FTC Bars Up-Front Fees For Debt Settlement Companies

Have you ever seen  those ads on late night television that offer to settle your debt for less than you owe? They charge up front fees to their clients. Some offer money back if they do not get the desired result. Well beginning October 27, 2010, those companies will no longer to charge those up-front fees.  The FTC Federal Trade Commission said they are cracking down on the debt-settlement industry. This industry flourished during the economic downturn as borrowers struggled to pay their bills.

Now debt settlement companies will only be able to charge a fee once a customer’s debt has been reduced, settled or renegotiated. Many customers’ of debt settlement companies complained they ended up deeper in debt or were sued by the creditors after failing to make payments.

These companies now have to disclose to customers how long it will take to get results, how much it will cost and any negative consequences that could arise from the process.  These companies tell their clients to stop making payments on their outstanding loans, such as credit cards, personal lines of credit and medical bills. Once a customer stops paying their credit card bills, the credit card companies add on late fees and increase their interest rate, leaving the borrower in a worse situation.

In addition, if the credit card company relieves more than $600 of debt, they can be required to send the borrower a 1099. That means that on the next years tax return the borrower will have to pay the amount of debt reduced, times their income tax rate. So if you owe the creditor $10,000 and the debt is negotiated down to $6,000, and you are in the 30% tax bracket, on next year’s tax return you will owe $4,000 X .3 = $1,200. This must be disclosed to customers.

Fine violations for these companies will cost up to $16,000 per violation. These rules apply to for profit companies. The FTC also promised to go after companies who pose as non-profits.

If have questions on bankruptcy please email David at:

David@ambroselawgroup.com or call (248) 624-5500

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Filed under Bankruptcy/Debt, David Lutz

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