The Beginning of the End for Debt Settlement Companies

by Richard S. Feinsilver on July 31, 2010

The New York Times reported that, on Thursday, July 29, 2010, the Federal Trade Commission announced restrictions on companies that mislead innocent consumers that they can reduce or eliminate unsecured debt.

The new rules, which will take effect this fall, will prohibit Debt Settlement and Debt Consolidation Companies from charging a fee before they settle or reduce an unsecured debt, such as a credit card. The rules will also require that Debt Settlement Companies set up dedicated accounts for debt relief payments by consumers (similar to escrow accounts), disclose how long it will take to settle or reduce a debt (similar to the new regulations imposed on the credit card companies disclosing the amount of time it will take to pay off a credit card), and the potential negative consequences that may occur during the process (such as the impact of defaulting on credit cards and creditor collection and enforcement efforts).

“Too many of these companies pick the last dollar out of consumer pockets and, far from leaving them better off, push them deeper into debt, even bankruptcy,” said FTC Chairman Jon Leibowitz in announcing the regulations. He also stated that these rules “…will stop companies who offer consumers false promises of reducing credit card debts in half or more in exchange for large, upfront fees.”

For the past 20+ years, I have been warning consumers of the inherent weaknesses in the Debt Settlement Process. Too many times, I have encountered clients who have dealt with Debt Settlement Companies, paid them exorbitant up-front fees, only to ultimately file for Chapter 7 bankruptcy. (See our post on Debt Consolidation vs. Chapter 13 Bankruptcy)

The FTC is to be commended for finally bringing this issue to the forefront and placing controls on Debt Settlement Companies.

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