American families won a major consumer victory today when the Federal Trade Commission issued a new rule barring debt relief firms from collecting up-front fees from customers before any service is provided.
We commend the FTC commissioners for exercising their authority to lay down common-sense rules in the debt settlement arena, where unfair and deceptive practices are rampant. The new rule applies to any debt relief firm that either receives a call from or makes a call to a customer. It prohibits these firms from collecting fees up front before they have provided any promised service or benefit to the consumer. Until now many debt settlement companies have required hefty fees—usually based on the size of the debt—at the beginning of a client relationship, before any of the customer's debts are settled. Far too often these companies never perform the task they were paid to do.
This model has been ripe for abuse, as research from Colorado, New York and other states has shown. The overwhelming majority of consumers pursuing debt settlement never see any benefit after paying large up-front fees. In many cases they end up even worse off than before. It is no coincidence that debt settlement companies are the leading cause of complaints and inquiries to Better Business Bureaus across the country and that 42 state attorneys general and the District of Columbia agree with the FTC that such a model is harmful.
While the FTC's new rule helps end one of the most egregious practices of the debt settlement industry, states can do more to curb others, such as charging unreasonablely high fees that are not tied to performance and doing so without assessing if a potential client is likely to benefit from a debt relief program.
The effective ban on up-front fees promotes fair, transparent markets. Consumers should pay for performance, not promises. The FTC has made clear it agrees.
For more information: Kathleen Day at (202) 349-1871 or firstname.lastname@example.org; Ginna Green at (510) 379-5513 or email@example.com; or Charlene Crowell at (919) 313-8523 or firstname.lastname@example.org.