On August 3, 2010, Illinois Governor Pat Quinn signed H.B. 4781 into law, which is now known as The Debt Settlement Consumer Protection Act, Public Act 96-1420 (the “Act”). The Act substantially alters the legal landscape for debt settlement companies operating in Illinois and/or serving Illinois consumers. A complete copy of the Act is available here.

The most significant impacts of the new law are the substantial fee restrictions that are imposed on the industry - after charging a $50 initial enrollment fee, debt settlement companies are prohibited from charging any additional fees until a settlement has been completed on behalf of the consumer. Once a legally enforceable settlement has been entered and payment has been made to the creditor, the company may charge no more than 15% of the amount of the consumer’s savings as a result of the settlement. If the settlement results in no savings to the client, the company is prohibited from charging any additional fees.

Apart from the fee restrictions, the new law places numerous other requirements on companies offering debt settlement services in Illinois. “Debt settlement services” are defined as “any service to assist a consumer in reducing or obtaining a settlement, adjustment, or satisfaction of the consumer’s unsecured debt.” The Act specifically does not apply to companies offering “debt management services,” which are subject to separate licensing and regulatory regulations. The Act also exempts from its provisions attorneys, accountants, banks, licensed debt collectors, broker-dealers, and investment advisors engaged in the ordinary practice of their respective professions.

Under the Act, companies offering debt settlement services in Illinois must first be licensed by the Department of Financial and Professional Regulation (the “Department”), and obtain a $100,000 surety bond. Prior to obtaining a license to offer debt settlement services, applicants must pay a fee; demonstrate their financial responsibility, experience, character, and fitness; and may not have committed any prior felony, failed to pay money collected on behalf of another, or made any false statement in applying for such license. Licenses expire on January 1 of each year, but may be renewed for an additional term by paying a fee of $1,000 and securing an additional surety bond in an amount set by the Department.

Before the company may accept any fees from a consumer, the company and the consumer must enter into a written contract for debt settlement services. The company must also provide the consumer with an individualized financial analysis and certain statutory disclosures. These disclosures include that debt settlement services may not succeed in reducing the consumer’s balances or interest rates, may not stop collection efforts, may harm the consumer’s credit rating, and will not alter the consumer’s obligations to make scheduled payments. Debt settlement companies must also advise the consumer that there are alternatives to debt settlement, that the consumer has the right to cancel services, and that the consumer’s failure to make payments to creditors may result in additional fees, penalties, and interest to the consumer.

A debt settlement company’s advertisements must include statutory disclaimers and may not be misleading. The debt settlement company must disclose all debt settlement activities, including any fees collected and consumer debt enrolled, to the Department in an annual report.

Finally, the Act prohibits certain practices by debt settlement companies. For example, such companies may not advise consumers to stop communicating with or making payments to creditors. They are also prohibited from engaging in debt collection; securing a consumer’s waiver, power of attorney or confession of judgment; or appearing in a judicial proceeding on behalf of the consumer. The Act bars debt settlement companies from paying referral fees and from accepting any compensation for providing debt settlement services from anyone other than the consumer to whom such services are provided.

A debt settlement provider who operates without a license or otherwise violates the Act may be found guilty of a Class 4 felony and may be enjoined from offering further debt settlement services. The Department is empowered to issue cease and desist orders to any companies believed to be violating the Act. Additionally, a violator may be fined up to $10,000 per violation and may be required to pay up to four times the amount of consumer debt enrolled into a Debt Settlement Consumer Protection Fund. This state fund will be used exclusively to provide restitution to consumers injured as a result of debt settlement services.

The Act authorizes the Department to adopt further rules governing debt settlement services. The Department’s current proposed rules are available here and will be open for written public comment from August 20, 2010 to October 4, 2010. Additional information about submitting comments to the proposed rules can be found at the Department’s website at: http://www.idfpr.com/DFI/DS/debtsettlement.asp.  

For further information, please contact Michael A. Thurman, , 310.282.2122.

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