Why You Shouldn't Trust Those Debt Settlement Commercials

You can't listen to satellite radio or watch cable TV without being bombarded by commercials for companies claiming they can help you reduce your debt, whether it be to credit card companies or the Internal Revenue Service (IRS).

A common characteristic of these ads is the warning that "there are a lot of scammers" out there making similar claims, but that you can trust them. How do you know? You might not want to take their word on that score. (Read consumer complaints about debt settlement companies).

Another common trait of these commercials is the disclaimer "if you have $10,000 or more in credit card debt..." they can help you. Why $10,000?

Because many companies charge a percentage -- usually around 10 percent -- of your total debt as their fee. The more money you owe, the more you will have to pay them. If your debt is less than $10,000, they really aren't interested in helping you because their fee would be too low.

The Federal Trade Commission (FTC) amended the Telemarketing Sales Rule (TSR) last year to add specific provisions to curb deceptive and abusive practices associated with debt relief services. One key change is that many more businesses will now be subject to the TSR.

The new rule expands the scope to cover not only outbound calls from the companies but inbound calls from consumers, in response to advertisements and other solicitations. There are three main changes to the rule, but one in particular will have the most impact.

No more upfront fees

Businesses can't collect any fees from a customer before they have settled or otherwise resolved the consumer's debts. If a company renegotiates a customer's debts one after the other, it can collect a fee for each debt it has renegotiated, but it can't front-load payments.

That means they can't charge any money up front. They must do the work before they get paid. This makes the debt settlement business much more risky and less lucrative. If a company demands an upfront payment from you, it is violating the law. You should assume it's a scam.

In the past ten years, the FTC and state law enforcement partners have filed more than 250 actions to stop deceptive and abusive practices by members of the debt relief industry. Even so, you should not assume that the remaining companies will always play by the rule.

Review the changes in the law

Instead of believing what the companies say in their commercials, consumers should know and understand the changes in the FTC rules by which the agency hopes to prevent consumer fraud. In addition to not allowing advance fees for services, the rule also prevents debt settlement companies from charging consumers until:

• They successfully settle or otherwise change the terms of at least one of the customer's debts;

• There's a settlement agreement, debt management plan, or other agreement that has the OK of both the creditor and the customer; and

• The customer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

 If customers enroll multiple debts in a company's program, the rule makes it clear they can't front-load their fees.

Consumers should perhaps take all these debt settlement commercials with a grain of salt. After all, settling debt is not as easy as many people make it sound.

"Many people owe money on their credit cards and are struggling to keep up with their bills because of the bad economy," said Minnesota Attorney General Lori Swanson last year, after suing six debt settlement companies doing business in her state. "People who are swimming in debt are often desperate for a life preserver, but they should know that debt settlement companies usually just anchor them down with even more financial problems."