The Uniform Debt-Management Services Act is a model state law, approved by the Uniform Law Commission in 2005, that regulates credit counseling and debt settlement companies. It requires them to register with the state, post a surety bond, hold your money in trust, disclose the terms of any plan in writing, and stay within capped fees. It also lets you sue a provider directly if it breaks the rules.1Federal Trade Commission. Uniform Debt-Management Services Act
Who the Act Applies To
The Act reaches any company that provides debt-management services to consumers, whether it operates as a nonprofit or a for-profit business.1Federal Trade Commission. Uniform Debt-Management Services Act It covers two different services and treats them differently throughout. Credit counseling sets up a plan to repay creditors in full, usually with reduced interest or waived fees. Debt settlement negotiates with creditors to accept less than the full balance. The fee caps and risk disclosures track those differences.
Some professionals are exempt when debt help is incidental to their real job. Attorneys advising clients within a normal attorney-client relationship, banks and credit unions performing standard banking functions, and judicial officers or people acting under court orders don’t have to register.1Federal Trade Commission. Uniform Debt-Management Services Act
How Your Money Is Protected
A provider cannot legally offer debt-management services in an adopting state without first registering with the designated state authority. The application requires detailed financials, evidence of professional liability insurance, and the business’s operating history.1Federal Trade Commission. Uniform Debt-Management Services Act Losing registration means losing the right to operate.
Every registered provider must also post a surety bond. The default amount is $50,000, and the state administrator can adjust it up or down based on the provider’s financial condition and experience.1Federal Trade Commission. Uniform Debt-Management Services Act If a provider mishandles funds or violates the Act, the bond is a pool of money that can compensate affected consumers.
The trust account rules are the strictest part. Every payment you send for distribution to creditors is held in trust and must be deposited into a dedicated trust account within two business days of receipt. That money is not the provider’s property and cannot be seized by the provider’s own creditors. Providers must keep separate records for each consumer, reconcile the account monthly, and make sure the cash balance always equals the combined total of every individual consumer’s account. Commingling with company money is forbidden. If a provider discovers or suspects embezzlement from the trust account, it must immediately notify the state administrator in writing.1Federal Trade Commission. Uniform Debt-Management Services Act When an agreement ends or the plan clearly isn’t working, the provider must promptly refund whatever hasn’t gone to creditors, minus fees legitimately owed.
What a Provider Can Charge
Fees are capped, and the caps depend on the service.
For credit counseling, where creditors agree to reduced interest or waived fees while you repay in full, the Act allows a one-time setup fee of up to $50 and a monthly service fee of up to $10 per creditor still in the plan, with a $50 monthly ceiling.1Federal Trade Commission. Uniform Debt-Management Services Act Those are maximums; providers and states can go lower.
For debt settlement, where creditors agree to take less than the balance, the setup fee is capped at the lesser of $400 or four percent of the total debt enrolled. Monthly fees follow the same $10-per-creditor, $50-monthly structure. When a settlement is reached, the provider can charge a settlement fee, but monthly fees paid up to that point must be credited against it. If you terminate the agreement before a settlement is reached, a portion of the setup fee must be refunded.1Federal Trade Commission. Uniform Debt-Management Services Act
Federal Law Overrides on Advance Fees
Read alone, the Act permits certain upfront fees for debt settlement. But the FTC’s Telemarketing Sales Rule imposes a blanket ban on collecting any debt settlement fee until three things have happened: the provider has renegotiated or settled at least one of your debts, you have agreed to the settlement, and you have made at least one payment toward the settled amount.2Federal Trade Commission. Complying with the Telemarketing Sales Rule The FTC has said that state laws authorizing advance fees do not conflict with the federal ban because the state laws permit rather than require early fee collection.3Federal Register. Telemarketing Sales Rule In practice, that means a debt settlement company that solicited you by phone or over the internet cannot collect a dollar until it delivers results, even in a state that has adopted the Act. A provider charging upfront settlement fees may be complying with state law and still violating federal law.
What the Provider Must Tell You, and What They Can’t Do
Every service agreement must be in writing. It has to tell you that enrolling could damage your credit and that creditors are not legally required to participate. Creditors can still refuse to negotiate, raise interest rates, or pursue collection regardless of your plan. The agreement must spell out your right to cancel at any time without penalty by giving the provider written or electronic notice, and it must contain a complete schedule of every charge.1Federal Trade Commission. Uniform Debt-Management Services Act The provider cannot take any payment that the written agreement doesn’t specifically authorize.
The Act bans a long list of provider conduct. Providers cannot misappropriate trust funds. They cannot settle a debt for more than half of what you owe without your specific consent after the creditor accepts the terms. They cannot take a power of attorney that gives them settlement authority beyond 50 percent of the principal balance. They cannot promise that joining a plan will prevent lawsuits, garnishment, repossession, or foreclosure, or promise that a specific payment will eliminate a specific range of debt. They cannot pay their salespeople based on enrollment volume. They cannot require you to sign a confession of judgment. They cannot buy the debts of consumers they serve. They cannot claim nonprofit or tax-exempt status they don’t actually hold. And a catch-all provision forbids any unfair, unconscionable, or deceptive conduct, including the knowing omission of material information.1Federal Trade Commission. Uniform Debt-Management Services Act
What Happens When a Provider Breaks the Rules
State regulators, usually the attorney general or a financial services commissioner, can audit providers, investigate complaints, issue cease-and-desist orders, and seek court injunctions. Civil penalties run up to $10,000 per violation, and up to $20,000 per violation for providers who defy a final enforcement order.1Federal Trade Commission. Uniform Debt-Management Services Act
You do not have to wait for regulators. The Act gives you a private right of action to sue a provider directly. If you win, you can recover actual damages, including fees you paid and money lost because of the provider’s conduct, plus reasonable attorney fees and court costs.1Federal Trade Commission. Uniform Debt-Management Services Act The fee-shifting piece is what makes these cases financially realistic when the underlying loss is a few hundred dollars.
Where the Act Is Actually Law
Because the Act is a model, it has no force until a legislature enacts it. Seven jurisdictions have done so: Colorado, Delaware, Nevada, Rhode Island, Tennessee, Utah, and the U.S. Virgin Islands. Adopting states retain some flexibility on dollar figures, registration mechanics, and administrative details.1Federal Trade Commission. Uniform Debt-Management Services Act
Many other states regulate debt-management services under their own statutes, some of which track the Act’s core provisions on bonding, disclosure, and fee limits, and some of which don’t. If your provider operates in a state that has not adopted the Act, your protections come from that state’s own law and from the federal Telemarketing Sales Rule, not from the Act itself.
Two Things the Act Does Not Cover
The Act regulates providers. It does not shield you from the tax and credit consequences that come with debt relief itself.
When a creditor accepts less than you owe, the IRS generally treats the forgiven portion as taxable income. If you settle a $20,000 debt for $12,000, the remaining $8,000 may arrive on a Form 1099-C and needs to be reported for the year the cancellation occurred. Debt canceled in bankruptcy is generally excluded. If you were insolvent at the time of the cancellation, meaning your total debts exceeded the fair market value of your assets, you can exclude the forgiven amount up to the extent of your insolvency by filing Form 982 with your return. Certain forgiven student loans and gifts also qualify for exclusion.4Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not? The Act itself is silent on tax, so budget for the bill separately.
Credit impact tracks the type of plan. Credit counseling plans where you pay creditors in full on schedule tend to have minimal effect, and FICO scoring models don’t treat a debt management plan notation as a negative factor. Debt settlement almost always damages your credit, because accounts typically go delinquent while the provider accumulates funds to negotiate with, and settled accounts get reported as paid for less than the full amount.
One more silence worth flagging: making payments through a plan can affect the statute of limitations on old debts. In some states a partial payment restarts the clock on a creditor’s ability to sue you for the full balance; in others it has no effect. This matters most when a settlement plan touches debts that might already be too old to enforce in court. The Act does not address it, so the answer depends entirely on the state law that governs your credit agreement.