Debt Relief Companies Prohibited From Collecting Advance Fees Under FTC Rule That Takes Effect October 27, 2010

Starting October 27, consumers trying to settle their debts will be protected by a new rule that prohibits companies that sell debt relief services over the telephone from charging fees before settling or reducing a customer’s credit card or other unsecured debt. The ban on advance fees reflects changes that the Federal Trade Commission made to its Telemarketing Sales Rule last July.

“The rule change that goes into effect next week is a major victory for consumers struggling to control and manage their debt without inadvertently digging themselves in deeper,” Chairman Jon Leibowitz said. “Starting on October 27, debt relief telemarketers are on notice – if you charge consumers before actually helping them, you will find the FTC and state enforcers knocking at your door to enforce the Rule. We look forward to working with our state partners to ensure that the Rule is enforced across the country.”

Over the past decade, the FTC and state enforcers have brought over 250 law enforcement actions to stop deceptive and abusive practices by debt relief providers that have targeted consumers in financial distress. The FTC will be enforcing the new rule, as will the states – which also have authority to bring actions under the Rule.

The new advance fee ban specifies that fees for debt relief services may not be collected until:

* the debt relief service successfully settles or changes the terms of at least one of the consumer’s debts;

* there is a settlement agreement, debt management plan, or other

agreement between the consumer and the creditor that the consumer has agreed to; and

* the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

The new rule also has provisions to ensure that debt relief providers do not front-load their fees if a consumer has enrolled multiple debts in one debt relief program.

The advance fee ban does not apply retroactively, so it applies only to consumers who enroll in a debt relief service after October 27, 2010.

See the full FTC release here.

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