Debt Consolidation Firms Will Soon Be Barred From Charging Upfront Fees

You rarely see or hear their ads on television and radio any more, but they're still out there, waiting in the weeds to take your money and destroy your credit rating.

"They" are those predatory debt consolidation companies who promise to pay off your credit card debt for a small portion of what you owe or to help you repair a poor credit score. Unlike legitimate debt relief advisors, these unscrupulous scam artists charge high upfront fees, talk you into stop paying your credit card bills and more often than not leave you in worse shape than before.

On October 28, a new rule imposed by the Federal Trade Commission (FTC) takes effect, designed to prevent debt consolidation firms from charging any upfront fees until the consumer has received either interest rate or principal reductions from their creditors. Debt settlement companies will be barred from charging advance fees until they successfully renegotiate a client's debt balance.

While the rule deals with one of the most abusive tactics used by these companies, it still doesn't stop them from diverting your hard-earned money into phony accounts or destroying your credit score by getting you to stop paying your creditors.

As Mark Huffman reported last month, the FTC rolled out the first phase of new rules aimed at protecting consumers from unscrupulous debt settlement companies by governing how they market themselves. So far, the initial response has been that their radio and television ads that seemed to appear every few minutes have all but disappeared.

Those rules, which went into effect on September 27, prohibited debt services providers from misrepresenting their program, its success rate or any material program features. Companies were also required to give consumers more detailed disclosures of the potential negative side effects of debt settlement or how long it might take to see any results.

The problem with the new FTC rules is that they only apply to telemarketers and over- the-phone sales. Granted, those categories make up the vast majority of debt relief transactions, but those companies can continue to scam unsuspecting consumers just by using the Internet or in any face-to-face transactions.

Up to the states

For any real muscle in taking down these debt bullies, you have to rely on your state government, or more specifically, state lawmakers and the state attorney general. The FTC rules may provide some leverage to those states that take on the predatory debt consolidators, but it will be up to individual states to pass new laws that actually prohibit abusive practices.

In Oregon, the attorney general reached an agreement with the country's largest debt relief company, the Texas-based Credit Solutions of America, which was accused of charging high upfront fees and encouraging consumers to quit paying their creditors. In that case, Oregon customers of CSA may be entitled to a partial refund. But CSA has a nationwide client base, so any customers in other states still have to fend for themselves if they aren't satisfied with the service they receive.

The file segregation scam

One of the most devious scams is something called "file segregation." The shady debt relief agency shows you how to get an employee identification number from the IRS.

This nine-digit number can be used as a substitute for a Social Security number. You would then use this number to apply for new credit, using a different address and phone number, and begin to build up a good credit score by using your new credit card and paying it off early.

The debt consolidation company will claim this is all completely legal, when in actuality they are helping you to commit a felony by creating a false identity.

Doing it yourself

Even legitimate debt relief agencies charge something, so you may want to try to deal with your debt problems yourself. For example, to fix your credit report, the first thing you should do is correct any errors, which are common. The Fair Credit Reporting Act gives you the right to dispute any information on your credit report along with receiving one free copy of that report every year from each of the three major credit-reporting bureaus, Equifax, Experian and TransUnion.

If you find a mistake or a suspicious item, contact the creditor, and if the issue remains unresolved, dispute the item with the credit bureau. You can also add a personal statement to your credit reports about a specific item, providing details that you feel may be relevant to creditors.

If the negative information is accurate, there's nothing you, or a credit-repair company, can do to change it no matter what some agencies claim. In fact, there's nothing that a credit relief company can do that you can't do for yourself.

The best way to fix your credit is to pay off your bills on time. If you need help, there are nonprofit agencies that can assist you in negotiating with creditors and creating a budget that works for you. And there are many legitimate debt settlement counselors out there that never charge upfront fees and you can find them by going to the National Foundation of Credit Counselors.

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