Monday, February 2, 2015

Debt Settlement Legislation You Need to Understand

Advertisements for debt reduction services (which go by many names) are seemingly everywhere. Unfortunately, some of these companies are scams, while a great deal many just charge you a lot of money and leave you worse off than you started. The FTC Telemarketing Sales Rule and many state laws have been put into place to offer protection against many of these scams, but that doesn't mean you can't still get in trouble.

Types of Debt Reduction Services

Services you may see advertised include:

Debt management service or credit counseling. These companies typically claim they will set up a plan to pay back your creditors for you, often by reducing the interest rates or even the principle so you can afford the plan.
• Debt settlement companies. These companies will usually claim they can reduce your debt by 50% or more and work be negotiating with your creditors to convince them to accept a one-time reduced lump sum payment or a few payments to pay off the debt. You will be required to make monthly payments into a bank account from which they take their fee and (ideally but not usually) pay the creditor when enough money has built up.
• Debt negotiation services. These companies will claim they can get creditors to reduce your payments, but they won't necessarily have an overall debt plan.

Scam-Ridden Industry

Unfortunately, this entire industry is plagued with scams. The FTC and several state attorneys general have sued hundreds of debt settlement companies over the years for misleading customers about what they can actually accomplish, how high their fees are and for violations of consumer protection laws and state laws. Many nonprofit credit counseling companies also had their nonprofit status terminated by the IRS for making a profit.

Federal & State Regulations

Nearly every state has laws regulating companies that provide debt settlement services, and many states prohibit these companies from even doing business. In many areas, these laws do not apply to debt settlement lawyers, whose services do have a greater benefit.

The FTC updated its Telemarketing Sales Rule in 2010 to give consumers some protection against these companies. This law applies to for-profit companies, services related to unsecured debts (like credit cards) and services rendered if the company calls you or you call them in response to an ad.

Before you pay any money to the company, they must disclose:

• The time necessary for the claimed results.
• If the service includes the settlement offer, the date the company will make the offer to your creditors and how long it will take to make a settlement offer to every creditor.
• The amount of money (or percentage of your debt) that must accumulate before the company makes a settlement offer.
• If the service requires you to stop making payments to your creditors, the negative impact on your credit, the fact that your creditors may sue you, and how much you may owe due to interest and fees.
• Your right to cancel the contract and receive a refund within 7 days of any money held in the account.

Companies that provide debt settlement services are also prohibited from collecting fees until it has received an agreement to reduce at least one debt, and you have made one payment on that agreement. This is very important to remember, and it's one of many rules that is often broken.

Before you turn to any services designed to reduce your debt, make sure you understand your rights under the law and avoid any companies that raise red flags by breaking these rules that protect you.

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