There have been a lot of changes made in the debt settlement laws with intent to protect consumers against any deceitful debt settlement practices. It is a common practice among the debt settlement companies to place alluring ads all over promising several things such as:
- Reducing your debts by more than 70%
- Not to talk to creditors, trustee or a lawyer for bankruptcy or a consumer proposal and
- To talk to then only.
Well, these promises are exceptionally tall and are too good to be true. Even then and till now they have been successful in alluring consumers and charge them an upfront fee that is considerably large.
The true picture is far from promising. According to different reports of the banking association it is found that not more than 10% of the debt settlement proposals received by banks from different such companies are actually accepted and honored. No matter how much money they spend on advertising and how hard they make people choose debt settlement feeding on the fear, in a large number of cases this process does not work, according to debt settlement reviews.
Now that the new law has come with the necessary amendments there is a change in their practice. They cannot take the advantage of the vulnerable position of the consumers anymore and make huge profits from the large payments made by the consumers with their debts far from being actually eliminated.
In short, the new laws surrounding debt settlement services has curbed down the perceived abuses of debt settlement industry.
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The changes in the law
According to the new law all debt settlement companies as well as the collection agents will now be regulated by the law which prohibits them from a few specific business practices. The most significant change in the rules is the capping of the fees charged by the debt settlement companies. The law states that:
- Now these companies can charge only up to 15% of each payment only provided a debtor makes a series of payments
- They are allowed to charge a setup fee for each outstanding account but for one time only and
- In case a debtor makes a lump sum payment to repay off a loan then these companies will charge only 10% of the amount of each debt as their fees.
Also, under the new rules there will be no up-front fee. The company can only charge a fee only when a payment is made to the creditor. This signifies that the creditor has accepted the settlement request.
In addition to that the law requires all debt settlement companies to have a valid license for collection as well as debt settlement.
Impact on the industry
The new rule in debt settlement has impacted the debt settlement industry no doubt. The previously profitable business has now changed for the better.
- Previously, these debt settlement companies collected upfront fees irrespective of the fact that the creditor accepted the deal or not.
- Moreover, the debt settlement company kept the payments made by the debtors for the first the first three or four months and did nothing.
- This raised the chances of the debtors being sued for no fault of them by the creditors who have all the right to do so.
In fact, the business or the old rules to be more specific provided them with free money and lots of it as well.
Under the new rules the debt settlement company will get nothing till the service is completed or at least the first payment is made by the debtor to the creditor after the negotiation process has been completed and a new agreement is signed.
That means, until a debt settlement company can make the creditors to accept the deal which is the case in majority of instances, they will not make anything from their debtors as fees. In short, the new rule has changed the free money into hard earned money.
This effectively has put most of the debt settlement companies out of business which is ideally the primary intent of the government.
Impact on credit counselors
The new rule has also made an impact on the credit counselors as well. According to the new rule those not-for-profit corporations that provides credit counseling services are exempted from these rules. If and only if they operate as a charitable organization the law allows them to continue helping debtors to settle their debts.
Typically in the past, these organizations did not oversee debt settlements but focused on developing debt management plans only where the debtor had to pay back the full amount that they owed to the creditor. The new rule does not take away this power from them as well.
Impact on others
The new rule has affected several others and has exempted many as well. A few of these organizations are as follows.
- Bankruptcy trustees: You may know that the bankruptcy trustees are regulated by the federal government department of the Office of the Superintendent of Bankruptcy. These trustees are not allowed to charge any up-front fees and they only collect funds when the bankruptcy or the proposal is officially filed. Their fees are stringently regulated by the government. However, since these trustees do not offer debt settlement services as per their business rule, the new rules will not have any impact on these federally licensed trustees.
- Collection agencies: The new rule is applicable in the same capacity to the collection agencies as it is applicable to the debts settlement companies. This means it is now theoretically possible and legally allowable that such a collection agency performs as a debt settlement company as well. This has raised their chances of making money in either way. When they collect any dues they earn commission on the collected amount as fees. On the other hand, when a debtor says that it is not possible to pay the amount given the current financial condition, they can offer to settle the debt for lower amount and earn fees this way as well.
However, which agency will offer what type of service or services is yet to be seen.