It’s about time. In new legislation geared towards protection for people with credit card debt, the Federal Trade Commission (FTC) also added some protections for people from debt consolidation agencies.

The most sweeping part of the legislation is that debt consolidation companies can no longer collect money up front before they start helping you. Here’s a direct quote:

“At the FTC we strive every day to make sure America’s middle class families get straight deals for their dollars,” Chairman Jon Leibowitz said. “This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up-front fees. Too many of these companies pick the last dollar out of consumers’ pockets – and far from leaving them better off, push them deeper into debt, even bankruptcy.”

Here’s how it’s always worked. Debt consolidation companies get you in, figure out you’re in trouble, and tell you they’re going to work it out for you. For a fee, they will “contact” all your creditors and get them to work with you on payment plans. You pay them a monthly fee, which helps build up the pool of money and they help you pay your bills.

What 99.7% (my calculation) do instead is collect your money and make nary a phone call. You start getting collection notices, phone calls, and threats of being sued. They’ll wait as long as 18 months before doing something. Then they call all of your creditors and work out a deal where they may pay 50% or less of your balance that’s owed to close the account. You end up getting a notice saying it was taken care of, but that the account was “closed by grantor”, which is a negative that sits on your credit report for 7 years. They end up saving you money long term, with your credit trashed, and they get a percentage of the savings, which they’ve been squirreling away. So, you’re out of debt, but you have no credit, and you got hit with a bill by the company on the front and back.

This legislation kicks in on October 27th; not sure why they picked such a strange date, but it’s better than never. There are some provisions that kick in on September 27th as well; once again, strange date. Actually, this information is all from their site, so it’s possible that one of these days is a typo. No matter, since we know it’s coming. Here are some specific rules they’ve indicated:

* require debt relief companies to make specific disclosures to consumers;

* prohibit them from making misrepresentations;

* extend the Telemarketing Sales Rule to cover calls consumers make to these firms in response to debt relief advertising

* the debt relief service successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer’s debts;

* there is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it;

* the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider;

* the dedicated account is maintained at an insured financial institution;

* the consumer owns the funds (including any interest accrued);

* the consumer can withdraw the funds at any time without penalty;

* the provider does not own or control or have any affiliation with the company administering the account;

* the provider does not exchange any referral fees with the company administering the account.