FTC Protects Consumers With New Debt Settlement Rules

Debt settlement is an effective debt relief solution for people drowning in unsecured debt. With debt settlement, you need to pay back only a part of what you owe to the creditors. Around 50% of the original debt amount is forgiven in this debt reduction process. However, there are too many scam companies in the debt settlement industry. These companies tempt the debtors with slogans like “be debt free in three months”. In reality, the fraud debt settlement companies push people further in debt. They charge huge fees to the debt strapped people but hardly make any effort to settle their debt. Nationwide Asset Services and Credit Solutions of America are two such companies which have been sued by A. M. Cuomo, the New York Attorney General.

To stop false advertising and deceptive practices in debt settlement industry, the Federal Trade Commission (FTC) has introduced a new set of laws. It is expected that with the help of the new laws, the American middle class families will get a fair deal from the debt settlement companies.

Let’s have a closer look at the new debt settlement laws introduced by the FTC.

No Upfront Fees

The debt settlement companies cannot charge advance fees to the debtors anymore. The following criteria have to be fulfilled before charging fees to the clients:

  • The debt settlement company needs to settle at least one of the debts of the client.
  • There has to be a written settlement agreement between the debtor and the creditor. The debtor must willfully agree to the terms of the settlement.
  • The consumers have to make at least one payment to the creditor (as per the new settlement agreement) before the debt settlement company charges fees from them.

While creating their fee structure, the debt settlement companies must follow certain rules. Fee charged for a single debt must be in proportion with the total fee that would have been charged if all the debts of the client were settled. Many debt settlement companies charge a percentage of what the debtors save using their services. If a client has multiple debts, then the percentage charged should be the same for all the debts.

Dedicated Account Rule

The debt settlement companies have to ask the clients to keep their fees and savings (for making payments to creditors) in a dedicated account. However, the companies should make sure that the following criteria are met:

  • The dedicated account must be maintained at an insured bank. Also, the debt settlement company must not have any association with bank. It cannot exchange cash with the bank (as referral fees).
  • The client must have complete ownership of the funds.
  • The client must have full right to withdraw the funds without being penalized.

Maintaining Complete Transparency

This rule requires the debt settlement companies to avoid misinterpretations while offering services to their clients. These companies need to make certain disclosures to the clients during telemarketing. This includes:

  • Explaining the basic facts about debt settlement programs to the clients.
  • Making the client aware of the possible length of the debt settlement program.
  • Disclosing the approximate costs involved with the debt settlement program.
  • Explaining the chances of success to the clients.
  • Explaining the negative affects of debt settlement programs to the clients.

The above rules are applicable to for-profit debt settlement companies. If a debt settlement company claims itself to be a non-profit organization then it has to provide enough evidence in support of the claim. So the new debt settlement rules attempt to combat scam companies who pose as non-profit organizations.

People usually turn to debt settlement when they are knee deep in debt. Some unscrupulous debt settlement companies take advantage of this situation and deceive the consumers with false promises. Scams companies push many debtors towards bankruptcy. With the new debt settlement laws, the FTC is aiming to protect the consumers from this type of fraud. Let us wait and see if the new laws succeed in protecting consumer rights.


Michelle Davis is a financial advisor and author for acclaimed blogs. Michelle has been writing on the topic related to debt settlement, bankruptcy law for more than five years and helping people to get wise with their money. Her interests include attending financial seminars, writing columns and visiting personal finance blogs.

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