FTC Cracks Down on Debt Relief Rackets

Tim Chen is founder and CEO of NerdWallet.com, a website that helps consumers to compare credit card offers.  Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and the Christian Science Monitor.

In a bad economy, con artists, scammers, and schemers come out in full force.  This time around is no different, with a number of profit-motivated credit counseling companies popping up and pushing “debt management plans” to consumers.

With so many Americans out of jobs and up to their eyeballs in debt, bankruptcies are at decade highs and many people are desperate to unburden themselves and start over.  So it’s easy to make debt management and debt relief sound like a good idea.  Who doesn’t want to shed their bad credit and move on with their lives? And while there is nothing inherently wrong with a debt management plan, it pays to be skeptical when anyone makes promises that seem to good to be true.

Over the past ten years or so, a new breed of credit counseling agencies has become common, with these agencies making unscrupulous promises on what they could negotiate on your behalf, and charging absurdly high upfront and ongoing fees. These companies spend heavily on TV advertising due to their hugely profitable businesses, causing additional headaches for already indebted families.

You’re probably seen many of these TV commercials or gotten unsolicited emails or phone calls advertising their “nonprofit debt relief services.”  And while you should definitely never sign on with a “for-profit” credit counselor, the nonprofit designation doesn’t necessarily mean you’re safe.  Many unscrupulous agencies designate themselves as 501(c)(3) organizations in order to falsely gain the trust of potential customers, and it doesn’t necessarily mean they aren’t motivated by their own bottom lines.

Fortunately, there’s help available

Just a few weeks ago, the FTC rolled out a new rule to protect consumers from just these types of debt relief schemes.  On October 27, 2010 they designated that credit counselors are not permitted to collect fees in advance of helping you with your debt.  It’s never been a good idea to pay these guys before they help you, but now the FTC has made it official.

Specifically, debt relief companies that sell their services over the telephone can only accept fees when the following criteria are all met:

  • The company successfully helps to change the terms of at least one of the consumer’s debts
  • The consumer and the creditor come to terms on a settlement agreement or debt management plan
  • The consumer has made at least one payment under the agreement

What does this mean for consumers? The idea is to prevent debt relief rackets from making money off of high upfront fees, often with unrealistic promises of success. Prohibiting those fees means debt relief companies can only charge when they are at least partially successful, so they’re no longer likely to prey on clients they can’t really help. It also means we’re likely to see fewer misleading ads.

It still pays to be a skeptic

Another FTC rule took effect on September 27, 2010 that requires debt relief companies to make specific disclosures to consumers about the services they provide and prohibits them from making misrepresentations. Specifically this means they need to tell potential clients how much their services will cost, how long it will take them to see results, what could potentially go wrong, and what (if any) dedicated accounts will be set up to make creditor payments, collect fees, and so on.

That’s generally good news. But the new rule changes also mean that companies will look harder to find loopholes, as is common in any financial or debt-related industries. So regardless of any rules designed to help you, you should still always be skeptical. Before signing on with any such agency, do some research and verify that they have your best interests in mind.  One good place to start to do such research is the NFCC website, where you can find advice and information about legitimate credit counselors.

With the right help, it’s only a matter of time before you’re back on your feet and en route to rebuilding your credit history.

Comments

  1. This is great news for consumers. I’m tired of hearing those debt relief ads touting ‘too good to be true’ promises aimed at people who need help the most. Often leaving those folks with empty promises and worse off than before they even called for help!

    It’s refreshing to see the FTC add new regulations that actually require them to do some work before collecting hundreds and thousands of dollars upfront.

    I wrote a post about it – New FTC Rules for Debt Settlement Companies in Effect. Check it out at http://gainmoneycontrol.com/new-ftc-rules-for-debt-settlement-companies-in-effect/.

  2. Yes, these new rules should help a lot. But they are still not a replacement for good old common sense. I’ve been preaching for years for consumers to protect themselves by shopping around, asking lots of questions, and reading contracts BEFORE signing them. No, there is no excuse for a professional company to lie. But consumers need to take some control over the situation too.

  3. The government nanny state is not your friend. I wouldn’t rely on them to tell you which outfits are okay to deal with in this situation.

    After an approximately 30% pay cut some years back, I had a situation where I had to use one of these outfits to help me deal with it. They took a load off my shoulders, as I was almost literally going crazy trying to deal with the situation myself. I was literally overwhelmed.

  4. Consumer credit counseling service is the best place to deal with. They have been shown to be reputable. I worked for a mortgage company for a year and you wouldn’t beleive all the sob stories I heard of the “companies” screwing people over and still leaving them with poor credit and outstanding debt.
    And those who claim to be able to clear or erase your bad credit? Illegal! Stay away from it!
    Bernice
    http://livingthebalancedlife.com/2010/recovery-slow-and-steady/

  5. Or you could negotiation these issue yourself. Really, all you’re doing with these agencies is paying them a ton of money to do something for you that you can do. It’s not that difficult to say, “I can’t pay this, but I can pay this.” If they keep hassling you, tell them to call back in a week and see if your offer is still go then HANG UP!

    In this world of caller ID, there’s no reason to even take their call until you are prepared to deal wih them on your own terms.

    And what’s with the tagline…on your way to rebuilding your credit? Should that be the goal here? Wasn’t “building your credit” the thing that got people into trouble in the first place? Maybe time to reconsider debt as a way to achieve financial prosperity. I prefer cash…guess what? Never been bothered by a creditor in my life. 100% success guaranteed. But it requires patience, discipline, and hard work. I won’t lie, it’s not easy at first, but like most things worth doing, it gets better as time goes along.

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