Expense Management America

On October 27, 2010, the FTC amended the Telemarketing sales rule to include debt relief services sold over the phone, credit counseling, debt settlement, and debt negotiation services that aim to reduce credit card or other unsecured debt. As of this date these companies may no longer collect fees in advance of providing services.

Debt relief companies are now required to make four specific disclosures to consumers, including how long it will take for consumers to see results, how much it will cost, the negative consequences that could result from using debt relief services, and key information about dedicated accounts if they choose to require them.

Debt relief companies are prohibited from making misrepresentations, including specific misrepresentations commonly made in this area. The rule extends the Telemarketing Sales Rule to cover inbound calls consumers make to these firms in response to debt relief advertising.

As part of the advance fee ban, the rule specifies that debt relief companies may require that consumers set aside their fees and savings for payment to creditors in a “dedicated account” if the following five conditions are met: the dedicated account is maintained at an insured financial institution; the consumer owns the funds (including any interest accrued); the consumer can withdraw the funds at any time without penalty; the provider does not own or control or have any affiliation with the company administering the account; and the provider does not exchange any referral fees with the company administering the account.

Our experience with debt negotiating companies is that they attract customers with large credit card debt by claiming to be able to settle those debts for a fraction of their face value. They often claim that their services are more effective than those provided by credit counseling services and that they are a superior alternative to bankruptcy.

These companies usually instruct their clients to stop paying their creditors. Some companies direct clients to make their payments to the debt negotiation company instead. They promise that when sufficient cash has been accumulated to offer a settlement to a creditor, they will do so. They go on to say that their program may take two or three years to complete. Most companies collect their fees upfront and generally the fees are based on some percentage of the promised savings.

Other companies simply collect their fee and advise debtors to save their money to pay their creditors themselves. California law limits the amount of fees debt negotiators can charge, but by not collecting the money and distributing it to your creditors, companies can remove themselves from the limiting statutes and charge whatever they wish. What they are supposed to do for you while you’re saving up your money is to contact your creditors and inform them that they’re working with you, negotiate the amount to settle your debt, and ask them stop contacting you.

Complaints on these companies allege that creditors continue to harass clients, fees and interest continue to accumulate, and that the companies do not contact the creditors. Usually, creditors turn the claims over to collection agencies, file suit and pursue collection of the money owed to them. Debts are seldom settled, customer's credit is ruined, and many people are sued forcing them to seek bankruptcy protection. Typically, it is difficult to obtain refunds from the companies.

Debtors may not realize that if their creditors do accept a negotiated settlement, the amount forgiven constitutes taxable income.