FTC issues final rule for for-profit debt relief companies

The Federal Trade Commission (FTC) recently issued its final rule to protect consumers from certain debt relief offers. Under the new rule, which becomes effective on Oct. 27, 2010, for-profit companies offering debt relief services may no longer charge a fee prior to settling or reducing a consumer's unsecured debt, like credit card debt.

The new rules were unveiled during a Middle Class Task Force meeting on July 29, 2010, with Vice President Joe Biden and FTC Chairman Jon Leibowitz.

At the meeting Leibowitz said, "This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up-front fees. 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."

Under the advance fee ban, covered debt relief companies may not charge consumers until the service is able to renegotiate, settle, reduce, or change terms related to at least one piece of the consumer's debt. The company and the consumer must also first agree to a debt-management plan or reach another agreement between the provider and consumer. And the consumer must have made at least one payment to their creditor(s) because of the agreement negotiated by the debt relief provider.

In addition to the above rule, three more telemarketing rules will take effect on Sept. 27, 2010.

The first will require debt relief companies to make specific disclosures to consumers about the services they offer the consumer. The second will prohibit them from making misrepresentations about their company and their services. And the third will extend the Telemarketing Sales Rule to cover calls made by consumers to firms advertising debt relief.

According to the FTC, the final rule applies to telemarketers of for-profit, debt relief services. This includes companies offering credit counseling as well as those offering debt settlement and negotiation services. While it does not cover not-for-profit organizations that offer debt relief services, it does cover those companies that falsely claim to be nonprofit entities.

-Chris Meehan