If you're in debt and desperate, debt settlement companies are gunning for you.
The bad guys have only a few more weeks to engage in the kind of misleading advertising and deceptive practices that have enriched their industry while impoverishing already-strapped borrowers.
So expect to hear a lot about "the credit card debt relief act" or "President Obama's debt relief plan," among other bogus come-ons.
"The advertising sounds so good that if I didn't know what I know, I might fall for this, too," said debt expert Gerri Detweiler, who runs DebtCollectionAnswers.com. "If the government bailed out the (credit card) issuers, why didn't they do anything for the borrowers?"
There is, of course, no credit card relief act or program that will magically erase your debts. Banks got bailouts because their collapses were deemed too dangerous to the world's economy. The collapse of individuals' finances isn't considered nearly as catastrophic; it's just a cost of doing business.
Costly promises
The companies making the claims about new debt laws or programs typically aren't even in the business of settling debts for less than what you owe, Detweiler said. They're often marketing companies trying to generate leads they can sell to debt settlement outfits for $100 to $400 a pop.Their lies are just meant to suck you in. The real damage is done by debt settlement companies that paint too-rosy pictures about what they can accomplish, then hijack you for fat fees that may never result in settled debt but can trigger other, terrible consequences.
- How much the companies charge to settle debts.
- How long the process is likely to take.
- Any negative consequences of debt settlement, including the facts that your credit scores will be trashed, you may get sued and you're likely to get a tax bill for any debt that is forgiven.
Then, starting Oct. 27, debt settlement companies will be banned from collecting upfront fees. That's a big change that likely will flush a lot of poorly funded startups and fly-by-night companies out of the business.
"I think it's going to help the legitimate companies cut through the noise of the firms that don't do much debt settlement but do a lot of marketing and fee collection," Detweiler said.
The new rules
According to the FTC, after Oct. 27 debt settlement companies can't collect fees until:- The debt relief service successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of the consumer's debts.
- There is a written settlement agreement, debt management plan or other agreement between the consumer and the creditor, and the consumer has agreed to it.
- The consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
The agency won't cap how much debt settlement companies can charge, but the fee has to be "in proportion" to the debt that's settled. (Legislation was introduced in Congress last spring to cap fees -- S. 3264 in the Senate and H.R. 5387 in the House -- but there hasn't been much action on either bill lately.)
Another important change has to do with where clients put their savings. Typically, debt settlement companies tell you to stop paying your creditors and instead put aside your payments to accumulate a lump sum that can be used for settlement offers.
It's always been a bad idea to let a debt settlement company have or control those savings, but now the FTC has spelled out that the money needs to be in an insured bank account controlled by the client, not the debt settlement company.
Continued: Before you try to settle