The rules that protect consumers who work with debt settlement firms

Debt Settlement

by Michael Bovee


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If you are struggling to keep up with your credit card payments and are worried that you may have to file for bankruptcy, settling those debts is an option you may want to consider. Debt settlement involves negotiating agreements with your creditors that allow you to pay off your cards for less than their outstanding balances. You can settle your own debts, or you can hire a settlement firm to do the negotiating for you.

In 2010, the Federal Trade Commission (FTC) amended the Telemarketing Sales Rule to protect consumers who work with debt settlement firms that market their services by phone. The changes were necessary because too many of these firms were making unrealistic promises to consumers about the results they could achieve for them and were charging consumers such large up-front fees that the consumers were left with little or no money to fund the settlement offers the firms negotiated for them.

Here is what you should know about the rules of debt settlement firms:

  • Debt settlement firms are prohibited from giving you misleading or inaccurate information about their services. For example, they must be honest about their success rates.
  • If you hire a debt settlement firm, it must provide you with the following information before it performs any work for you:
  • - The cost of its services
    - The potential downsides of settling your debts
    - When you can expect to see results from the firm's efforts on your behalf

  • If a debt settlement firm requires that you put into a dedicated account the money you'll owe for its services and the money you'll use to fund any debt settlements the firm negotiates for you, the account must be located at an insured financial institution. The firm cannot own, control or have any affiliation with that institution, nor can it exchange a referral fee with the institution. Also, any interest earned by the money in the dedicated account must go to you.
  • Are you heading for debt trouble? This simple checklist can help you.

  • In addition to being barred from charging you an up-front fee for its services, a debt settlement firm cannot collect any money from you until all of the following has happened:
  • - It's provided you with a settlement agreement and you've agreed to the terms outlined in the agreement.
    - The firm has settled at least one of your debts.
    - You've made at least one payment on the settlement.

  • The fee a debt settlement firm charges you to settle one of your debts must be in proportion to the total fee the firm would charge if it settled all of your debts. However, if the fee is based on the percentage of what you save through settlement, then the percentage must be the same for each settled debt.

Updated October 2016


Michael Bovee is the founder and president of Consumer Recovery Network (CRN), a fair and ethical debt settlement firm. CRN is unique in the industry in that it supports consumers settle their own debts by providing them with information and coaching and it also offers full-service settlement assistance. Michael has been a vocal advocate for reform of the settlement industry.

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