When facing overwhelming credit card debt, many people turn to debt settlement companies for help. In fact, you’ve probably seen online ads from these companies promising quick fixes, but they can often dig you into even deeper trouble.
A law firm is often a better option for debt relief. Not only do they tend to have more favorable outcomes when it comes to debt settlement, but they’re also held to a higher standard, meaning you’re guaranteed stronger legal protections and more peace of mind.
In this guide, we’ll break down these two different options and highlight why law firms are likely the safer and smarter choice for most borrowers.
Understanding Debt Settlement
Debt settlement is a popular strategy among people struggling to pay off their credit card debt. Before you hire a professional to help you through the process, it’s important to understand how debt settlement works.
What is Debt Settlement?
Debt settlement is when you negotiate with your creditor to pay less than your full debt balance. You’ll often make a lump-sum payment or a series of payments, and in return, your creditor will forgive the rest of your debt. This means no more interest, no more late fees, and no more debt collection phone calls.
How Debt Settlement Works
Debt settlement involves negotiating with your creditor(s) to compromise on a lower payoff amount. The process often involves stopping payments on your accounts, which causes them to become delinquent. While this isn’t ideal, it can motivate your creditors to negotiate.
Once you’re ready to settle, you (or a debt relief professional, on your behalf) will negotiate with your creditors to see if they’ll accept a lower amount. If they agree, your debt will officially be settled once you make the agreed-upon payment.
Pros and Cons of Debt Settlement
Pros:
- Resolve your debt quicker
- Pay less on your debt than you owe
- End debt collection calls
- Stop racking up interest and late fees
Cons:
- No guarantee your creditors will settle
- Might damage your credit score
- Could result in lawsuits and other collection efforts
- Requires debt settlement or attorneys’ fees
Debt Settlement Companies
Overview of Debt Settlement Companies
A debt settlement company is a for-profit company that negotiates with creditors on behalf of its customers. In many cases, the company will have you pay into a separate account each month rather than making payments to your creditors. If the settlement is successful, they’ll use these funds to pay your settlement.
Debt settlement company employees usually aren’t attorneys. Instead, they’re sales representatives and other people who may lack any debt or legal training.
Services Offered
Debt settlement companies usually use a set process for their customers that involves stopping payments on their debt, accumulating funds into a separate account, negotiating with creditors, and facilitating the settlement payment. They may also offer debt advisory services or help set up payment plans. Many states limit or prohibit unlicensed debt settlement companies.
The Costs Involved
Debt settlement companies usually charge a fee as a percentage of your total debt amount, often as high as 25%. For example, if you have $10,000 of debt, you could owe as much as $2,500, even if you aren’t able to settle the debt by a significant amount.
Risks of Using Debt Settlement Companies
Using a debt settlement company to deal with your credit card debt has some significant risks, including:
- Hidden fees: Debt settlement companies aren’t always straightforward about their fees, and you could end up paying more than you expected.
- Lack of legal protections: Because they aren’t attorneys, debt settlement companies don’t offer much in the way of legal protections. They also aren’t necessarily legally required to act in your best interests even though they may claim they have an attorney on staff.
- Potential scams: There are far too many scams in the debt settlement industry, and it’s often difficult to tell which companies are scams until it’s too late.
What Debt Settlement Companies Won’t Tell You
Debt settlement companies use creative and aggressive marketing tactics, but they don’t always disclose everything you need to know. Here are some things debt settlement companies may not tell you before you sign on to be a customer.
Your Debt May Grow Instead of Shrink
The debt settlement process often involves stopping payments on your credit card accounts. During this time, you’ll rack up additional interest charges and late fees. In the end, you could end up owing even more than you originally did.
Creditors Aren’t Required to Settle
There are no guarantees in debt settlement. Creditors don’t have to settle with debt settlement companies and many opt not to, and could instead choose more aggressive collection efforts, including lawsuits.
Fees Are High and Often Front-Loaded
Debt settlement companies charge as much as 25% of your total debt amount. You may have to pay these fees upfront, even before you’ve settled your debt which could be illegal. And if the debt settlement is unsuccessful, you’ve paid a lot of money for no results.
The Salesperson Disappears After You Sign
The person who sold you on their debt settlement services probably won’t be the person you work with throughout the process. If you signed up because you found that person to be trustworthy, you may be let down when someone else is handling your account.
Secured Debts Aren’t Covered
Debt settlement only works for unsecured debts with no collateral attached to them. This includes things like credit cards and personal loans. But secured debts, including mortgages and auto loans, typically aren’t eligible for debt settlement. After all, the creditor can simply foreclose on or repossess the underlying asset instead.
Many Companies Operate Questionably or Illegally
Plenty of debt settlement companies have been sued, criticized, or faced regulatory problems for their practices. It’s important to do your due diligence before choosing a debt relief company, but you could still end up working with an unethical provider.
Law Firms for Debt Settlement
Overview of Law Firms Handling Debt Settlement
A debt relief attorney or law firm that handles only debt matters may be able to help you settle your debt in a similar way to a debt settlement company, but with some added benefits. Rather than working with a company (one that likely doesn’t have attorneys doing the negotiating), you’re working with an attorney who has been trained in this area and has a higher ethical obligation to you as the client in any matter including your debt matter.
Legal Services Provided
Like debt settlement companies, a debt relief law firm can negotiate with your creditors on your behalf. But more importantly, they can do far more than that. First, they can take a holistic look at your debt situation and advise you on whether debt settlement is actually the best solution for you and discuss the legal implications of all options to resolve debt. If not, they can help you carry out a different strategy.
A debt relief attorney can also pivot and represent you in case things with your settlement don’t go as planned. They can help you explore alternative strategies or represent you in case your creditors sue you for your unpaid debt.
Fees Compared to Debt Settlement Companies
Debt settlement law firms usually have a more transparent and fair fee structure. Some may charge a percentage-based fee, while others charge either a flat fee or an hourly fee. Either way, you’ll know and understand the fee ahead of time.
Many debt settlement attorneys are outcome-focused, meaning they get paid when you get results. They may take a percentage of your saved amount. For example, if you owe $20,000 and your attorney is able to settle your debt for 50%, they would take a percentage of your $10,000 of savings as their fee.
Legal Protections and Advocacy
Working with a debt relief attorney offers plenty of benefits that you simply won’t get with a debt settlement company, including:
- Attorney-client privilege
- Compliance with state and federal laws
- Leverage in negotiations as attorneys working for you
- Higher ethical obligations and recourse if you feel you’ve been wronged
Factors to Consider When Choosing
Your Financial Situation and Debt Level
Generally speaking, the more debt you have or the more complex your situation, the more likely you’ll want to work with a debt relief law firm. While the added risk may be worth it for a relatively small amount of debt, you likely want the best results if you have a lot of debt.
Comfort with Risk and Negotiation
If you have a higher risk tolerance and want to chance it, you might feel more comfortable working with a debt settlement company. However, if you’re risk-averse or want the best protections in place for your finances in case your creditor sues you, a law firm may be a better option.
Impact on Credit Score
Debt settlement is likely to impact your credit score, no matter which route you go. But a law firm may offer better results, which can minimize the impact on your credit. Credit may be an even more important factor if you’re hoping to buy a home or finance another large purchase in the next couple of years.
Long-Term Financial Goals
Debt settlement is just one part of your overall financial picture. A debt relief attorney can better help you focus on the big picture, advise you on how your debt settlement will affect your finances, and help you explore other solutions like bankruptcy, debt consolidation, and more.
Benefits of Using a Law Firm
We’ve already briefly mentioned some of the benefits of working with a law firm for debt settlement, but here’s some more information that may be helpful.
Legal Expertise
Attorneys have years of education, training, and experience practicing in the area of debt relief. Their expertise can improve your chances of a successful debt settlement. And if the settlement process doesn’t go your way, they can represent you in a debt lawsuit or whatever comes next.
Attorneys also have a greater understanding of consumer protection laws, meaning they’re likely to act more in your best interests than a debt settlement company would and advocate for you based on the laws.
Stronger Negotiation Leverage
Creditors may be more likely to negotiate with an experienced debt attorney rather than a debt settlement company simply because they take them more seriously. They also know you have legal representation to guide you through any potential litigation, so they may be more inclined to avoid unnecessary legal costs.
Comprehensive Advice Beyond Just Settlement
Debt relief attorneys can help you with far more than just debt settlement. First, they’ll take a look at your overall financial picture, including your debt, to advise on whether debt settlement is really the best solution. If it’s not, they can guide you in a different direction.
Next, if the debt settlement doesn’t work, a debt settlement company is likely to end its relationship with you. But a debt relief attorney will advise you on your next steps, whether that be debt consolidation, credit counseling, bankruptcy, or debt litigation.
Conclusion
Both debt settlement companies and debt relief law firms can try to help you settle your debt. But thanks to their better track record of results, stronger consumer protections, and long-term peace of mind, an experienced debt help attorney is often the best choice for most borrowers.
If you need help managing your credit card debt, we may be able to help. Tayne Law Group has experienced attorneys who can analyze your debt situation and as a client will advise you on the best next steps. We have a proven track record of helping borrowers in exactly your situation.
To learn more about how Tayne Law Group can help, contact our law offices by calling for a free no obligation phone call with an experienced team member (866) 890-7337 or filling out our short contact form. We never share or sell your information, and all conversations are confidential.
