Two senators introduced legislation Thursday to restrict debt settlement companies from collecting fees before a settlement is reached. Under the legislation, consumers would receive detailed upfront disclosures - including a list of all costs and promised services.

A Government Accountability Office study last week found hundreds of thousands of people are duped by firms that promise debt reductions and collect fees from borrowers.

That helped lead Sens. Charles E. Schumer, D-N.Y., and Claire McCaskill, D-Mo., to put forward  legislation to more tightly regulate the industry.

Settlement firms typically promise to negotiate with credit card companies to reduce the amount consumers owe. Costs vary, but a company might charge up to 20% of the total debt. Fees are usually required upfront, even though a settlement may never be secured.

Under the Schumer-McCaskill bill, consumers would have the right to cancel a debt settlement contract and get a full refund. The legislation would provide for enforcement through state attorneys general and the Federal Trade Commission. The federal agency also would be given authority to regulate the industry's advertising and marketing practices.

Collections & Credit Risk has published several stories recently about states cracking down on debt settlement schemes including one in Alabama where $12 million was seized, another in Minnesota and this one involving Illinois suing several settlement firms and their executives. 

If you would like to comment on this topic, please send an e-mail to Darren Waggoner at

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