Regulatory Litigation: Connecticut Regulates For-Profit Debt Adjusters and Debt Negotiators
Debt Adjusters
On October 1, 2009, Connecticut Public Act 09-208 went into effect. Sections 23-28 amend the law concerning debt adjusters. "Debt adjustment" is defined in Section 23 of the Act as the receipt of a debtor's money "for the purpose of distributing such money or evidences thereof among creditors in full or partial payment of obligations of the debtor." In other words, a debt adjuster is someone who collects money from the client and uses the money collected to settle the client's debts. This law only applies to debts incurred primarily for personal, family or household purposes, i.e., consumer debts. The Act amends Connecticut law to permit for-profit entities to act as debt adjusters, but requires them to be licensed by the Commissioner of Banking. Before October 1, 2009, Connecticut law only permitted nonprofit organizations to serve as debt adjusters.
Debt adjusters must provide credit counseling free of charge before entering into a fee agreement, comply with certain recordkeeping and record-retention requirements, and maintain a separate bank account for the deposit of clients' funds.
Lawyers are exempt from regulation as debt adjusters.
Debt Negotiators
Sections 29-33 of the Act create a new kind of entity, called a "debt negotiator." A debt negotiator is someone who assists "a debtor in negotiating or attempting to negotiate on behalf of a debtor the terms of a debtor's obligations with one or more mortgagees or creditors of the debtor, including the negotiation of short sales of residential property or foreclosure rescue services." This law applies only to consumer debts. Note that the law applies to entities and individuals who wish to represent homeowners on short-sale and other foreclosure avoidance strategies.
A debt negotiator's fee agreement must contain a three-day right of rescission, and may not provide for payment in advance. Periodic payment of a debt negotiator's fees is permitted as work is completed. A debt negotiator's fees are subject to regulation by the Banking Commissioner, who has imposed a maximum fee schedule.
Lawyers are exempt from regulation as debt negotiators.
Licensing and Compliance
In each case, a two-year license costs $1,600.00. The licensee must post at least a $40,000 bond. In addition, the law regulates various aspects of the debt adjuster's and debt negotiator's business, including how it deals with consumers. For example, fee agreements must be in writing.
Take-Home Message
Professionals, such as accountants, real estate agents and consultants, sometimes offer debt negotiation (think short-sale negotiations) and debt adjustment as a new service line when their usual business is slow. If they decide to do so, they should make sure they get licensed, comply with the new debt adjuster and debt negotiator statutes, and seek legal advice if they need assistance with the application process and compliance issues.
