Should I Hire an Attorney for Debt Settlement? Or Should I Use a Debt Settlement Company?

If you're struggling to pay your unsecured debts, such as credit card debt, private student loans, and medical bills, you might be wondering if you should hire a lawyer or a debt settlement company to help you negotiate with your creditors. In almost all cases, it's better to hire a reputable attorney rather than a debt settlement company. Also, be aware that you can settle debts on your own. However, a lawyer can negotiate with creditors on your behalf, defend you in court if you get sued, and tell you about other legal options, such as filing for bankruptcy.

Still, you need to be careful. Make sure you're hiring a legitimate law firm and not a debt settlement company masquerading as one. It's best to avoid debt settlement companies altogether, even if the company claims to use lawyers.

Understanding Debt Settlement

"Debt settlement" is the process of negotiating with creditors to accept less than the full amount owed as a one-time payment to settle a debt. It's often used for unsecured debts like credit cards or medical bills. To handle the debt settlement on your own, you would contact your creditors to explain your financial situation and propose a settlement amount. Typically, you'll need to offer a lump sum payment that's less than what you owe. Before you agree to a settlement, get the terms in writing and pay promptly after you come to an agreement with the creditor.

Creditors aren't obligated to accept your offer, and you'll need good negotiation skills to get a deal. People who want help in the debt settlement process often hire a debt settlement company or debt relief attorney to help them. But which is better? Typically, you'd be much better off hiring a lawyer.

How Debt Settlement Companies Work

Debt settlement companies often claim they'll be able to talk your creditors into settling your unsecured debts for pennies on the dollar. These companies say they can negotiate with creditors on your behalf, promising reduced payments and an end to collection calls from creditors.

Debt settlement companies operate by, supposedly, negotiating with your unsecured creditors to get them to accept a reduced lump sum or fewer payments to pay off your debt. If you're current on your payments, they'll tell you the creditors won't settle unless you stop making payments. The company might tell you to pay it rather than your creditors. The company keeps the funds in an account, which the debt settlement company manages. Or the company might have you open a savings account in your name and accumulate funds there.

Once the account has sufficient money available (based on the debt settlement company's opinion), the company negotiates lump-sum settlements with your creditors. In the meantime, you become delinquent on your debts, and your credit scores fall.

The company pays the creditors—and often themselves—with money from the account.

How Much Do Debt Settlement Companies Charge?

Generally, you must pay the debt settlement company a percentage based on the amount you save through settlement or your total enrolled debt (15-25%), and perhaps a monthly fee and other fees, like a set-up fee.

What the Debt Settlement Company Won't Tell You

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. 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 downsides to using a debt settlement company that the company most likely won't mention.

Downside #1: Your Debt Grows

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. It often takes two to four years to complete the debt settlement process. Over that time, your accounts will accumulate interest and fees.

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.

Downside #2: Your Creditors Might Not Settle

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 would have because you're working with a debt settlement company.

Downside #3: Debt Settlement Fees Are Typically High

Using a for-profit debt settlement company can be expensive. These companies often charge a set-up fee, a monthly fee, interest, 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 disappear with your money.

Again, you'll most likely 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.

Downside #4: The Charming Salesperson Who Sold You the Company's Services Won't Work on Your Case

Debt settlement companies usually use smooth-talking, charming salespeople to get you to sign up for their plan. But that person who convinces you to hire the debt settlement company probably won't be the person talking to your creditors. These companies use their best salespeople to get people to hire the company to provide debt settlement services, not to work out deals with creditors.

Downside #5: Secured Debts Aren't Included in the Settlement Negotiations

Debt settlement companies usually won't deal with your secured debts, which often are (or should be) your highest priority for repayment. These companies often induce people to devote precious resources to paying unsecured debts when you should be using that money to pay secured debts, like your home mortgage.

Downside #6: Many Debt Settlement Companies Are Scammers

In recent years, the debt relief service business has boomed. But these companies generally produce poor results and, again, charge very high fees. They siphon off your limited resources in fees and charges and pay only a few (if any) creditors.

The Federal Trade Commission and state attorneys general have sued hundreds of these companies for misleading consumers about what the companies can accomplish, how much their fees really are, and for violating consumer protection laws or specific state laws governing debt relief services. The IRS has ended the nonprofit status of a number of so-called nonprofit credit counseling companies that were making profits, either directly or through affiliates.

Laws Covering Debt Settlement Companies

The Federal Trade Commission Telemarketing Sales Rule offers limited protection against for-profit debt settlement companies. The rule only applies to for-profit companies, services related to unsecured debts, and services rendered after the debt relief company calls you or you call in response to an ad, not if the company communicates with you through the internet or the mail.

Before you have to pay any money, the rules require debt relief service companies to disclose:

• the total cost of the service, along with any significant restrictions, limitations, or conditions regarding the service
• all terms and conditions of the refund policy (or a statement informing you that there is a no-refund policy)
• when the debt relief service provider will make a settlement offer to each of the creditors
• how much money (or the percentage of each outstanding debt) you must save before the company makes a settlement offer to creditors
• the possible consequences of not making timely payments (for example, your credit will likely be adversely affected), and
• your rights regarding a dedicated account if the debt relief company requires you to set aside funds in an account. (16 C.F.R. § 310.3 (2024).)

Most importantly, the rules prohibit a company from collecting fees from you (or your account) until it has obtained an agreement to reduce at least one debt. You also must have made at least one payment on the agreement. (16 C.F.R. § 310.4 (2024).) The rules also place guidelines on fee amounts.

Also, almost all states regulate debt relief companies, and some states prohibit debt settlement companies from doing business. These state laws usually don't apply to lawyers and merchant-owned associations claiming to help debtors.

However, many debt settlement companies don't follow the law.

Avoid Debt Settlement Companies

Ultimately, instead of helping you get out of debt, a debt settlement company might leave you with even more negative information in your credit reports and facing collection lawsuits. In extreme cases, companies reportedly have used consumers' money to pay the company's operating expenses instead of paying the consumers' creditors.

Even if the debt settlement company provides the services promised, you're better off using the money you would spend on the high fee to make payments to your creditors or on hiring a legitimate debt relief lawyer.

Should I Hire an Attorney for Debt Settlement?

If you need help settling your debts or are unsure about whether negotiating settlements is appropriate (as opposed to, say, filing for bankruptcy), a skilled attorney can provide you with practical legal advice after thoroughly analyzing your situation.

Here's why you should consider hiring a debt settlement attorney.

• An attorney has negotiation skills. Debt settlement attorneys have negotiation skills developed over three years of law school, many years of practical experience, and extensive knowledge about debt collections.
• An attorney will go over all of your options with you. A good debt settlement attorney will go over all of your options. The attorney can help you determine if you should try to settle your debts or 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. A lawyer can also represent you if a creditor files a lawsuit against you. 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. Debt settlement companies can't do these things.
• An attorney must act ethically and in their client's best interest. Unlike debt settlement companies, attorneys must comply with ethical standards and act in the best interest of their clients.

When to Consider Hiring an Attorney

Again, you can arrange debt settlements yourself. However, people often make mistakes when negotiating their own settlements. While you'll save money by settling debts on your own, you might inadvertently restart an expired statute of limitations or do a poor job of negotiating.

If you're feeling overwhelmed at the thought of negotiating with creditors, and you don't understand the legal repercussions of settlement or your legal rights or options, then it's time to think about hiring a lawyer.

Considerations Before Hiring an Attorney

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 with an appearance of legitimacy. But the lawyers have little to do with you, your creditors, or the debt settlement process.

It's generally best to hire a local debt settlement attorney you can meet with face-to-face rather than hiring a firm over the phone or the 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.

Talk to a Debt Settlement Lawyer

Talking to a lawyer can help you decide if debt settlement is more appropriate than filing for bankruptcy or some other option. If you decide on debt settlement, you might get a better result using a lawyer than if you handled the negotiations yourself. Again, lawyers are skilled negotiators and might be able to get a more favorable deal than you would get on your own.

Also, attorneys know the law. A lawyer will know if a creditor is using illegal tactics, making illegal threats, or taking unlawful actions against you.

Finally, if a creditor decides to sue you to collect a debt, an attorney can defend you. The lawyer can also handle all communication to and from the creditor or debt collector, even before a suit happens.