How and when a company offering debt relief can collect a debt settlement fee is laid out quite clearly by the new "Final Rule" which serves as an addendum to the Federal Trade Commissions Telemarketing Sales Rules. Keep in mind however, that companies and attorneys that do not market their debt negotiation services using telemarketing are not bound by these new laws. (Actually it is not quite so cut and dry in terms of who is and who isn't affected by these new laws. But as far as you are concerned, you should only be dealing with companies or attorneys who run their businesses and collect their fees based on the principals of the new laws.)
Let's start with some assumptions...
Once you enter the program you will be required to stop paying your 3 creditors (if you have not already). It is important to understand that as a result of this action your credit score and credit report will likely be further damaged. It is also important to understand that just because you are now in a debt settlement program, this does not mean that your debt will stop growing. In fact, there is a good chance that the interest rate on the debts could increase and you will likely be hit with late fees and penalties which will further add to the debts.
No Fees Are Due At This Point By law, debt negotiators cannot collect a debt settlement fee until an agreement to settle the debt has been reached, and you (the consumer) have paid the required amount. In other words, no up-front fees may be collected by settlement companies.
Aside: As I mentioned above, there are some exceptions to this. For example, any company or individual who meets face to face with the client prior to them signing on to a debt settlement program are not bound by these new laws. This, among other things, means that they can in fact charge up front fees. My advice to you however is... NEVER PAY AN UP FRONT DEBT SETTLEMENT FEE EVEN IF THE COMPANY OR INDIVIDUAL IS NOT BREAKING THE LAW BY COLLECTING IT. Why? Because you simply don't have to. There are plenty of companies out there who will do the work and settle your debts prior to you having to pay a dime. And if you don't pay until the service is complete, then your chances of being scammed are reduced immensely.
It is not uncommon to have your first debt settled within six to eight months of the start of the debt negotiation program. In our example we will assume that a settlement agreement of $2,500 has been reached on the $5,000 debt. You agree to the amount, and make the payment. It is at this point that the company can collect its first debt settlement fee. But how much should it be? Well, the law states that the fee charged must be in the same proportion to the debt settled. In other words, because 1/3 of your debts were settled, the company can collect 1/3 of the total debt settlement fee. Therefore you now owe $750 (1/3 X $2,250 = $750).
Continuing with this thought, a company cannot charge different percentage fees on different debts that you enter into the program. For example they could not charge you 10% on the $3,000 debt, 15% on the $5,000 debt and 25% on the $7,000 debt. The percentage must be the same for each debt. This helps guard against companies front loading their fees.
After fourteen months of you saving money, and the company negotiating with your creditors, the credit card company holding the $3,000 debt agrees to settle for $1,200. At this point (after the settled has been paid) you owe an additional debt settlement fee installment of $450. (15% of $3,000, as agreed to up front)
It's been twenty two months since you stopped paying your creditors. The final credit card company was beginning to worry that you might declare bankruptcy, and reluctantly agreed to settle the debt once and for all for $2,500, a 64% savings to you (before the debt settlement fee). Again, once the settlement has been paid to the creditor, the debt negotiator is entitled to the final installment of their fee, $1,050.
By forcing debt negotiation companies to actually obtain a favorable result prior to collecting their debt settlement fee, the FTC laws regarding the debt relief industry have gone a long way to protect you and other consumers from companies that would take your money and not follow through on their promises. They have done their part so to speak. Now it is up to you to do your part and only deal with debt negotiators who collect their fees after they deliver the promised results to their clients.