Rogue debt relief companies advertising through robocalls may no longer charge high upfront fees. That is the result of a Federal Trade Commission ruling that goes into effect October 27, 2010.
At issue is the practice of debt relief companies using auto dialers to contact thousands of people each day in order to push their financial products. The vast majority are debt settlement companies who prey on vulnerable debtors who are desperate to get help with their delinquent debt accounts.
What is happening is consumers are getting collection calls from their credit card and loan companies when they are unable to keep up with their payments. Then they get a call from someone who promises to help, only their promises include deceptive and false claims that cannot be substantiated.
Debt settlement company clients pay in hundreds and thousands of dollars in upfront fees. They first start to worry when the collection calls increase rather than decrease. Then when they get their first court summons, they realize that it was all a big mistake.
They have paid all of their money into these debt relief scams, and now they have no money to use toward the debt collector that is taking them to court. They face the shame of a judgment, the derogatory record on their credit reports and the resulting liens, wage garnishments and levies that can be initiated through a judgment.
This ruling by the FTC does not prevent the charging of high upfront fees by debt settlement companies. What it does is to ban this practice of front-loading fees if the client is sourced through a robocall. Additionally, clients who call in response to other advertising would also be protected under the Telemarketing Sales Rule.
The ruling does not apply to nonprofit organizations that have tax-exempt charity status. Of course, true charities focus more on fostering referrals and providing financial education for public benefit than on commercial advertising.
Debt settlement companies will have to choose their next step. Some will choose to defy the order and will have to be forced to shut down. Some will shift their tactics to other carpet-bombing advertising tactics, such as through direct mail or sending spam email, although they would still be subject to the limitations if clients call in to sign up. Others will likely shut down due to the inability to raise large amounts of upfront revenues without actually having to provide a service.
Since the entire debt settlement industry regularly breaks deceptive advertising laws, any impact will likely be the result of regulatory lawsuits on a per-company basis. That is something that we have already seen, with Attorneys General from New York, Texas and West Virginia leading the charge.
Consumers who do need debt help should ignore the false claims made by debt settlement companies. Instead, they should follow the advice of regulators and the Better Business Bureau by seeking help with a nonprofit credit counseling organization with a solid rating.
Note: Apparently the October deadline was too late for one state. Attorney General Bill McCollum barred Credit Solutions of America, one of the leading debt settlement companies, from enrolling new Florida clients using an advance fee model. This injunction is a result of a lawsuit initially filed by the state of Florida in October 2009. American Debt Arbitration and Nationwide Asset Services, Inc. were also barred from charging unlawful fees in violation of Florida’s Deceptive and Unfair Trade Practices Act.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."