41 State Attorneys General Join To Seek FTC Rules Amendments To Address Upfront Fee Debt Relief Ripoffs

In a recent letter to the Federal Trade Commission, 41 state Attorneys General have expressed their concerns regarding the sale of debt relief services to consumers and the complaints they've received about alleged deceptive trade practices and upfront fee ripoffs engaged in by these operators, and the need for amendments to the FTC's Telemarketing Sales Rule to address these concerns.(1)

For the letter, see Telemarketing Sales Rule - Debt Relief Amendments.

For a related report from the National Consumer Law Center, see An Investigation of Debt Settlement Companies: An Unsettling Business for Consumers.

(1) The AGs describe, in pages 2-4 of their letter to the FTC, the debt relief business models that are the cause for their concern:

• In contrast to debt management plans in which consumers make monthly payments to creditors, the debt settlement business model generally requires that a consumer stop making regular payments to creditors. Instead, the consumer makes payments directly to the debt settlement company or into a separate account arranged by the settlement company. The consumer continues to pay into the account until the debt settlement company believes there are sufficient funds to attempt to negotiate and settle the consumer’s debts. Debt settlement companies do not disburse regular payments to consumers’ creditors. Presumably, withholding all payments from the creditor increases the company’s bargaining position. Almost all debt settlement companies charge a large portion of their fees in advance before they perform any significant services on behalf of the consumer. It is this business model which has been reported to be growing rapidly and has come under increased scrutiny by the media, regulators, consumer advocates, and federal, state and local enforcement agencies.

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• [Another] type of debt relief business [causing concern] is a relatively new breed: the debt negotiation model. These companies often represent that they can negotiate dramatic and immediate interest rate reductions on behalf of consumers and that the renegotiated credit terms will save the consumers thousands of dollars in a matter of months. Debt negotiation companies further claim that their counselors are specially trained and possess industry-insider knowledge and that consumers will not achieve similar results working directly with their credit card companies. The written agreements between debt negotiation companies and consumers, however, typically disavow the debt negotiation companies’ ability or obligation to secure reduced interest rates and merely promise to “show” consumers savings of thousands of dollars. After the consumer completes a financial profile, debt negotiation companies typically “show” the promised savings in an accelerated payment schedule. The “savings” are usually based on assumed interest rate reductions and increased monthly payments, which the debt negotiation companies’ customers usually cannot afford to pay. Like the debt settlement model, most debt negotiation companies charge all of their fees in advance, before any services are performed on behalf of the consumer.