If you provide debt relief services, the new Rule says you can’t collect any fee from a customer until you meet these three requirements:
1. You must have reached a successful result for your customer. You must have renegotiated, settled, reduced or otherwise changed the terms of at least one of the customer’s debts.
2. There must be an agreement between your customer and the creditor. Your customer must agree to the settlement agreement, debt management plan, or other result reached with the creditor due to your service. According to the Rule, the agreement from the creditor must be in writing, although your customer may agree to it orally. You can’t take your fee in advance by getting your customer to agree to a blanket “pre-approval” of any settlement you might be able to negotiate in the future.
3. Your customer must have made a payment to the creditor. Your customer must have made at least one payment to the creditor or debt collector as a result of the agreement you negotiated.
It is illegal to front-load your fees. If your customer has multiple debts enrolled in your program and you’ve settled one of them, you may collect a portion of your full fee – as long as you also have completed the three required steps in connection with that debt. The new Rule gives you two options for calculating your fee if your customer has enrolled multiple debts:
• Alternative 1: Proportional fee. According to the Rule, your fee must “bear[] the same proportional relationship to the total fee for renegotiating, settling, reducing, or altering the terms of the entire debt balance as the individual debt amount bears to the entire debt amount.” The “individual debt amount” and the “entire debt amount” refer to what your customer owed at the time her or she enrolled the debt in the service. So if you settle a proportion of a customer’s total debt enrolled with you, you may get that same proportion of your total fee.
Example 12: Company M enters a contract with Alex to settle his debts. When Alex enrolls, he owes three separate $1,000 debts in the program for a total of $3,000. The contract states that Company M will charge Alex a total fee of $600. Six months after Alex enters the program, Company M settles one of his debts. Alex signs an agreement with the creditor and pays the settlement amount. In this example, Company M now may charge Alex a $200 fee – one-third of its total fee – because the company settled one-third of his total debt.
• Alternative 2: Percentage of Savings. If you base your fee on a percentage of what your customer saved as a result of your service (often called a contingency fee), the percentage you charge must be the same for each of a customer’s debts. Further, the amount saved must be based on the difference between the amount of debt enrolled in the program and the amount of money required to satisfy the debt.
Example 13: Company N enters a contract with Barbara to settle her debts. She enrolls three separate $1,000 debts in the program for a total of $3,000. Company N clearly and conspicuously discloses to Barbara that its fee will be 25% of the savings achieved by using its service. Six months after entering the program, Company N settles one of Barbara’s debts for $600 – saving her $400 of the $1,000 she owed on that account. Barbara signs an agreement with the creditor and pays the settlement amount. Company N may collect a fee of $100 – 25% of the $400 Barbara saved.
For more information, see here: http://www.business.ftc.gov/documents/bus72-debt-relief-services-telemarketing-sales-rule-guide-business
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