How debt relief companies get paid
Understanding the money flow tells you more about a company than its advertising does.
The federal rule
The Federal Trade Commission’s Telemarketing Sales Rule bans advance fees for debt relief services sold over the phone. It took effect in October 2010.
A company cannot request or receive any fee until both of these have happened:
- It has renegotiated, settled, reduced, or otherwise altered at least one of your debts under an agreement you signed
- You have made at least one payment toward that agreement
No enrollment fee. No setup fee. No monthly fee before a settlement exists. Any of those, charged before the first debt is settled, breaks federal law.
The exemption to know about. The rule governs debt relief sold through telemarketing, which covers calls you place in response to advertising. Purely face-to-face sales fall outside it. Some operators route people to in-person signings specifically to escape the fee ban. Treat that push as a warning sign.
Common fee structures
Percentage of enrolled debt. The most common. Typically 15% to 25% of the total balance you bring into the program, charged as debts settle. Note this is a percentage of what you owed, not of what you saved.
Percentage of savings. Charged against the difference between the original balance and the settlement. Sounds friendlier and can cost more or less depending on how well settlements go.
Under the rule, if a company charges a percentage of savings it must disclose both the percentage and the estimated dollar amount it represents.
Per-settlement fees. Charged as each individual debt resolves.
The dedicated account
Most programs have you deposit money into an account you control while settlements are negotiated. Funds accumulate there until there is enough to make an offer.
The account is yours. You can withdraw from the program at any time without penalty, and your funds must be returned within seven business days of your request. Any company that treats your deposits as theirs is a problem.
Account maintenance fees charged by the bank administering it are separate from the company’s own fees and are permitted.
What they must disclose before you enroll
- Total cost of the service, in dollars or percentage with the estimated dollar figure
- How long before they make offers to your creditors
- How much you must save before an offer gets made
- That not paying creditors damages your credit
- That not paying can lead to collections and lawsuits
- Any material restrictions, limitations, or conditions
Ask for all of it in writing. A legitimate company provides it without friction.
Marketing companies versus service providers
Many companies advertising debt relief do not perform it. They generate leads and hand you to a licensed provider that does the negotiating.
This arrangement is legal and common. It should be disclosed rather than discovered. Ask directly: are you the company that will negotiate with my creditors, or are you referring me to someone else?
This site works that way. Debt Help U does not negotiate debt. We refer people who qualify and ask for it to a partner, and we are paid a referral fee when someone enrolls. That fee comes from the partner, never from you, and your terms are the same either way. Our full disclosure explains it.
We mention it here because the question in this article applies to us too, and answering it about ourselves is the only honest way to write the article.
Questions to ask before signing
- When exactly do you collect your first fee?
- Is the fee a percentage of my enrolled debt or of my savings, and what is the estimated dollar amount?
- Who negotiates with my creditors, you or someone else?
- What happens to my accounts and my credit during the program?
- What if a creditor refuses to settle or sues me?
- Can I withdraw, and how quickly do I get my money back?
Written answers. A company that resists putting them in writing has told you what you need to know.
Sources
- Federal Trade Commission, Telemarketing Sales Rule, 16 CFR Part 310, advance fee ban at § 310.4(a)(5)
- FTC, “Debt Relief Services and the Telemarketing Sales Rule: A Guide for Business”