4 Debt Relief Laws to Know to Avoid Scams and Save Money


Last Updated: February 22nd, 2022


man holding credit card at computer

Guest Post by Lyle Solomon

Debt relief scams are rampant in the country, and perhaps this is why the Federal Trade Commission (FTC) issued new rules to protect consumers on September 27, 2010. Even though a decade has passed, many Americans are still not aware of the debt relief laws passed by the FTC for their protection, and that's unfortunate. Scammers take advantage of their ignorance and milk money without providing any service.

If you owe money on your credit cards and are planning to work with a debt relief company, it's essential to know the provisions of the Telemarketing Sales Rule first. The provisions clearly explain the debt relief laws companies have to follow throughout the country.

Here are a few significant debt relief laws that all the settlement and consolidation companies must follow.

Debt relief companies can't charge advance fees

Suppose you owe a significant amount of money on cash advance loans and need instant payday loan relief. You are spending sleepless nights thinking about it. Finally, you decide to work with a debt settlement company and get rid of your payday loans.

After preliminary research, you make a list of debt settlement companies and call them one by one. The debt settlement companies promise to help you out. But there is a catch. You have to pay an advance fee before they settle your debts. You pay the fees, but the company doesn't deliver the services.

To help consumers get fair deals, the FTC introduced a new law wherein debt relief companies can't charge advance fees before they settle a debt. This would prevent fraudulent companies from taking money based on false promises.

Debt relief companies can't charge a fee unless they have made at least one payment to a creditor. They can charge fees after settling at least one of the consumer's debts.

Debt relief companies have to create a proper fee structure

Debt relief companies can't charge abnormal fees from consumers, and they need to have a proper fee structure. If a debt relief company settles multiple debts, the fee for a single debt should be in proportion to the total fee charged by them.

If a debt relief company charges a fee based on the specific percentage of the total money saved by the consumer, then the percentage charged should be in proportion to each debt. It should be the same for each debt.

Debt relief companies must open a dedicated account in an FDIC-insured bank

As per the laws, consumers will keep their savings and fees in a dedicated account. The debt relief company has to open a dedicated account in an FDIC-insured bank for the consumers to set aside money for settling bills.

Consumers will control the funds, and they can withdraw the money at any time without any penalty.

The debt relief company can't be affiliated with the bank or charge any referral fee for this.

Debt relief companies can't misrepresent facts

Debt relief companies can't give false information to consumers. They can't make impossible promises and then break them. They have to provide a written agreement and specific disclosures to consumers. Consumers should get enough time to read and understand them.

The written agreement has to be signed by the consumer and the creditor.

Furthermore, before a consumer starts working with a debt relief company, they have to give specific disclosures regarding the following things:

  • How do they plan to settle their debts
  • How long it may take to pay off the debt
  • The overall cost of the debt relief services
  • The potential impact of debt relief programs on credit score
  • Necessary information about the dedicated accounts

It's important to note that the debt relief laws apply to the following companies:

  • Debt settlement companies
  • Debt relief companies
  • Debt consolidation companies
  • Credit counseling agencies     

The law applies to for-profit companies. It does not cover non-profit organizations.

Debt relief companies can't make false claims regarding their success rates and non-profit status.

If you believe a company has violated debt relief laws, you can file a complaint with the FTC or file a lawsuit against the company directly.

The bottom line

Too many debt relief companies take money from consumers and put them in bigger financial trouble. Debt relief laws are in place to stop this harmful practice in its tracks. 

Before signing any agreement with a company, check if it follows the debt relief laws. If it charges advance fees or refuses to provide you with specific disclosures, this should raise a red flag. Avoid companies that promise to settle your debts within a week. It's impossible.

Best debt relief companies follow all the laws to avoid lawsuits and fines. Your aim should always be to work with these companies. 

Lyle Solomon is a principal attorney for the Oak View Law Group in California, where he specializes in consumer finance. He has also written several articles on financial well-being. Connect with him on LinkedIn or tweet him at @lyle_solomon.

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