Sorting Out Debt-Relief Promises
Consumers will be protected from debt-relief companies that charge hefty upfront fees and make questionable claims, thanks to new government rules that take full effect in late October.
"The new rules are a huge first step," says Lauren Bowne, staff attorney for Consumers Union. "They're going to prevent companies from charging upfront fees until they actually do something for you."
But consumers shouldn't get too complacent. The amendments to the Telemarketing Sales Rule, or TSR, apply only to for-profit companies and do not cover ambiguous claims that might be made by such companies on the Internet or in face-to-face meetings.
The rules come amid a growing number of consumer complaints, and as the number of companies promising consumers relief has skyrocketed in the recession. In 2002, for example, there were only eight debt-relief companies in the business. Today there are at least 2,000, and they're managing a total of about $20 billion in credit-card and other unsecured debt, according to the Association of Settlement Companies, a trade organization.
Cracking Down
The regulations also will dramatically change the industry's business model, likely forcing many -- good and bad -- out of business.
Three TSR provisions to take effect Sept. 27 should significantly reduce the numbers of late-night TV advertisements that promise a quick settlement for pennies on the dollar. The rules call for debt-relief companies to make specific disclosures to consumers about what will happen, what it will cost, how long it might take and what kind of results to expect, including any negative consequences.
The regulations, which extend the TSR rules to cover calls consumers make to firms in response to debt-relief ads, also will ban companies from misrepresenting what they can do.
The most significant change outlaws for-profit companies that sell debt-relief services over the telephone from charging fees before they settle or reduce credit-card or other unsecured debt. That rule takes effect Oct. 27.
Typically, a consumer pays into an account for multiple months before the debt-relief provider begins negotiating with creditors. The account is accumulating money that will be used to pay off the negotiated claims as well as cover the debt-relief company's charges.
Most companies charge consumers a fee of about 15% of their total debt and start to withdraw chunks of that fee before work actually begins. For a person with $20,000 in debt, fees would total about $3,000, generally over a three-year period or the time it takes to settle all the claims.
"Too many of these companies pick the last dollar out of consumers' pockets, and far from leaving them better off, push them deeper into debt, even bankruptcy," says Jon Leibowitz, chairman of the Federal Trade Commission, in a statement describing the new rules.
Debt-relief providers now must successfully renegotiate, settle, reduce or otherwise change the terms of at least one of the consumer's debts before charging the consumer, according to the FTC.
Debt-relief companies also can't charge a consumer until there's a written contract in hand and at least one payment has been made to a creditor.
"This becomes a capital challenge to us," says Andrew Houser, chief executive of Freedom Debt Relief, which bills itself as the nation's largest negotiator of consumer debt. Mr. Houser, who worked with the FTC on the rules, says his company settled more than $400 million in debt last year.
"Our profits are going to go negative in the first two years," he says. "But this goes a long way in cleaning up the industry."
Thousands Affected
Debt-settlement companies can, and often do, get creditors to slash as much as 50% off an account's balance, but there's no guarantee they will be able to do that. Terms vary by lender and by consumer. A retiree, for example, might get different terms than a younger, single man with a job.
Since the start of the recession, the Better Business Bureau has logged more than 3,500 grievances in all 50 states. State attorneys general also have fielded calls. Many consumers complained that they had paid hundreds of dollars in upfront fees but never got relief.
"As hard as it's going to be for us," says Mr. Houser, "if you take the long-view perspective and these companies that are giving our industry a bad name aren't around a year from now, it becomes very hard to criticize an industry that is not charging fees until and unless they get results."
But consumers shouldn't get too comfortable with debt-relief companies once the rules take effect. While the rules cover credit-counseling, debt-settlement and debt-negotiations services, they do not cover nonprofit firms that offer those services, because the FTC lacks authority over them.
Ms. Bowne of Consumers Union looks to the fledgling Consumer Financial Protection Bureau, and Congress, to plug those and other loopholes.
"Finally, people are waking up to some of these inherently dangerous financial products," she says. "It took the economic crisis to see what happens when there's no regulation."
By JENNIFER WATERS
MARKETWATCH SEPTEMBER 5, 2010
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