New Rules Could Erase Debt Settlement Industry

What's Hot

2 Types of Black Marks Might Vanish From Your Credit File SoonBorrow

6 Ways the Obamacare Overhaul Might Impact Your WalletInsurance

7 Dumb and Costly Moves Homebuyers MakeBorrow

This Free Software Brings Old Laptops Back to LifeMore

Obamacare Replacement Plan Gets ‘F’ Rating from Consumer ReportsFamily

Beware These 12 Common Money MistakesCredit & Debt

21 Restaurants Offering Free Food Right NowSaving Money

17 Ways to Have More Fun for Less MoneySave

House Hunters: Beware of These 6 Mortgage MistakesBorrow

30 Household Uses for Baby OilSave

25 Ways to Spend Less on FoodMore

Nearly Half of Heart-Related Deaths Linked to These 10 Foods and IngredientsFamily

5 Surprising Benefits of Exercising Outdoors in WinterFamily

10 Ways to Save When You’re Making Minimum WageSave

Boost Your Credit Score Fast With These 7 MovesCredit & Debt

7 Painless Ways to Pay Off Your Mortgage Years EarlierBorrow

The Most Sinful City in the U.S. Is … (Hint: It’s Not Vegas)Family

The True Cost of Bad CreditCredit & Debt

10 Companies With the Best 401(k) PlansGrow

This Scam Now Tops ID Theft as the No. 2 Consumer ComplaintFamily

6 Stores With Awesome Reward ProgramsFamily

6 Ways to Save More at Lowe’s and The Home DepotSave

6 Healthful Treats for Your DogFamily

New Study Ranks the Best States in the U.S.Family

Thousands of Millionaires Moving to 1 Country — and Leaving AnotherGrow

Strapped for College Costs? How to Get the Most From FAFSABorrow

6 Overlooked Ways to Save at Chick-fil-AFamily

Ask Stacy: What’s the Fastest Way to Pay Off My Mortgage?Borrow

Where to Sell Your Stuff for Top DollarAround The House

8 Ways to Get a Good Price on a Shiny New AutoCars

Ask Stacy: How Do I Start Over?Credit & Debt

Secret Cell Plans: Savings Verizon, AT&T, T-Mobile and Sprint Don’t Want You to Know AboutFamily

30 Awesome Things to Do in RetirementCollege

14 Super Smart Ways to Save on TravelSave

The Rich Prefer Modest Cars — Should You Join Them?Cars

You’ll Soon Pay More to Shop at CostcoSave

10 Ways to Save When Your Teen Starts DrivingFamily

In a victory for consumers, this October it's going to be a lot tougher to be in the debt settlement business.

Unless you’ve been living in a cave for the last several years, you’ve seen and heard debt settlement ads – the ones that make is appear that eliminating credit card debt is as simple as paying “pennies on the dollar.”

But after October of this year, those ads may start fading away, along with many of the companies. Yesterday the Federal Trade Commission announced what could become crippling restrictions on this particular way to deal with consumer debt.

We’ve done several articles on the problems surrounding debt settlement – the process of offering a creditor (typically a credit card company) less that the full amount owed to satisfy a debt. The new FTC restrictions are designed to address consumer complaints regarding companies making promises they didn’t keep and charging high up-front fees for services they ultimately didn’t provide.

New rules taking affect in October of 2010 will prohibit a common debt settlement practice – charging an upfront fee prior to fully eliminating a customer’s debt. The new rules also require disclosure of how long the settlement process could take, what it costs and the potential damage than can result to a consumer’s credit history. (See Should I Consider Debt Settlement?) The rules, which will apply only to for-profit debt settlement companies, also require that the companies set up dedicated accounts for payments they collect and hold for consumers.

In a press release announcing the new regulations, Jon Leibowitz, chairman of the F.T.C., said “Too many of these companies pick the last dollar out of consumers’ pocket and, far from leaving them better off, push them deeper into debt, even bankruptcy,”

“This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, upfront fees,” he said.

Debt settlement has been a burgeoning business as the recession, unemployment and the housing bust combined to result in millions of Americans with monthly debt payments they couldn’t meet. These companies offer a seemingly simple and attractive solution by advertising that they can settle debts for a fraction of what’s owed.

The process of debt settlement often requires a consumer to set aside money in an account for many months – even years – until enough is collected to offer a credit card company a lump-sum settlement. Since after October many debt settlement companies won’t be able to collect any fees until the end of the process, that could put many out of business.

But don’t expect all the internet ads you see regarding debt settlement to go away. The new rules cover calls made from consumers in response to debt settlement ads, as well as telemarketing calls. The rules don’t apply, however, to transactions that take place face-to-face or entirely online.

The new rules cover calls consumers make to debt settlement firms in response to advertising as well as telemarketing calls made by firms. However, the FTC’s new regulation does not apply to in-person sales or to Internet-only sales.

Because consumers can often confuse legitimate credit counseling organizations with unsavory debt settlement companies, my advice – after October, at least – is to weed out debt settlement companies by getting on the phone with any company offering to help you reduce your debt burden. And to always ask about up-front fees.

In addition to the FTC crackdown, two bills are also pending in Congress (Senate Bill 3264 and House Bill 5387) that would radically limit the fees companies can charge. Current fee structures are commonly 10% of the amount of debt negotiated – the new legislation would limit them to a maximum one-time fee of $50 plus five percent of the settlement savings.

Stacy Johnson

It's not the usual blah, blah, blah

I know... every site you visit wants you to subscribe to their newsletter. But our news and advice is actually worth reading! For 25 years, I've been making people richer without making their eyes glaze over. You'll be glad you did. I guarantee it!


Read Next: Lookin’ Good! How to Get a Killer Deal on Eyeglasses

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 1,964 more deals!