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Originally published Wednesday, April 28, 2010 at 2:07 PM

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Debt settlement companies could face tighter rules

Debt settlement companies that charge high fees and mislead consumers would be more tightly regulated under new legislation introduced Wednesday.

The Associated Press

NEW YORK —

Debt settlement companies that charge high fees and mislead consumers would be more tightly regulated under new legislation introduced Wednesday.

The proposed law, put forward by Sens. Charles E. Schumer, D-N.Y., and Claire McCaskill, D-Mo., comes as complaints about the debt settlement industry have soared amid the economic downturn.

Under the legislation, companies wouldn't be able to collect fees until a settlement was reached. Consumers also would get clearer upfront disclosures, including a detailed list of all costs and promised services.

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

Hiring a debt settlement company doesn't stop the collection calls either. Interest and financing charges continue racking up too, and lenders may even decide to sue in the meantime.

Consumer groups note that individuals can negotiate directly with lenders, and that credit card companies often refuse to negotiate with debt settlement companies. Even if a settlement is reached - either independently or through a third party - it can severely hurt the consumer's credit score.

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.

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