Colorado Debt Relief Services Guide to Legal Requirements

 When one researches the history of debt negotiation practices, you will find references going back to the days preceding the Revolutionary War.  At those times, the legal process of debt collection could take years so creditors were often willing to accept a negotiated settlement rather than wait out the legal process.

More recently in the late 1980s and early 1990s, debt negotiation became more common with business debt where debt negotiation firms would help suffering companies negotiate all its debts with creditors. These “debt arbitration” companies typically charged their clients an up front retainer fee of around 1% of the debt amount and then were often paid a fee calculated at 25% of the savings achieved in the negotiation of the clients debts.

During the 1990’s the practice of negotiation the debts of a company evolved and these negotiation tactics were now used by debt negotiation companies to resolve consumer’s personal debts.  From here, we began seeing today’s debt settlement programs and debt management programs.

 Debt Settlement Programs

Debt Settlement greatly differs from Debt Management and Credit Counseling. Debt Settlement companies will negotiate with the creditors on behalf of the client to settle for a specific amount (in some cases for less than the balance owed). In return, the debtor will make one settlement payment or a series of settlement payments for the balance owed depending on the circumstances of each individual program. Once the debt has been compromised for the agreed upon amount, the creditor will issue a letter to the consumer and report to the credit bureaus that the debt has been “settled” and/or “settled for less than the full amount”.

 Debt Management Programs

So what is a debt management program?  Debt management involves a designated third party assisting a debtor with repayment of his or her debt.  Debt Management plans are designed to help people with heavy debt and high interest rates get their financial situation under control.  A more concise definition of a Debt Management Plan is a structured repayment plan set up by a designated third party. In such a plan, the debtor client deposits money each month with the debt management company which uses these funds to pay the client’s unsecured debts, such as credit cards, student loans and medical bills.  In such programs, the debt management company negotiates with the creditors for concessions such as a lowering of the interest rate or waiver of certain fees.

 Providing Debt Relief Services to Consumers in Colorado

Colorado enacted a new law effective January 1, 2008 that regulates the provision of debt relief services. This new law, known as the Colorado Uniform Debt-Management Services Act (the “Act”), requires companies to register as a provider prior to providing debt relief services to consumers who reside in the state of Colorado.

The Act requires registered companies to provide extensive disclosures to consumers including a list of the goods, services and charges for each that your company will provide to the consumer.  The Act also requires the company to provide reasonable education about management of personal finance and to prepare a financial analysis and plan for each of the company’s clients.

The Act also places limitations on the amount and types of fees that can be collected by your company that are dependent on the types of services your company is providing (debt settlement vs. debt management).  In addition, companies are not permitted to request or receive payment of fees until the company has settled the terms of at least one debt by way or a written settlement agreement with the creditor.  The Act also provides consumers with extensive rights to cancel the services agreement with your company and to do so with no monetary penalty nor further obligation to the debt relief services company.

 License required to offer debt relief services?

 Yes.   Colorado has a Uniform Debt Management Services Act that has a registration requirement applicable to debt management companies.  See Colorado Revised Statutes Section 12-14.5-201 et seq. Under this Act a provider may not provide debt-management services to an individual who it reasonably should know resides in this state at the time it agrees to provide the services, unless the provider is registered under the Act. See 12-14.5-204.

“Debt-management services” are defined as services as an intermediary between an individual and one or more creditors of the individual for the purpose of obtaining concessions.  See 12-14.5-202(9)(A).

Application Requirements – The applicant will be required to complete various application forms and disclose important background information, its educational materials, a description of its financial analysis and initial plan, a copy of each form agreement that it intends to use with its customers, and a schedule of fees and charges that it will impose on its customers.