If you’re struggling to pay your debts, you may be wondering if you should hire a lawyer or a debt settlement company to help you negotiate with your creditors. In most cases, it’s best to avoid debt settlement companies altogether. And although it often makes sense to hire a lawyer, make sure you’re hiring a legitimate law firm and not a debt settlement company masquerading as one.
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Debt settlement is the process of negotiating with your creditors to get them to reduce the amount you owe on your debts. To do this, you can:
Debt settlement companies often claim that they’ll be able to talk your creditors into settling your debts for pennies on the dollar. If you’re current on your payments, they’ll tell you the creditors won't settle unless you stop making payments. Usually, the debt settlement company tells consumers to make payments (that would otherwise go to the creditors) to them while they negotiate with creditors. These payments then cover:
The debt settlement company may also charge a contingency fee, which is a percentage based on the amount you save through settlement. (Learn more about how debt settlement companies operate.)
The debt settlement company might not mention that once you stop making your payments, the total amount you owe will increase due to various added fees and interest charges. They also probably won’t tell you that your creditors don’t have to accept a lesser amount than they are owed to settle the debt or that many creditors won’t accept a settlement, especially if you’re working with a debt settlement company. (In fact, your creditors may even become more motivated to go after you and file a lawsuit sooner than they otherwise would have if you're working with a debt settlement company.)
Most debt settlement companies don’t fully explain these risks to their customers. Why is this? Because debt settlement companies are for-profit companies. They aren’t in business because they care about your situation or want to help you out. They want to make a buck. In almost every situation, you’ll be much better off using the money you would have paid to the debt settlement company to pay down your debt. (Learn more about the risks and pitfalls of using a debt settlement company in Nolo’s Debt Settlement Company Scams article.)
If you think you need help negotiating a debt settlement or are unsure about whether you should do this, a skilled attorney can provide you with practical legal advice after fully analyzing your situation. Debt settlement companies can’t do this.
A good attorney will go over all of your options. The attorney can help you figure out if you really should try to settle your debts or whether you should do something else, like file for bankruptcy, for example. (This is different from a debt settlement company, which will probably just try to convince you to hire it to settle the debts.)
In addition, if a lender, credit card company, third-party debt purchaser, or other creditor eventually decides to sue you to collect the debt, an attorney can defend you in the suit. Likewise, if a creditor violates the law (such as the Fair Debt Collection Practices Act) in its efforts to collect from you, an attorney can provide specific advice and tell you how to proceed in your particular situation. (Learn more in Nolo’s article Using a Lawyer to Negotiate With Creditors.)
Attorneys must be licensed and are supposed to uphold strict ethical standards. Unfortunately, not all do. Some debt settlement companies employ lawyers to act essentially as fronts (or, in some cases, attorneys may team up with a debt settlement company) to provide the company an appearance of legitimacy. However, the lawyers may have little or nothing to do with you, your creditors, or the debt settlement process.
It’s generally best to hire a local attorney whom you can meet with face-to-face rather than hiring a firm over the phone or Internet. You should schedule a meeting to sit down with and speak directly to the attorney. Find out if the attorney will deal directly with the creditors or if a member of the staff will be doing the negotiating. If the company says they are "attorney backed" and/or won't let you meet with or talk to an attorney, this is a big red flag that the attorney has little to do with the operation.
Here's another red flag that the “law firm” you’re dealing with is really just a debt settlement company: It wants you to pay money for it to negotiate with your creditors, but says you're on your own if you get sued. Debt settlement companies masquerading as law firms are usually unwilling to provide you with legal representation if your creditors sue you. (Learn more about finding a good lawyer to negotiate with creditors.)
Keep in mind that you can arrange a debt settlement yourself. If you are certain that you want to settle your debts rather than filing bankruptcy or some other option (and your creditors aren't already suing you or causing you problems), you might not need to hire an attorney.
It often makes sense to negotiate your own settlement so you can save money and maintain control over the process. In addition, your creditors could be reluctant to settle if you hire someone to represent you in the process. After all, if you can afford to hire a debt settlement company or an attorney, why can’t you pay the full debt? (In some cases, you may be able to get free help negotiating with your creditors.)
In the end, debt settlement companies (and sometimes even attorneys) often aren’t able to obtain a better settlement than if you simply approach the creditors on your own. To learn how to tackle settling your debts yourself, do some research on the Internet. Start by visiting Nolo’s Debt Settlement & Negotiating With Creditors area.