New Debt Settlement Rules Start September 27th

Photo (cc) by eric731

They’re everywhere these days – ads from debt settlement companies claiming they can help you pay off your credit card balances for pennies on the dollar.

Debt settlement involves negotiating with credit card companies and other creditors to lower the principal amount you owe, then paying it off in a single lump sum. This is different than credit counseling, which typically involves negotiating a lower interest rate and payments, then paying off the debt in full over time.

I’ve written about both debt settlement and credit counseling extensively. In general, I like credit counseling and advise people to steer clear of debt settlement companies. Here’s an article I wrote that explains credit counseling. If you want to know more about debt settlement, and why I think it offers more hype than hope, check out posts I’ve done just this year…

If you didn’t read those articles, here’s the gist: too many debt settlement companies suck. The bad apples in the barrel – and there are many – promise things they have no intention of delivering, charge too much to do too little, and utterly vaporize your credit history.

Last summer the FTC finally stepped up to the plate and put out new rules for debt settlement companies that will cost them money and probably save hapless consumers from abuse. And now those rules are starting to go into effect. Here they are in a nutshell.

Starting September 27: New Rule – Tell the truth

According to the FTC, the rules that take effect on the 27th…

  • require debt relief companies to make specific disclosures to consumers;
  • prohibit them from making misrepresentations; and
  • extend the Telemarketing Sales Rule to cover calls consumers make to these firms in response to debt relief advertising.

What this means in plain English is that debt settlement companies can’t overstate the success of their programs – they’re also required to disclose potential negative side effects of a debt settlement. For example, many debt settlement companies have in the past assured consumers that settling a debt wouldn’t negatively impact their credit score. This is complete hogwash. Paying less on a debt than is owed will nearly always lower your credit score. It could also cause an income tax issue. For more examples of the false promises some debt settlement companies routinely employ, see the GAO story above.

Starting October 27: New Rule – Don’t charge till you do something

While telling the truth may prove difficult for some debt settlement companies, it’s this new rule that’s really going to hurt. Because rather than charge up-front for their services like they typically do now, they’ll have to wait until at least one of the following occurs:

  • 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.

In other words, until the debt settlement company actually performs, they don’t get paid. Another rule that will go into effect on Oct 27 requires them to keep all customer funds in a segregated, insured account.

These rules don’t apply to all companies, just for-profits. And don’t think that just because there are new rules that prohibit wrong-doing that it won’t occur anyway. After all, we’re talking about companies that, at least in some cases, employ commissioned salespeople who take complete advantage of the broke, innocent, and desperate – not normally the type to follow rules.

My advice? If you’re in debt trouble, avoid debt settlement companies. Instead, talk to a credit counseling organization, or a bankruptcy lawyer.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
8 Products to Reduce Anxiety and Stress
8 Products to Reduce Anxiety and Stress

Current events have you feeling anxious? These Amazon products can take the edge off.

Retirees Can Dodge Taxes on These 9 Types of Income
Retirees Can Dodge Taxes on These 9 Types of Income

There are lots of things Uncle Sam can’t touch — so long as you play by the rules.

Big-Ticket Things You Should Never Buy
Big-Ticket Things You Should Never Buy

In this week’s podcast: Are you wasting big money on these common purchases?

7 Social Security Blunders That Can Ruin Your Retirement
7 Social Security Blunders That Can Ruin Your Retirement

Making even one of these mistakes can easily cost you tens of thousands of dollars.

Here’s the Average Retirement Age in Your State
Here’s the Average Retirement Age in Your State

Are you on track to retire at the same age as most residents of your state?

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

The Next 5 Groups Who Will Get the COVID-19 Vaccine
The Next 5 Groups Who Will Get the COVID-19 Vaccine

The CDC has unveiled a schedule that likely will determine who gets the next doses.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

11 Generic Products You Should Buy at Costco
11 Generic Products You Should Buy at Costco

Not all generics are worthwhile, but these are among the best from Costco’s Kirkland Signature brand.

8 Tips for Retiring Comfortably on Social Security Alone
8 Tips for Retiring Comfortably on Social Security Alone

It’s never too early to start learning how to live well while living on less.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have all of these documents that are crucial to their golden years — especially during a pandemic.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

9 Small Expenses That Are Bleeding Your Budget Dry
9 Small Expenses That Are Bleeding Your Budget Dry

Keep more of future paychecks by eliminating these budget-busting unnecessary expenses.

The 4 Best Things to Buy in January — and 4 to Avoid
The 4 Best Things to Buy in January — and 4 to Avoid

As a new year dawns, deals abound for some types of products. In other cases, it pays to wait.

11 Huge Retirement Costs That Are Often Overlooked
11 Huge Retirement Costs That Are Often Overlooked

Does your retirement budget account for all of these costs?

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.