As a result of amendments to the Telemarketing Sales Rule (TSR), companies that sell debt relief services, including debt settlement, debt management, and debt negotiation, are prohibited from charging fees before settling or reducing a consumer's credit card or other unsecured debt. The prohibition took effect on October 27, 2010.

Specifically, debt relief companies may not collect any fees until the following occurs:

  • The company has settled, renegotiated, reduced, or otherwise changed the terms of at least one of the consumer's debts.

  • There is a written agreement between the company and the consumer that the consumer has agreed to.

  • The consumer has made at least one payment to the creditor as a result of the agreement negotiated by the company.

The ban on advance fees is just one of the recent amendments to the TSR that have been implemented by the Federal Trade Commission to address "pervasive illegal conduct" in the sale of debt relief services. The other amendments, which took effect on September 27, 2010, include the following:

  • Requiring disclosures about the specific debt relief service being offered, including the cost and length of any debt relief program

  • Prohibiting specific misrepresentations about material aspects of the debt relief services being offered, including success rates

  • Extending the reach of the TSR to include inbound calls from consumers in response to debt relief companies' advertisements

  • Broadly defining the term "debt relief services" to include debt settlement, debt negotiation, debt management, and any service that offers or purports to alter the payment terms or other terms of a debt between a consumer and a creditor or debt collector

The practices of the debt settlement industry have been the subject of several successful actions Ballard Spahr has brought on behalf of a major credit card issuer against debt settlement law firms, debt settlement companies, their principals, and a back-office processor for debt settlement companies. As a result of these actions, the card issuer has recovered millions of dollars, the fraudulent companies and law firms have been taken over by receivers, and the lawyer principals have been suspended from the practice of law. 

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or, or Beth Moskow-Schnoll, 302.252.4447 or 

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