Prior to the new FTC debt relief legislation, one of the biggest beefs consumers had with debt negotiation companies was that they grossly misrepresented their services to potential customers and then failed miserably when it actually came to living up to those promises. The Final Rule (legislation enacted by the FTC in 2010 targeting the debt negotiation industry) was put in place to curb this behavior among other things.
While it's not important for you to understand all the ins and
outs of these laws, it is however important for you to understand the
different claims that companies make that may in fact be
misrepresentative of the actual services they are able to provide. When
you are desperate to get out of debt, it is easy to fall prey to debt
relief providers who promise the moon up front, but fail to deliver in
Below you will find specific references to facts that the FTC laws clearly state must not be misrepresented. The best way to use the information below is to apply it when you are reading a debt relief company's marketing material, or speaking to a representative on the phone. Once you are aware of the possible misrepresentations that debt negotiation companies can and will make, you will be in a much better position to ask more detailed questions and in the end protect yourself from unscrupulous providers.
The FTC makes it clear that debt negotiation companies "must not misrepresent any material aspect of their service". So what does this mean exactly? Well, here are the types of claims that a company might make which must be factual.
1. Non-profit vs. for-profit. A company cannot represent themselves as a non-profit company if in fact the are not.
2. The percentage of debt that a consumer will save by using their services, or the amount of money that will be saved.
3. The amount of time that it will take to achieve the results that the company professes it can obtain.
4. The percentage of a debt or the amount of money that you the consumer would have to save before a) the debt negotiator begins the settlement process with your creditors and b) the debt negotiator makes an offer to your creditors that has a high likelihood of acceptance.
5. Credit reports and credit scores. Enrolling in a debt settlement program will likely lead to a drop in your credit score and will also damage your credit report. Claims to the contrary are likely misrepresentations.
6. Enrolling in a debt settlement program will not protect you from lawsuits or collection agencies. Claims to the contrary are misrepresentations.
7. Finally, debt negotiation companies must also be truthful when making claims about the percentage or absolute number of consumers who have achieved the results that they represent.
Alright, so now you have an idea of what claims a debt negotiation
company might make and cannot, by law, misrepresent. This of course
does not mean that they won't (either intentionally or
unintentionally), but it at least gives you a heads-up as to what to be
aware of when interviewing a company that you might work with. And
while you are interviewing them, make sure that you ask the following
two questions about their claims regarding the percentage of savings
that you will likely realize if you enroll in their program. For
If a company claims that it can save you 50% of your outstanding debt ask them:
1. "Is that 50% of the amount of the debt when I enroll, or 50% of the amount of the debt at the time of settlement?" You see, once you enroll your debts in the program, most debt negotiation companies will require you to stop paying the creditors to whom these debts are owed. From that point onward you may be hit with increased interest charges, penalties and late fees that will continue to pile up over time. A credit card debt that was $5,000 when you enrolled in the program, may have easily ballooned to $6,000 twelve months later. If at that time you settled the debt for $3,000, this represents a 40% savings $2,000 / $5,000 = 40%) not a 50% savings which is what the percentage would be if you used the $6,000 figure.
2. "Is that 50% savings after I pay your fee, or before?" Sticking with the above example, if the debt was settled for $2,500, (representing a 50% savings), but the fee for the service was $750 (15% of the enrolled debt amount which is quite common), the actual savings realized by you would only be 35%.
Even with the new Final Rule laws in place to protect consumers it is still ultimately up to you to educate and protect yourself from the "bad actors". The more you know about the laws, what to look for in reliable debt negotiation companies and the questions to ask before signing up with one, the less chance you'll have of being scammed and ending up further in debt and further in despair.