If you’re struggling to pay your debts, you might 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.
In almost all cases, it's better to hire a reputable attorney rather than a debt settlement company if you want help negotiating a debt settlement. And, in some cases, you might be better off settling the debts on your own.
Debt settlement companies often claim that they’ll be able to talk your creditors into settling your unsecured 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 will contact your creditors once you have saved enough—based on the company's opinion—and offer each one a lump sum that is less than what you owe. The debt settlement company might also charge a contingency fee, which is a percentage based on the amount you save through settlement, and other fees, like a set-up fee.
Most debt settlement companies don’t fully explain the risks associated with hiring the company to their customers. Why not? 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, and some are outright scammers. In almost every case, you’ll be much better off using the money you would have paid to the debt settlement company to pay down your debt or using it to hire a reputable lawyer to help you.
Here are a few of the downsides to using a debt settlement company that the company most likely won't mention.
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. Also, the company might not mention that your credit will take a major hit because your creditors will report the missed payments to the credit reporting bureaus.
They also probably won’t tell you that your creditors don’t have to accept a lesser amount than they're owed to settle the debt or that many creditors won’t agree to a settlement, especially if you’re working with a debt settlement company. In fact, your creditors might 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.
Using a for-profit debt settlement company can be expensive. These companies often charge a set-up fee, a monthly fee, and a percentage of each settled debt (say, 25%), and they might pay themselves before paying any of your creditors. Or a debt relief company might simply disappear with your money. Even if the debt relief company actually works to settle your debts, it won't do anything that you couldn’t do for yourself for free. In almost all cases, you'll be better off negotiating debt settlements on your own, hiring a debt settlement lawyer to help you, or filing for bankruptcy, instead of hiring one of these kinds of companies.
If you need help settling your debts, or are unsure about whether negotiating settlements is appropriate, a skilled attorney can provide you with practical legal advice after fully analyzing your situation. Debt settlement attorneys usually have negotiation skills developed over three years of law school and many years of practical experience, as well as extensive knowledge about debt collections. A lawyer can also represent you if a creditor files a lawsuit. Debt settlement companies can’t do these things.
An attorney will go over all of your options with you. 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. A debt settlement company will probably just try to convince you to hire it to settle the debts.
An attorney can defend you if you get sued. If a creditor decides to sue you to collect a debt, an attorney can defend you in the suit. Likewise, if a creditor violates the law in its efforts to collect from you, an attorney can provide specific advice and tell you how to proceed in your particular situation.
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 might team up with a debt settlement company) to provide the company an appearance of legitimacy. But the lawyers 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 speak directly to the attorney. Find out if the attorney will deal directly with the creditors or if a staff member will be doing the negotiating. If the company says they're "attorney backed" or won't let you meet with or talk to an attorney, that's 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.
You can arrange a debt settlement yourself. If you're sure 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. Also, 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 the end, debt settlement companies, and sometimes even attorneys, often can't work out a better settlement than if you simply approach the creditors on your own.
Settling a debt, no matter who handles the settlement process, could have tax consequences. The IRS generally considers canceled debt of $600 or more as taxable, and settling debts for less than what’s owed can increase your tax liability depending on your tax bracket and the canceled amount. Consult a tax professional for more information.