Debt Relief

It seems that every day we hear commercials for debt relief companies, who promise to eliminate your debt for a small fee. The Federal Trade Commission just announced new rules regarding debt relief companies to protect consumers.

Who do the new rules apply to?

The rules are designed to protect consumers from some deceptive practices of some of the debt relief services. The new rules apply to for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services. The rules do not apply to non-profit debt services. There are over 200 pages of explanation and regulations dealing with these new rules. Some of the rules are effective September 27, 2010 and some October 27, 2010.

What do the new rules say?

The major change, which kicks in on October 27, 2010, is that debt relief companies can no longer charge any fees before they actually settle or reduce your credit card debt or other unsecured debt. No fee can be charged until:

  • The debt relief service successfully re-negotiates, settles, reduces or otherwise changes the terms of the debt;
  • There must be a signed settlement agreement or debt management plan between the consumer and the creditor;
  • The consumer must have made at least one payment to the creditor pursuant to the settlement;
  • If there are multiple debts, there are detailed rules to make sure the fees are not front loaded. So fees are collected as each debt is handled.

What does it cost to use a debt relief service?

In the past, many people would sign up for these services and have no idea what it would cost them. Under the new rules, the debt relief company must give you the following information before you sign up:

  • How much the service costs - They must tell you if the fee is a specific dollar amount or a percentage of your savings;
  • How long it will take to get the advertised results - The company must make a good faith estimate of when it will make an offer to each creditor regarding settlement;
  • How much money the customer will save on each debt before an offer is made to a creditor to settle the debt;
  • The consequences of failing to make timely payments to a creditor - For example, damage to your credit score, a law suit and additional fees and interest.

There are other protections under the new law . You can obtain additional information at the Fedral Trade Commission's web site,