If you're struggling to pay your unsecured debts, such as credit card debt, private student loans, and medical bills, you might wonder 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 if you want help negotiating debt settlements. A lawyer can negotiate on your behalf, defend you in court if you get sued, and tell you about your legal options.
However, you need to 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.
Debt settlement companies often claim 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.
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.
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.
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.
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.
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.
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.
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.
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.
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 thoroughly analyzing your situation.
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 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.
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 attorney 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.
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.
Talking to a lawyer can help you decide if debt settlement is better 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 better 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.