ly.Debt settlement companies, who have actually thrived during the economic recession, have received a jolt with the FTC passing a new rule to control their activities. The rule passed by the Federal Trade Commission will prohibit the for-profit debt settlement companies from charging upfront fees for their services until they successfully renegotiates, settles or reduces the terms of at least one of the consumer's debts.

Prohibitions as per the new FTC rules

As per Federal Trade Commission, the new rule which is going to take effect from October 27, 2010, will prohibit the for-profit debt settlement companies from taking the following steps:

Misrepresenting facts : The for-profit settlement companies will be prohibited from misrepresenting any debt relief services in the FTC rule. They cannot even claim to reduce debt by a certain percentage without evidence to support that claim.

Fundamental information :  The settlement companies should clearly state the amount of time it will take for consumers to see results and the total cost of the service. Under this rule, if the company bases its fees on the percentage of what the consumer will save from its services, it must provide both the percentage and the estimated amount that will be saved.

Upfront fees : The new rule prohibits the debt settlement companies from charging any fees from the consumers until they settle or reduce debt. No fees can be collected from the consumers until –

A.    The company successfully settles or reduces at least one of the consumers’ debts.
B.    The company gets a written settlement agreement between the consumer and his creditor.
C.    The consumer has made at least one payment to his creditor according to the agreement negotiated by the settlement company.

Amount to be saved : The new FTC rule requires the for-profit debt settlement companies to provide an estimate of the amount the consumer will have to save before they make an offer to the creditors.

Dedicated account : The new FTC rule prohibits settlement companies from creating ‘dedicated accounts’ for the consumers if the account doesn’t meet the following criteria:

A.    The account needs to be maintained at an insured financial institution not affiliated with the debt settlement company.
B.    The consumer can withdraw funds from the account anytime without any penalty.
C.    The settlement company will not exchange referral fees of any sort with the company administering the account.

The new rule will make the settlement companies to go for a complete overhaul of their payment structure. The FTC has also warned that companies which will violate the new rule will be punished with a $16k fine per violation. Thus, the new rule will certainly bring relief to thousands of consumers who are reeling under high debts but are wary of the fraudulent debt settlement companies.