Debt-relief companies aren’t in the business of lending money, so what do they do? For a fee, they negotiate with your creditors on your behalf. But if you ask them for a loan, they won’t give you one. That’s because they don’t provide loans, and also because they don’t invest their own money in your business. So those companies do specialize in one thing: negotiation. You still owe your creditors money, but ideally you owe less money. The fee for getting you there is how they make money.
Telemarketing Sales Rule
The Federal Trade Commission’s rule describes a debt relief service as any service to renegotiate, settle or change the terms of a debt owed to unsecured creditors or debt collectors, such as cutting the balance, the interest rate or the fees. That rule is the FTC’s Telemarketing Sales Rule, amended in 2010. It’s written in a way to protect consumers from rip-offs. It covers debt relief sold over the telephone. This includes calls you make in response to an ad. Some firms available via the internet may fall outside the ruling. A good yardstick for a business owner is the law itself.
The heart of it is timing: such a firm can’t charge a fee until at least one debt is actually settled or reduced. In the decade before the rule, the FTC, along with states, filed 259 cases against debt relief companies for abusive and deceptive practices targeting consumers in financial trouble. In writing the rule, the Federal Trade Commission decided that charging fees in advance for debt relief, a field it sees as often filled with deception, was itself deceptive. That decision was based on a review of public comments, a workshop, testimony before Congress, complaints, and enforcement experience. It also found that advance fees get in the way of helping people get out of debt. The Consumer Financial Protection Bureau has brought cases under the rule since 2011.
How can a debt-relief agency make money if it can’t collect fees until debts are actually settled? Under that rule, fees can be charged only when
- (a) the agency has actually settled, reduced or changed at least one debt;
- (b) there is a written settlement or other agreement with the creditor and the client has agreed to it; and
- (c) the client has made at least one payment to the creditor under that deal.
The fee is generally charged per debt settled, so they only make a fee after the service is rendered.
How does a debt relief firm ensure its fee is paid? The rule says the company can require the client to save the fees and settlement money into a separate bank account, and each time a debt is settled, the company’s fee is paid out of that account. So the company’s risk of not getting paid off is much lower. There are five conditions that a dedicated account must meet:
- The account must be at an insured bank;
- the client must have legal ownership of the money and interest;
- the client can withdraw the money at any time without penalty;
- the debt relief company can’t have any ownership in, control over, or be “affiliated with” the institution managing the account; and
- the two can’t trade referral fees.
In plain terms, this company can’t just put your money into their own bank account.
However, the FTC does not set any limits on the amount a debt relief company may charge, it’s just a matter of timing. Many states do have regulations in place that limit the amount and timing of the fees. Companies must comply with the federal rule and the laws of each state where they operate.
While paying for results is attractive to consumers, it places an uncertain cash flow on these companies and makes operations more complicated. It’s been a tough landscape for startups that start out small and can’t afford to draw on a lot of capital. Put another way, a firm that never lends you a dollar is betting its own payroll on your creditors saying yes. Debt settlement companies may have to wait to see whether creditors will work with them at all. Despite the challenges, it hasn’t held off investors, who have shown interest in the sector since the rules are now clearer. Recently, though, some banks have begun partnering with debt relief companies to offer loans to customers who have signed up for a settlement program, though the debt relief firm itself still earns a fee.
But there are others who make a living around debt relief, too: lead generators who sell your name, payment processors who move the money. The FTC and CFPB have sued those, too. The rule makes it illegal for someone to give “substantial assistance“ to a company that they know is violating the rule.
When Choosing a Debt Settlement Program
Before you sign up with a firm, they are required to tell you how long it will take to see results, how much they will cost, any potential negative consequences, and key facts about the dedicated account if they require one. Under the law, debt relief companies cannot lie about their success rates, or even pretend they are a non-profit. Real non-profits aren’t covered by the law, so if you are looking for a non-profit debt relief company, be sure it is actually non-profit.
So if you run a business and you’re weighing a debt settlement offer, the questions to ask follow from how these firms get paid. First, how much will they charge? Second, when will they charge you for services? Do they have state laws they have to follow? Ask, too, how long it will take to see results. And if they are asking for the money upfront, why should you trust them? And finally, what are the potential risks of using the service? The answers to those questions will guide you to determine whether or not the settlement firm is worth it.
For you, the business owner, the practical upshot of all this is simple. A firm that follows these rules can’t just up and take your money without doing anything. They’ve got to put in work and show you results. Only once they’ve done that can they charge their fees. These firms don’t act as lenders. The bills are not paid with the firm’s money. Instead, business owners are paying a fee to hire a company to negotiate with creditors on their behalf. When choosing a debt settlement program, make sure it is a company that will help you rather than take advantage of your situation.
