If you’re behind on a merchant cash advance, loan or line of credit, you may be wondering if settling for less than the full amount owed is legal. It is. At Delancey Street, it is one of the first questions the owners we talk to ask. You can negotiate with a creditor to reduce or modify your debt, and you can hire a company to do it on your behalf. But it is a regulated business. Why? Because the industry had issues; in the decade prior to the federal rule, the FTC and state enforcers reportedly brought a combined 259 cases to stop deceptive and abusive practices by debt relief providers that targeted people in financial distress.
Telemarketing Sales Rule
The big federal rule was the one from the FTC. On July 29, 2010, the FTC issued a final rule amending the Telemarketing Sales Rule in order to strengthen consumer protection when purchasing debt relief services, such as debt settlement. The stated intent was to increase safeguards against deceptive and abusive telemarketing practices in debt relief services. The rule broadly defines “debt relief service” as: Any service that, directly or indirectly, advertises or claims to renegotiate, settle or in any other way alter the terms of a consumer’s debt with one or more unsecured creditors or debt collectors, including services that claim to reduce the amount, interest rate or fees the consumer owes to his or her creditors.
How has this rule changed things for for-profit debt relief companies selling their services over the phone? They can no longer charge a fee up front for settling or reducing a customer’s debt. They must make specific disclosures while telemarketing. They can’t make misrepresentations. Plus, it also applies to calls you make to these firms in response to their debt relief ads. The rule covers debt settlement, debt negotiation, and credit counseling. It does not cover nonprofits, though the government has said it does cover companies that falsely claim to be nonprofits.
A company can’t collect a fee until it has successfully negotiated, settled, reduced, or otherwise altered the terms of at least one debt; until there’s a written agreement with the creditor that the customer has signed; and until the customer has made at least one payment under that agreement. The FTC found that charging fees up front was both misleading and a barrier to actually getting people out of debt. Note that the rule doesn’t say how much a company can charge - only when it can collect. Many states, however, do regulate the amount and timing of fees.
The rule allows debt relief companies to insist that clients deposit their fees and the funds earmarked for creditors into a “dedicated bank account.” However, a company can only demand such an account if five requirements are met:
- the money must be held in an account at an insured institution;
- the customer must remain the owner of the money, including any accrued interest;
- the customer must be able to access the money at any time without penalty;
- the provider must not own, control or have any affiliation with the company managing the account; and
- the provider must not exchange referral fees with that company.
The FTC viewed these conditions as protecting customers from having their money misused by the provider.
The debt relief company has to tell you all the basics before you sign up for anything: how long until you see results, how much it’s going to cost, what the possible negative impacts are of using debt relief, and some important information about the “dedicated account” if it has one. In fact, it’s illegal to lie about any aspect of a debt relief service. They can’t make false statements about things like how well they’re likely to work or whether they’re a nonprofit. And the Telemarketing Sales Rule says it’s also illegal to give “substantial assistance” to someone you know is breaking it, or whose violations you deliberately ignore. In conjunction with the rule, the FTC has issued guidance detailing the evidence providers must have to support the advertising claims typically used in connection with the sale of debt relief.
The rule is enforceable. It went into effect September 27, 2010; the advance fee ban went into effect October 27, 2010. The FTC, the states and, since 2011, the Consumer Financial Protection Bureau have brought many cases alleging violations. They have pursued debt relief providers and also service providers like payment processors and lead generators. A number of states have adopted some or all of the rule, including the advance fee ban. Many already required licensing and regulated the fees that providers could charge. Some web-based providers may be outside the rule’s reach.
This rule is the product of an old law. The Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. 6101, et seq. (the Telemarketing Act), was enacted in 1994 to address deceptive and abusive telemarketing and authorize the FTC to promulgate a rule defining and prohibiting such practices. The Act further provides that state attorneys general and other appropriate state officials, as well as persons meeting its jurisdictional requirements, may bring civil actions in federal district court.
Keep in mind that legal does not mean that a creditor is obliged to work with you. Some of this industry’s oversight outside of enforcement investigations actually comes from creditors and debt collectors, who may or may not want to engage with a debt relief provider representing you. Remember, a settlement is an agreement, and both parties have to agree to make it happen.
Settle Business Debt for Less than What You Owe
Armed with that knowledge, what should you expect as the owner of a business? You’ll be happy to know that you can settle business debt for less than what you owe - and you can hire a firm to do it for you - and both of those are legal. These guidelines were created for consumer protection, and some states have their own versions of the rules. But they serve as a solid benchmark to evaluate any debt settlement company: how does it get paid, how does it control your money, what information does it provide beforehand, and does it guarantee anything it can’t truly assure. If a firm demands a large upfront fee before resolving any debt, or refuses to clearly explain its costs and potential pitfalls, you should avoid that company.
We negotiate with MCA funders, lenders, and other creditors for less than the balance owed. We do not sell you another loan. Our fee is one percentage of the enrolled debt, which we quote to you in writing, before any work is done. Delancey Street is not a law firm. If the right decision for you is litigation or bankruptcy or tax resolution we will refer you to a vetted independent attorney. The first consultation is always free and confidential. If your case cannot be won, or if a cheaper option is available, such as Subchapter V bankruptcy, we will tell you on the first call.
