As per a recent report by the Federal Reserve, the total revolving debt in America stands at $796.5 billion. Therefore, it is no wonder that a lot of American households are drowning in debt and seeking debt relief. Many people are not in a position to opt for debt consolidation because of blemished credit. Therefore, they approach the debt settlement companies to eliminate their financial troubles. Unfortunately, some sham companies cheat the consumers and take advantage of their economic plight. These companies lure the debtors with advertisements like “be debt free in 3 months”. However, they would collect fees from you without fulfilling their promises.

Law enforcement Officials have been inundated with complaints against debt settlement companies. The Better Business Bureau has the same experience. The consumers complain that debt settlement companies push them deeper into debt. They get sued by the creditors and the companies make no effort to rescue them. Phil Lehman, a reputed attorney, points out that a considerable number of debt settlement companies deliberately confuse the debtors about fees.

The U.S Government Accountability Office and the Federal Trade Commission have found out that huge fee for little result is quite common in the debt settlement industry. To make sure that the consumers get a fair deal, the FTC has come up with new debt settlement rules. Let’s have a brief look at some of them:

1) Upfront fee ban

A debt settlement company can ask for fees only if you have benefited from their services. For instance, they can collect fees from you, if the following conditions are satisfied:

If your debt has been successfully reduced.

If a settlement agreement has been documented and you have agreed to it.

If you have started making payments according to the new settlement agreement.

2) Making disclosures

The new FTC rules have made it mandatory for the debt settlement companies to make specific disclosures to the debtors. The companies have to clearly disclose the following information to the consumers:

The pros and cons of debt settlement programs.

Chances of a successful settlement.

The possible length of the program.

Also, the companies should avoid any kind of misinterpretation of facts.

3) Dedicated accounts

The debt settlement companies can ask the consumers to maintain a dedicated account. This account will be used to save money for fees and payments. However, the consumers should own the fund and must be able to withdraw it without attracting penalty. Also, the debt settlement companies must not exchange any kind of referral fee with the financial institution.

The debt settlement companies admit that the industry needs more transparency but they object to the banning of upfront fees. Sources from the industry say that most debt settlement companies are struggling and many of them may go out of business due to the banning of advance fees.

The new rules are a welcome step to combat debt settlement scams but they have some loopholes. For instance, they are mainly telemarketing rules and hardly protect the consumers when they deal face to face with the companies. Moreover, the rules do not limit the fees that can be charged by the companies. Scary fees are a part of debt settlement scams. So this omission leaves the FTC’s effort incomplete.

We should appreciate the FTC’s endeavor to crack down the fraud debt settlement companies. However, the consumers will be protected only if the rules are implemented strictly. That would not be easy.