Until recently, debt settlement firms could pretty much charge you whatever they wanted for their services, and more significantly, collect those fees before they even settled a debt for you! The enactment of the "Final Rule" by the FTC in late 2010 changed this... somewhat.
Now, companies that provide debt negotiation services (whether that be the reduction of your overall debt or the reduction of the interest rates associated with them) can still charge whatever they like for their services, but, and this is major, they can no longer collect any fees from you until they settle or otherwise resolve your debt. That's right. If they don't provide the service that they promised you, you don't pay. Period. Here are the specifics of the new law along with some examples of how it will affect the collection of fees by debt settlement firms.
Before a debt negotiation company can collect a penny from you for their services, they must meet all of the following three requirements:
1. The first requirement that must be met is an obvious one... the company (or individual) must actually accomplish what they said they would do for you. If you hired them to settle your debts for a reduced amount, then they must have actually negotiated a reduction with one of your creditors.
2. Unless you agree to accept a settlement offer no fees are due. In other words, it's not good enough that the company representing you negotiates a settlement deal with your creditors. You must ultimately "sign-off" on it.
3. In order for the final requirement to be met, you must make at least one payment to your creditor as a result of the debt negotiation that you signed.
All three of the above requirements must be met in order for debt negotiation and settlement firms to collect their fee.
If you only have one debt enrolled in the program, then yes, they can collect their entire fee once that debt is settled. But... if you have more than one debt enrolled, then it is illegal for them to "front-load" their fees in any way. Let's take a look at an example.
Let's say that after speaking to several debt settlement firms you decide to sign an agreement with one of them to settle four separate unsecured debts or $5,000 each, for a total of $20,000. The company makes it very clear (and it is in the agreement) that they are going to charge you a fee equal to 15% of the total amount of your debts when you entered the program. In this case that fee would be $3,000 ($20,000 X 15% = $3,000). Six months go by and you are presented with an offer to settle one of your debts. The offer is for $2,000, which equates to a $3,000 savings to you. (Requirement #1 has been met.) You agree to this offer and sign an agreement with the creditor. (Requirement #2 has been met.) One week later you pay the creditor $2,000 and the debt is considered settled. (Requirement #3 has been met.)
At this point all three requirements have been met and the debt settlement firm can collect its fee from you. But how much of the $3,000 fee can they collect? Well, the law states that they can only collect a portion of the fee equal to the portion of the total debts that have been settled. In this example 25% of the total original debt amount has been settled ($5,000 / $20,000 = 25%), therefore the company can collect 25% of the fee, or $750 (25% X $3,000 = $750)
What if the amount of debt increases while you're in the program? Do your fees increase?
Can a debt negotiation company charge different percentage fees for different debts?
How is a "proportional fee" different from a "percentage of savings fee", and will this affect how much you have to pay and when you have to pay it?
For answers to these questions and a continuing discussion on debt settlement firms and how fees are charged click here...