FTC's New Rule Bans Upfront Debt Settlement Fees

Today, the Federal Trade Commission came down hard on for-profit debt relief firms. The FTC’s new amendments to the Telemarketing Sales Rule will prohibit debt relief companies from collecting advance fees, among other things. Here is some basic information about the new Rule.

Who: The Federal Trade Commission, which enforces the Telemarketing Sales Rule, has developed the new rules.

The rule applies to all for-profit debt relief agencies that sell debt relief services over the telephone, including those that discuss settlement over the phone with prospective clients. In other words, they don’t have to be cold-calling consumers to be covered by the rule.

When: These final amendments are effective on September 27, 2010, except for the upfront fee ban, which is effective on October 27, 2010.

What: The Rule will:

(1) prohibit debt relief service providers from collecting a fee for services until a debt has been settled, altered, or reduced;

(2) require certain disclosures in calls marketing debt relief services; and

(3) prohibit specific misrepresentations about material aspects of the services. 

I will write more as I sift through the details.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Your Credit Crisis.

GAO Issues Report on Debt Settlement Industry

This past weekend I saw an advertisement on television for a debt settlement company touting special relief for consumers with credit card debt, thanks to the recent credit card legislation. The ad went on to say that you have the right to settle your credit card bills.

The problem is that it's just not true. There's been no special bailout for credit card holders (just help for the banks that issued the cards), the Credit CARD Act says nothing about negotiating settlements on credit cards, and while you certainly have the right to try to settle your credit card bills, your credit card issuers have the right to say no.

Yesterday, a Senate committee held a hearing on the debt settlement industry. At the center of the hearing was a report issued by the Government Accounting Office (GAO) describing its experience “mystery shopping” debt settlement firms. The GAO report on the debt settlement industry focused on issues that have been raised by state and federal regulators, including high upfront fees, misleading sales tactics, and even outright lies on the part of these firms.

It can't be cheap to run television advertisements like the one I saw this weekend. Unfortunately, someone is paying for that advertising, and it appears that the folks who are paying for that marketing may also be the ones who can least afford it.

If you are considering negotiating your debts, proceed with caution. Make sure you also talk with a bankruptcy attorney and read our tips for evaluating a debt settlement firm.

Gerri Detweiler – Personal Finance Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

Wake Up, America! David Walker, Fiscal Responsibility, and America's Addiction to Debt

On February 3, 2010, The Commonwealth Club lecture featured David M. Walker, former Comptroller of the United States and author of the book Comeback America: Turning America Around and Restoring Fiscal Responsibility. Mr. Walker has some intriguing ideas about healthcare reform, Social Security and Medicare, taxes, education, and a whole slew of other timely issues that touch all of our lives.

One particularly jolting statistic that Mr. Walker notes in his speech is the fact that within twelve years, unless the U.S. changes the way we approach fiscal spending, the single largest line item in the federal budget will be interest on the federal debt. He asks with a touch of irony: "What do we get for interest on the federal debt? Absolutely nothing."

Mr. Walker notes: "Great powers do not stay great if they're not economically strong. Great powers are not debtor nations; they are creditor nations. And we are the world's largest debtor nation."

At the end of the interview, an audience member asked about I.O.U.S.A, a documentary featuring Mr. Walker about fiscal responsibility and the dangerous threat that fiscal irresponsibility poses for America. In Mr. Walker's mind, fiscal irresponsibility poses a greater threat to our country than terrorism abroad. It's a compelling argument and one that should wake all of us up to the tremendous challenge facing our modern American society and lifestyle.

I.O.U.S.A. has a follow-up called I.O.U.S.A. Solutions, which will be posted within the next few months on the Internet for free and made available to schools and other institutions.

You can view the speech on The Commonwealth Club's blog:

http://commonwealthclub.blogspot.com/2010/02/david-walker-takes-on-americas-fiscal.html

To listen to the audio version of the lecture, you can download the audio file in RealAudio format.

For a bit of humor on the subject, view David Walker's recent interview on The Daily Show:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
David Walker
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

Digging Out of Debt

Gerri Detweiler, our very own Debt Expert and Credit Advisor for Credit.com, appeared on FOX 35 Good Day recently. Gerri shared her insight on all of the different options for getting out of debt, including DIY debt reduction, credit counseling, debt settlement and bankruptcy.

To find out more, watch the clip:

How Joe Got A Credit Card Debt Cancelled

On the Credit.com forums, we answer credit questions from readers all over the country who are dealing with credit card, mortgage, auto loan, or credit report issues. Recently I corresponded with Joe about his $30,000 credit card debt. Joe is on disability and struggling with severe mental health issues as well as his wife's breast cancer. His only source of income is disability. He can't handle the stress of the debt on top of the other problems.

He met with a bankruptcy attorney, which is the first step I always recommend to someone in that situation. The attorney told him he couldn't file for Chapter 7, but at the same time he was essentially "judgment proof." That means that even if his creditors sued him, they wouldn't have any way to really collect.

I encouraged him to write to his creditors, by certified mail, explain the situation, and ask them to stop contacting him. He did that.

He has already received a letter from one of them indicating they are writing off the debt. You can read the letter here.

I told Joe it is essential he now meet with a tax professional to see if he can avoid having to pay taxes on the canceled debt. It's important he do that now, rather than waiting until next April.

I share this story because there are many people struggling right now with no ability to pay back their debts. Many of these people are experiencing extreme financial stress and need to see a light at the end of the tunnel. Joe's story may provide the impetus they need to get help with their debt.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

Lower Incomes Make It Harder For Some to Wipe Out Debts Starting Nov. 1

If you’ve been considering bankruptcy, you may need to talk with a bankruptcy attorney now. In an ironic twist, the nation’s economic woes will make it harder for debtors in some (not all) states to wipe out debts in bankruptcy come November 1, 2009. Here’s why:

Bankruptcy law was reformed in 2005, largely as the result of an industry-led effort to make it harder for people to eliminate unsecured debt by filing what’s sometimes referred to as a “straight” Chapter 7 bankruptcy case. The purported goal was to make it harder for people to “abuse” the bankruptcy system and force them into a Chapter 13 repayment plan where they would have to pay back at least some of their debts. 

The “means test” was the method devised to achieve this goal. It is a complicated formula that starts with the state median income for families of a similar size. Unfortunately, because so many people are out of work or earning less, state median incomes have dropped in many places. That means more people may be subjected to the means test. And depending on the results of that calculation, they may find themselves forced into Chapter 13, or just out of luck.

The new income figures go into effect November 1, 2009. If you are curious what’s happened in your state, you can look at the before and after figures.

Warning! Do NOT look at these charts and try to determine for yourself whether you can or cannot file Chapter 7. You need a bankruptcy attorney for that. Some consumers have successfully filed Chapter 7 with incomes that are double the state median figure.

What I DO want you to do is get the help you need. If you’ve been hanging on and avoiding this difficult discussion, talk with an attorney before your problems get worse. The consultation is free and confidential, and the attorney can help you figure out what your options are – whether you decide to file or not. 

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

Credit-Related Complaints Among Top Ten for 2008

The National Association of Attorneys General (NAAG) has released its Top Ten List of Consumer Complaints for 2009 and -- no surprise -- debt collection and credit cards both made it on the list, with debt collection in the #1 spot.

The top three: Debt collection, auto sales, and home repair/construction remained the same from year 2007. The findings are based on an annual non-scientific survey conducted by the National Association of Attorneys General (NAAG).

The National Top Ten Consumer Complaints for 2008 are:

• Debt Collection
• Auto Sales
• Home Repair/Construction
• Credit Cards (tie)
• Internet Goods and Services (tie)
• Predatory Lending/Mortgages
• Telemarketing/Do-Not-Call
• Auto Repair
• Auto Warranties (tie)
• Telecom/Slamming/Cramming (tie)

Consumers reported unauthorized charges and inaccurate late fees on credit or debit cards. Also reported were phony debt reduction services and foreclosure scams, when companies claim to be able to save a home if the consumer pays money upfront.

The 2008 national consumer complaints list is generated from survey responses completed by the offices of the Attorney General and tallied by the NAAG Consumer Protection Project.

If you believe you are victim of a credit or financial scam, it's a good idea to file a complaint with your state attorney general's office. They may not help resolve your individual complaint, however, so it is also not a bad idea to talk with a consumer law attorney to find out whether you may be able to get your money back.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

My Experience with IBR: Almost Too Easy to Believe

In June I wrote about Income-Based Repayment, a federal program that allows college graduates to restructure their student loan payments based on their income and how large their families are.

Although IBR went into effect on July 1, 2009, I did my usual procrastinating and waited until the day before my deferment with the federal Direct Loan program was due to expire before I made inquiries.

The verdict? Success! During a 17-minute conversation with a Direct Loan representative (I asked a lot of questions), I began the process that should shrink my monthly loan payment by 59 percent from what it would have been.

The program is designed for borrowers who have a high debt-to-income ratio, such as those who have been laid off or had their work hours cut back. The basics: Payments are capped at 15 percent of discretionary income, which is your gross income minus the amount equivalent to 150 percent of the federal poverty line (which works out to $16,245). Fifteen percent of that, divided by 12 months, is your new monthly bill. The repayment period is also extended from the usual 10 years to 25 years. For other details, check out the FinAid site and IBRinfo.

With my current 10-year repayment plan, I was on the hook for $488.89 a month starting August 7. The Direct Loan representative Beth was so nice that she asked me if I knew what my new monthly payment amount would be. I had indeed run the numbers, and I pegged it at $198.94. The program requires that you re-apply every year and tell them what your updated income is. If it has gone up, your payments go up.

The first thing Beth told me was to extend my deferment to cover my fast-approaching due date, because the IBR paperwork takes a couple of weeks to process. Following a pleasant interlude in which the Muzak version of Peter Frampton’s “Baby, I Love Your Way” played, Beth extended my deferment over the phone. Once IBR is approved, I can send a letter asking for the deferment to be shortened so I can begin making payments.

Direct Loan uses your tax returns to prove how much you earn, and if your earning situation has changed, or if (like me) you’re a freelancer and get paid (ahem) irregularly, you can supplement the application with a “self-certification letter” that describes how much you bring home and how often.

The feds’ IBR application can be found here. Make sure to compare repayment plans to determine whether IBR or other income-based plans are right for you.

Landon Hall – A freelance writer in Silicon Valley, Landon was a reporter, sports writer and editor at The Associated Press in Portland and New York City from 1997-2006.

DEEEECLINED! Get the Details about Your Notice of Denial!

Doritos and Mountain Dew. That's all I wanted. It was my third year of law school in Florida. I walked into the gas station, grabbed my goods, and went to the counter to begin a day with a friend on his boat. I handed the items over to the clerk, he scanned them with a ubiquitous beep. I slid my card.

—Pause—

"DEEEEEECLINED!" He didn't so much scream it as much as he swung it like a blunt force weapon. The sound came from his not-so-insignificant gut. Like a Viking charging. My friend standing behind me heard him. Everyone heard him. I felt it. My mother, I am sure, felt a surge of disappointment six states away. I didn't have enough money to buy processed cheese and yellow caffeine. My friend who had been standing behind me gently added his items to mine, slid his card, and we left.

Getting declined hurts! It doesn't just hurt. It is personal. Somehow we feel it reflects on us as people. I know someone whose debit card was declined through a processing error—he paid with another card, went to the nearest ATM, printed of a balance receipt, and left it for the waitress to see that he really did have money.

People of all socio-economic classes currently struggle to obtain credit. According to the Federal Reserve Board's April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, banks continue to report "tightened credit standards on residential mortgages." So, if you've gotten rejected recently too, you are not alone. People who could get credit three years ago can't get credit now.

While the Viking at the gas station bellowed my rejection, you probably got a consumer credit "Dear John" letter, a.k.a. "Denial Notice". In no uncertain terms you were told "No." You are probably wondering why you received a denial notice, what it means, and what you can do.

The first step is to figure out why you were denied credit. The good news is that federal law grants you the right to obtain specific information. Getting your hands on the reason you were denied may not be easy, but the information can help you learn how to qualify next time.

Two key federal bodies of law provide you the right to receive specific information. First, the Equal Credit Opportunity Act (and Regulation B) prohibit certain discriminatory practices. These laws require creditors to explain the reason they denied you. They require creditors to keep certain records and send you these notices to document the actual reason you were denied. The second federal law requiring the denial notice is the Fair Credit Reporting Act. It requires creditors to tell you if they based your denial on information from a consumer-reporting agency (or other outside source) and to tell you if they obtained certain information from an affiliated company.

These laws mandate specific requirements for your denial letter. When you got denied, your notice was most likely titled: Disclosure of Right To Request Specific Reasons for Credit Denial or a Notice of Action Taken and Statement of Reasons. The first type of notice is very general and tells you that you can ask for more information. The second type of letter is more informative and actually lists the denial reason. If your notice didn't really tell you why you were denied, you can force the creditor to provide a specific reason, as long as you properly contact the creditor within 60 days.

To get the information, send a letter to the creditor at the address provided. Give them your information and tell them in writing that you "would like a statement of specific reasons why your application was denied." Always send your notice by certified mail, return receipt requested.

If your denial notice already included specific reasons, pay attention to those reasons. Creditors establish certain criteria, often called underwriting, and if you meet the criteria, creditors want to lend you money.  This is how they make money and stay in business. It is always possible the creditor may have misunderstood your financial situation.

Maybe you accidentally entered the wrong information on your application. If this is the case, the creditor may be amenable to providing credit if you can update your application with correct information. The creditor might have denied you based on your "length of employment."  While you may have entered "7" as the number of years you have worked for your employer, the credit analyst may have misunderstood your response to mean seven months. Or perhaps the creditor could not contact your credit references and denied you credit instead of notifying you about this problem. If you can alert your references, you may be able to get credit.

These are just examples, but you get the point. Don't curl up into ball or write poetry about it. Investigate it, learn from it, and use the information to your advantage. (And if you already wrote poetry about the experience, please post it!)

If you were denied because of something in your credit report, order your report and see what it says. If it contains inaccuracies, you can correct them with the consumer reporting agencies. 

Naturally, nobody wants to be declined. Certainly, "Dear John" letters don't feel good. That being said, federal law does provide you a great way to figure out what's going on with your credit. The good news is you can take the time to find out why you got denied so it won't happen again.

This article is intended to be informational and does not provide legal advice nor create an attorney-client relationship. Laws are constantly changing, and each federal law, state law, and regulation should be checked by legal counsel for the most current version and before acting on this information. Certification as a Specialist in Consumer Finance Law by the

Tennessee

Commission on Continuing Legal Education and Specialization is not currently available. None of the attorneys listed in this communication are certified in any area of specialization.

Justin B. Hosie – Justin Hosie is a member of Chambliss, Bahner & Stophel, P.C.’s Consumer Finance Group, focusing his practice on consumer financial services, the Federal Electronic Signatures Act, Truth in Lending Act, Equal Credit Opportunity Act, and Electronic Funds Transfer Act, as well as state regulatory compliance.

New York Times on Debt Settlement: Another Perspective

An article today in the New York Times warned about the perils of debt settlement, and a number of comments were posted in response. I’d like to add mine.

As a consumer educator for 22 years, I first shuddered when I heard about debt settlement. In fact, I recall writing an article about ten years ago where I said it was quite possibly the worst idea ever...Don’t pay your debts? Let them go delinquent? How could that ever help you solve a debt problem?

Unfortunately, though, I’ve had to change my tune. I am still opposed to the approach that many settlement companies are taking where they charge high upfront fees regardless of whether they help consumers, and I appreciate the warning about them in the article. But I don’t rule out settlement all together as a legitimate option for some consumers who are buried in bills.

Debt settlement has become popular because while consumer debt has increased, options for resolving that debt have contracted. Bankruptcy has become more difficult for some people to file, as Ben describes in his comments on the New York Times article. And credit counseling typically requires debtors to pay back 100% of their debt plus interest, often at double-digit rates. That simply doesn’t provide enough relief for them to dig themselves out from debt.

(Fortunately, new payment plan terms agreed to by the National Foundation for Consumer Credit and top creditors will allow more people to pay off their debts through reduced payments in a Debt Management Plan. This should make counseling a better option for more consumers. I’ll write about that in a separate post.)

In addition, most people I talk with have absolutely no desire to file for bankruptcy. They want to pay their debts back, but they cannot pay the full amount. They, too, often turn to settlement as a way out.

In an ideal world, borrowers should be able to negotiate directly with their creditors. However, when someone owes multiple creditors (as most people do when they are deeply in debt), each creditor will do its best to be at the top of the pile. The stress and pressure that causes can be impossible to handle for someone who is already struggling financially. I’ve spoken to people who are trying to pay as much as they can, but the calls are so constant that they fear they will lose their jobs. Others are suicidal. It only takes one creditor who is especially aggressive to push a borrower over the edge.

In writing my new e-book Reduce Debt, Reduce Stress, I interviewed several debtors who successfully completed settlement programs and were thankful that option was available to them because it allowed them to avoid bankruptcy. (Each owed too much to be able to complete a credit counseling program.)

In a comment on the article, Sudhir recommends that consumers check with the Better Business Bureau before choosing a settlement company. Unfortunately, however, the BBB does not recognize settlement companies as legitimate options and does not provide top ratings for settlement companies, even if they generate no complaints (and pay the membership fee).

However, I agree that consumers must be extremely cautious about choosing a settlement company to work with. These programs are not painless. Your credit will be ruined for a while because you stop paying, you could be sued, and there can be tax implications. Hang up on any company that makes settlement sound like an “easy, guaranteed” program to pay off your debt. You can read my Fourteen Questions to Ask a Settlement Company and use them to help you choose the right settlement partner.

And I also strongly recommend talking with a credit counseling agency to find out whether that may be the right option. Even if you have talked with one recently, you may want to try again, as the payment requirements are easing. Don’t be worried that counseling will affect your credit the same as bankruptcy. That’s not true anymore. FICO has changed their credit scoring model: When they calculate credit scores, they now ignore the fact that a consumer has gone through credit counseling. If you can pay back your debts through a Debt Management Program (DMP), do so.

I also recommend that you talk with a bankruptcy attorney who can help you evaluate the bankruptcy option. There are many wrong assumptions about bankruptcy floating around, including the notion that you can’t file if you make too much money. Only an attorney can give you the straight scoop on whether filing makes sense for your situation.

Finally, go in with open eyes. With settlement (like everything else), if it sounds too good to be true, it probably is.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com. Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of the e-book Reduce Debt, Reduce Stress: Real-Life Solutions for Your Credit Crisis