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Starting this week, for-profit companies marketing debt-relief services over the telephone are prohibited from charging a fee before they settle or reduce a customer’s debt to the Internal Revenue Service, credit card company, or other unsecured debt. The new rule by the Federal Trade Commission covers telemarketers of for-profit debt-relief services, including credit counseling, debt settlement, and debt negotiation services. Nonprofit firms are not affected by the rule.

1.  What is this ruling meant to prevent?  Explain this in terms of GAAP recognition of revenue.
2. Under the new ruling, providers’ fees for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled.  Assume that John Smith has 3 debts enrolled ($150,000, $450,000, and $300,000) and the company agrees to settle the debts for a charge of $1,200 for settling the debt.  When they settle the $450,000 debt according to the new ruling, how much of this fee can they collect?
3. Under the ruling, if a consumer enrolls multiple debts into one debt relief program and the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts, according to the FTC. Can you think of a possible situation where manipulation of this part of the ruling may be used by debt-relief services to gain greater fees?  If so, how do you think this can be investigated?

Staff. (2010). FTC rule prohibits debt-relief companies from collecting up-front fees. AccountingWEB, October 27. (Retrievable online at