remain in financial peril," Stroh said.
States take lead
The new federal rules are designed to provide support to a number of states that have long waged a fierce battle against predatory debt settlement firms. Earlier this year Illinois passed a law to prohibit debt settlement firms from engaging in unfair and abusive practices.
"Debt settlement operators target hardworking people with crushing credit card balances. They claim they're able to pay off your debt for a fraction of what's owed, but most times, this turns out to be a scam," said Illinois Attorney General Lisa Madigan. "They take your money and almost never reduce your debt.
In Oregon, meanwhile, Attorney General John Kroger this year reached an agreement with Credit Solutions of America (CSA) that cracks down on the Texas-based debt settlement company's alleged practice of charging high upfront fees and encouraging consumers to quit paying their creditors.
"CSA's existing Oregon customers may be entitled to a partial refund if they are not satisfied with the service they get," Kroger said.CSA is the largest debt settlement company in the country and has a national client base. Oregon consumers complained that CSA charged very high up-front fees and encouraged clients to stop paying their creditors. There were frequent allegations that a lack of effort on behalf of CSA resulted in litigation and costs levied against consumers.
Also in 2010, Minnesota sued American Debt Settlement Solutions, Inc. of Boca Raton, Florida; Debt Rx USA, LLC of Dallas, Texas; FH Financial Service, Inc. of Dallas, Texas; Morgan Drexen, Inc. of Anaheim, California; Pathway Financial Management, Inc. of Garden Grove, California; and State Capital Financial, Inc. of Hallandale Beach, Florida, claiming the six companies violated the state's new debt settlement law.
