NEW YORK — Companies that promise to reduce or eliminate credit card balances and other debt for customers will no longer be allowed to charge an upfront fee.
The Federal Trade Commission said yesterday that the new restrictions are a crackdown on the debt-settlement industry, which has flourished as consumers struggle to pay bills.
Debt-settlement firms can charge a fee only if a customer’s debt has been reduced, settled, or renegotiated, starting Oct. 27.
Since the start of the recession, the Better Business Bureau has received more than 3,500 complaints about debt settlement. Customers complained they ended up deeper in debt or were sued by creditors after failing to make payments. The bureau did not separately track complaints against the industry prior to the recession.
Debt-settlement companies often charge an upfront fee, typically a percentage of the customer’s outstanding balance. In exchange, they promise to negotiate with creditors to reduce or eliminate the debt.
The new FTC regulations also require companies to disclose how long it will take to get results, how much it will cost, and any negative consequences that could arise.
For example, customers can go deeper into debt when they hire a debt-settlement company. This is because they stop making payments on their loans, and late fees and interest charges pile up.
Customers are often required to set aside money in a separate account maintained by the debt-settlement company, to eventually pay off any remaining debt. However, companies will be able to require such an account only if it’s maintained at an independent financial institution under a customer’s name. The customer must also be able to withdraw the money at any time without penalty.
Debt-settlement companies that step outside the rules will be subject to a $16,000 fine per violation. The rules apply only to for-profit companies. The agency warned it will go after companies that pose as nonprofits.
The Better Business Bureau cautions customers to be wary of any organization that charges steep upfront fees. It also suggests that struggling borrowers first contact lenders directly to renegotiate debt, or seek help from nonprofit credit counseling centers.