New rules for debt-settlement companies

The Federal Trade Commission has issued new rules that update our July 2009 SMI newsletter story, Settle A Debt for Less than You Owe?

The Baltimore Sun provides the basics.

Companies promising to settle debts for less than you owe soon won't be able to charge for their services until they do their job.

The Federal Trade Commission...plans to outlaw advance fees charged by for-profits pitching debt relief services over the telephone beginning Oct. 27. After that, consumers won't have to pay a fee until a debt is reduced.

Also starting next month, debt settlement companies must disclose to prospective clients the cost of the program, how long it will take to get the results promised and any negative consequences of the debt relief program.

USA Today personal-finance writer Sandra Block adds more:

The rule will crack down on marketing companies that earn big commissions for signing up as many customers for debt settlement as they can, says Gerri Detweiler, personal finance expert for Credit.com. These businesses have no interest in determining whether consumers are good candidates for debt settlement, she says....

[Still,] Detweiler contends that debt settlement remains a viable option for some consumers who have large credit card debts but aren't good candidates for bankruptcy....

[T]he FTC rule provides a good guide to the kinds of questions you should ask before you [sign up with a debt-settlement company]. For example:

• What's your success rate, and what percentage of people drop out of your program?....
• How much will it cost, and how long will it take to settle my debts?....
• How much will I need to save? Debt-settlement companies typically ask you to make regular payments to a dedicated account. When a certain amount has been saved, they'll go to your creditors and offer to pay off a percentage of the debt. The rule requires debt-settlement firms to provide a reasonable estimate of the amount you'll need to save before they'll make an offer.

Despite the new rules, the advice in our 2009 article still stands: "Although debt-settlement companies have helped some debtors, this is definitely a 'let-the-buyer-beware' area."

Another point worth mentioning — FTC chairman Jon Leibowitz says that before hiring a debt-settlement firm, it's a good idea to call your creditors and explain your situation. "You can sometimes develop your own workout plan," Leibowitz says. He notes that in some cases creditors "are willing to help consumers because it's in their own best interest."

Or as Larry Burkett used to put it, "It's better to run toward your creditors than to run away from them."
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Matthew Pryor in his 8th year with Sound Mind Investing, now serving as Director of Operations. Learn more about Christian investing and finances at the Sound Mind Investing website.