Debt settlement companies are governed by both state and federal regulations. The FTC passed regulations that took effect in October of 2010. The main changes that took affect are:
- Requiring debt relief companies to make specific disclosures to consumers;
- prohibiting debt relief companies from making misrepresentations; and
- extending the Telemarketing Sales Rule to cover calls consumers make to these firms in response to debt relief advertising.
Finally, the Telemarketing Sales Rule also prohibits charging advanced fees. In order to comply with the rules, a debt settlement company cannot collect fees until the following has been accomplished:
- the debt relief service successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer’s debts;
- there is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it; and
- the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
To ensure that debt relief providers do not front-load their fees if a consumer has enrolled multiple debts in one debt relief program, the Final Rule specifies how debt relief providers can collect their fee for each settled debt. First, the provider’s fee for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled. Alternatively, if the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts.
In Ohio, the Debt Pooling Act, Ohio Revised Code 4710 regulates debt adjustment in the State of Ohio. Although this act does not flatly ban debt settlement, it does put a cap on the amount of fees a debt settlement company may charge. In Ohio, a debt settlement company is only permitted to charge eight and one half percent of the overall monthly payment, or thirty dollars, whichever is greater. There are other very strict requirements these companies must adhere to such as putting up a surety bond and conducting an audit.
Most debt settlement companies fall into two main categories, and many of times, these categories will overlap.
- Companies that are set up as a debt settlement company and charge advanced fees or amounts that exceed the permitted amount in the State of Ohio. These companies simply do not comply with the law.
- Companies that try to skirt the various laws by partnering up with a “law firm.” It seems as though many of these companies are located in California, Texas and Florida, although you will see examples throughout the nation. It is rare for these “attorney model” companies to have an attorney employed that is actually licensed in the State of Ohio. Typically, the attorney model law firms simply have a list of “affiliate” attorneys, which have not agreed to represent the client in a court of law. In most cases, this particular attorney is not part of the legal fee agreement. As such, this “affiliate” is no more than an attorney on a list.
In addition to blatantly violating the federal and state laws that apply to the debt settlement industry, many debt settlement companies will oftentimes misrepresent the dangers of their programs. For example, a debt settlement company might disclose in its contract that a creditor may still bring a lawsuit against the consumer, while at the same time, the representative is indicating that this is highly unlikely. In fact, due to the length of most programs, it is highly likely that you will be sued by one of the creditors on the program.
If you have been ripped off by a debt settlement company, you should contact a consumer law attorney immediately. An attorney will be able to examine your specific situation in an effort to see if the company violated any state or federal laws. If the attorney determines there are violations, he or she may be able to recover the money you paid to the debt settlement company, other types of damages, and attorney fees.
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