Starting October 27, new federal regulations will bar debt settlement firms from charging fees for their services until they actually succeed in reducing a consumer’s debt. The prohibition on advance fees covers debt settlement services sold over the phone and follows new rules that went into effect last month requiring better disclosures for consumers.

As the new protections go into effect, Consumers Union is calling on the Federal Trade Commission to closely monitor compliance with the law and clamp down on debt settlement firms that try to get around these rules.

Under the new rules, a debt settlement company cannot charge any fees until it reaches a settlement on at least one of the consumer’s debts that the consumer agrees to in writing. Fees cannot be collected until the consumer has made at least one payment to the creditor as a result of the negotiated agreement. If one portion of the debt is settled, the fee will be limited to a proportion of what the total fee would have been if the entire debt was settled or a percentage of the amount saved by the settlement.

Since the new rules only cover debt settlement services sold over the phone, some debt settlement firms may try to circumvent the law by using a third party or notary to meet in person with consumers to finalize the contract after a traditional telephone sales pitch. Some debt settlement companies are reportedly considering working with a network of attorneys in different states who will meet face-to-face with a consumer to finalize debt settlement service agreements in person.

In addition, the debt settlement industry already has started selling “education kits,” which claim to help consumers deal with their financial situation, while emphasizing the importance of debt settlement services. These kits are sold at a high up-front cost along with a monthly charge and appear designed to lure consumers into signing up for a traditional debt settlement service agreement.

Beyond the prohibition on advance fees, debt settlement firms are subject to new rules requiring them to disclose to consumers the time it will take to reduce the debt, when the firm will negotiate a settlement with creditors, and how much money consumers must set aside before a settlement offer will be made. Debt settlement firms also must tell consumers about the negative consequences of not making payments to outstanding creditors, such as being subject to collections or lawsuits, decreased creditworthiness, and increased debt.

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