USA Today.com has posted an article about how a new rule from the Federal Trade Commission can aid consumers who are looking into debt settlement options. This new rule will make it much more difficult for debt-settlement companies to make questionable claims about their success rate. Furthermore, the rule will ban the companies from charging up front fees, which is likely to drive a lot of the debt-settlement companies out of business.
“With this rule we’ll be taking a major step towards cleaning up the Wild West of debt settlement,” FTC Chairman Jon Leibowitz says.
The rule will crack down on marketing companies that earn big commissions for signing up as many customers for debt settlement as they can, says Gerri Detweiler, personal finance expert for Credit.com. These businesses have no interest in determining whether consumers are good candidates for debt settlement, she says.
Michael Bovee, founder and president of Consumer Recovery Network, a debt-settlement firm that doesn’t charge upfront fees, agrees. Many consumers who have signed up for debt settlement in recent years should have filed for Chapter 7 bankruptcy, he says.
But Detweiler contends that debt settlement remains a viable option for some consumers who have large credit card debts but aren’t good candidates for bankruptcy. A 2005 bankruptcy-reform law created a “means test” that has made it more difficult for some individuals to file for Chapter 7 bankruptcy. And a bankruptcy filing will stay on your credit report for 10 years, which could make it difficult for you to get a job, particularly one that requires a security clearance.
The FTC has provided a handy guide that prompts consumers to ask the following questions before signing up with any debt settlement company or agency.
-What’s your success rate, and what percentage of people drop out of your program?
The rule prohibits companies from cherry-picking examples of successful customers to inflate their results. If a debt-settlement company claims it can reduce your debt by a certain percentage – 40% to 60%, for example – ask for objective evidence to support that claim.
•How much will it cost, and how long will it take to settle my debts? The biggest misconception consumers have about debt settlement is they’ll get a service in exchange for an advance payment, Leibowitz says. “Most of them do not do that.”
The FTC rule bars debt-settlement firms from collecting any money until they’ve settled or reduced your debt. But you should still make sure you understand how much the service is going to cost and how long you’ll have to wait before you see results. Under the FTC rule, if the company bases its fees on a percentage of the amount it estimates you’ll save, it must provide both the percentage and the estimated dollar amount that represents.
•How much will I need to save? Debt-settlement companies typically ask you to make regular payments to a dedicated account. When a certain amount has been saved, they’ll go to your creditors and offer to pay off a percentage of the debt. The rule requires debt-settlement firms to provide a reasonable estimate of the amount you’ll need to save before they’ll make an offer.
•Where will the dedicated account be held? The FTC rule establishes several conditions for this account: It must be held at a financial institution that’s not affiliated with the debt-settlement company; it must belong to you; and you must have the right to withdraw your money at any time.
Before signing on with a debt settlement group, it’s a good idea to call your creditors and explain the situation.
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