FTC cracks down on debt reducers

NEW YORK --- Companies that promise to reduce or eliminate credit card balances and other debt for customers will no longer be allowed to charge an upfront fee.


The Federal Trade Commission said Thursday that the new restrictions are a crack down on the debt settlement industry, which flourished during the economic downturn as borrowers struggled to pay bills.

Beginning Oct. 27, debt settlement companies will only be able to charge a fee once a customer's debt has been reduced, settled or renegotiated.

Since the start of the recession, the Better Business Bureau has received more than 3,500 complaints about debt settlement companies. Customers complained that they ended up deeper in debt or were sued by creditors after failing to make payments. The bureau did not separately track complaints against the industry prior to the recession.

Debt settlement companies often charge an upfront fee, typically a percentage of the customer's outstanding balance. In exchange, the company promises to negotiate with creditors to reduce or eliminate the debt.

The new FTC regulations also require debt settlement companies to disclose to customers how long it will take to get results, how much it will cost, and any negative consequences that could arise from the process.

The amendments to the FTC's telemarketing sales rule apply to any debt relief companies that sell services over the phone. They do not apply if the initial contact is in-person, or if the services are rendered entirely online.