Thanks to some new governmental laws that will soon take effect consumers will be protected against hefty fees that some debt-relief companies impose. The new rules are expected to fully take effect in October of this year, but some start this month.
“The new rules are a huge first step,” says Lauren Bowne, staff attorney for Consumers Union. “They’re going to prevent companies from charging upfront fees until they actually do something for you.”
These rules are being implemented because of the increase in consumer complaints surrounding the promises debt-relief companies have not fulfilled. In the wake of the recession, the number of complaints have skyrocketed. This could be in part due to the increased amount of companies that exist today. Compared to 2002, when there were only eight debt-relief companies in the business, today there are at least 2,000. According to the Association of Settlement Companies, the debt-relief company industry manages about $20 billion in credit card and other unsecured debt.
The New Rules
The new regulations will work to change the debt-relief industry as a whole and possibly forcing many out of business. Three provisions will take effect as soon as September 27, 2010 which will significantly reduce the number of TV advertisements that claim quick settlements for consumers. The new rules call for debt-free companies to accurrately make disclosures to consumers that will answer the following questions:
- What will happen?
- What will it cost?
- How long will it take?
- What will the expected results be? both good and bad
The regulations will also be extended to consumers that reach out by making a call to these debt-relief companies in response to an advertisement they saw. The rules will also ban these companies from misrepresenting what they can actually accomplish for consumers.
On October 27, 2010 debt-relief companies will experience the full force of the regulations when they will no longer be able to charge a fee before they settle or reduce debt for the consumer. The Debt-relief companies will not be able to charge a consumer until there’s a written contract and at least one payment has been made to a creditor. Astonishingly enough, currently these companies charge fees to consumers before they have even attempted to negotiate with the creditors. This means consumers can be paying fees for months before anything has even started to be resolved.
Typically, companies charge consumers a fee around 15% of their total debt and begin to collect this fee before any progress is made for them. In other words, a person who has $20,000 in debt would expect to pay about $3,000 in fees.
“Too many of these companies pick the last dollar out of consumers’ pockets, and far from leaving them better off, push them deeper into debt, even bankruptcy,” says Jon Leibowitz, chairman of the Federal Trade Commission, in a statement describing the new rules.
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