A new regulation goes into effect today, potentially limiting the profitability of debt settlement companies. These companies can no longer ask for up-front fee payments from customers wishing to settle debt; clients need to pay only after the companies provide results.
In other words, for-profit debt settlement companies, including those masquerading as non-profit entities, must speak with your creditors and present your debt repayment plan before you make your first payment. In the current situation, these companies collect the payment in advance to make sure you can cover your debt before reaching out to the creditors to negotiate terms and formulate a plan.
While this sounds like a good rule designed to protect consumers from ineffective debt settlement companies, there are holes in the regulation that allow most companies to operate as before, often taking payment in advance and never delivering results.
The new regulation only applies to debt settlement companies selling their services over the phone. If you visit a debt settlement company in person, or if a representative comes to your door to explain the process, they can still collect the up-front fee. Additionally, attorneys are exempt from the new rule, and many debt settlement companies qualify as attorneys.
Not every debt settlement company is nefarious, but for those struggling with debt these highly-advertised companies seem like the only option. Sometimes speaking with creditors directly can produce results, and many Americans never bother to try to negotiate before giving up. Failing that, the National Federation of Credit Counselors is a non-profit organization that can help pair consumers with a legitimate, helpful debt counselor.
Federal Trade Commission press release, July 29, 2010