Regular readers of The ZipDebt Blog already know that I strongly advise consumers to steer clear of third-party debt settlement firms. These companies charge an outrageous 15% or more of the total enrolled debt, even before any meaningful work is performed. They deliberately mislead people on how the process really works, and they do not provide the services advertised.
Such companies also frequently get people sued by using obsolete and dangerous tactics like “cease communication” notices to creditors. Given the poor reputation of the industry, many consumers have already figured out that traditional debt settlement companies should be avoided like the plague. However, more and more people have recently been asking about the legitimacy of an alternative called “attorney debt settlement.” For the benefit of consumers doing their homework on debt solutions, let’s take a closer look at this so-called “attorney model.”
Over the past several years, many of the big players in the debt industry shifted to the attorney model for debt settlement in the hope they could avoid state laws pertaining to the debt industry, and also with an eye toward surviving pending major regulatory changes at the Federal level. The shift was based on legal loopholes that — generally speaking – make attorneys exempt from laws on debt adjusting, negotiating settlements, handling credit disputes, and so on. The idea is to have an attorney head your debt settlement company, thus providing a “fig leaf” of protection against regulations that restrict fees or business practices. The idea was to completely sidestep any concern over regulatory problems. (Of course, the problem with this approach is that the FTC is already wise to this tactic. The proposed Federal rule change will include attorney firms in its definition of “debt relief services.” If third-party debt settlement is what you do, then attorney or not, you’re a debt relief service under the pending rule change, and that means all the new restrictions will still apply to you.)
Although the attorney model for debt settlement has been around for quite some time, lately it seems to be coming up more and more frequently during consultations with consumers looking into this strategy. In addition to the tactical reasons discussed above, what’s happening is that numerous new companies have popped up across the country over the past 1-2 years trying to exploit the current financial environment (which is very good for selling settlement services). They are using boiler room call centers to “close” people on enrolling in settlement programs, and the pitch is now being framed around the attorney-led debt settlement firm to a much greater degree than a few years back. Many of these “debt consultants” are the same high-pressure salespeople who were peddling subprime mortgages before the real estate meltdown.
From the viewpoint of someone trying to *sell* debt settlement services, the attorney model is a great boon because it instantly calms the consumer’s worst fears. When a person first hears about the debt settlement strategy, the next thing they learn is that the accounts must be behind and headed toward charge-off before the creditor will discuss reasonable settlement figures. So the logical next question would be, “If I just stop making payments, won’t the banks just take me to court to recover what I owe? What about lawsuits?”
“You’ll have an attorney on your side,” the sales rep will respond. “It’s far less likely that a creditor will sue you when they know you have an attorney helping you. That’s why you should sign up with us instead of that other debt company that doesn’t have attorneys on staff.”
Sounds logical, right? The problem is that it’s a fairy tale from start to finish.
Let’s separate fact from fiction on this subject. First of all, just because someone happens to have a law degree, it doesn’t mean that person is ethical, or even competent at what they do. Some of the *worst* offenders among companies shut down by various state Attorneys General are companies headed by lawyers. Case in point: Allegro Law Center. Here is a link to an article about the Alabama Attorney General’s recent shut-down of this toxic bunch of scam artists.
The victims who were duped into retaining the help of this so-called attorney were left holding the bag. The Alabama AG has seized $12 million in the company’s assets for distribution back to victims, but that will probably be a drop in the bucket compared to the actual fees collected by these crooks. All of these victims thought they would be protected by having a “lawyer” on their side. Wrong. The shut-down happened precisely because the attorney heading this company did not perform the services advertised. Clients got sued. Allegro Law Center didn’t help. People complained. The AG responded to the mountain of complaints and closed the operation. Thousands of distressed consumers were left in worse shape than when they hired the supposed “law firm.”
This is by no means the only such case. Hess Kennedy (yet another bogus law firm) in FL was shut down last year and the lead attorney was disbarred from practicing law. And this same game has been going on for a very long time, with similar firms getting shut down as far back as the 1990s for scamming consumers in the exact same fashion. (There really is “nothing new under the sun” when it comes to the debt industry!)
Next, let’s apply a little logic here. If you live in North Carolina, for example, how is a Florida or Alabama attorney going to help if you get sued? They don’t even have a license to practice law in your state! To counter this natural objection, some sales reps will claim their company has “lawyers in all 50 states.” Not true. Just try asking to speak with that attorney! Heck, just try asking for the *name* of the attorney who will be assigned to your file – you won’t get a straight answer. That’s because they do not actually have an attorney in your state.
Now, what if you’re talking to an attorney-based debt settlement firm that *does* happen to be located in your home state, or they really *do* have an attorney on staff in your neck of the woods. What then? Well, it doesn’t matter one tiny little bit! The creditor will do whatever they are going to do, even if you have an attorney involved. It won’t stop the collection process from rolling forward, and it will *still* cause the creditors to escalate in retaliation. (That remains the fatal flaw of ALL third-party debt settlement programs. The mere fact that you have hired a negotiator causes the other side to escalate in retaliation. The result is a fast-track to multiple lawsuits, which come much sooner than they would otherwise. By taking a do-it-yourself-with-coaching approach, you can avoid that fatal flaw and get *better* settlements than the poor client who hired the settlement firm!)
Think about this for a minute. If you owe the money fair and square, what good would it be to have an attorney represent you anyway? If you get sued, the creditor can easily prove you owe the money (a freshly printed stack of copies of all your monthly statements should do the trick), and the attorney will then just advise you to set up payment arrangements on the full balance in order to avoid having a judgment recorded against you. Or maybe he can get you an 80% settlement. Big deal! You can negotiate 80% settlements or 100% payment arrangements by yourself, before or after a lawsuit gets filed. You don’t need an attorney’s help and an extra $5,000 or $10,000 in fees just to wind up paying back 80-100% anyway!
If you think I am biased because I offer DIY debt settlement coaching services, or that I have an axe to grind here, there is no reason to simply take my word for any of this. If you are doing research on a debt settlement company representing itself as a law firm, ASK FOR A COPY OF THEIR CONTRACT. If they refuse to show you a copy in advance without hooking a payment from you, doesn’t that tell you right there you don’t want to do business with them? If they do forward a blank copy of their contract, read it very carefully. Aside from the fact that 100% of the contract language is designed to protect the settlement company from YOU (should you decide to go after them for various misrepresentations), and not the other way around, please pay close attention to the paragraph on *what happens if you get sued*. You’ll see language in most of these contracts that clearly states that the firm *does not and will not represent you in court*.
Huh? What’s the point of hiring a supposed “law firm” then? Well – there is no point! There is *no* extra advantage to be gained by using a settlement firm operating on the attorney model, only extra problems! It’s just another *marketing gimmick* designed to separate you from your hard-earned cash, right when you can least afford to part with that cash! That fee money would be far better spent on funding your settlement account.
The bottom line is that “attorney debt settlement” is no better than traditional settlement programs offered by non-attorney firms, and in some cases, it’s actually worse. So it’s nothing more than “lipstick on a pig.” Don’t fall for this version of the tired old debt settlement sales pitch. You CAN settle your debts on your own. You just need some training and coaching from ZipDebt to tackle the project properly. We’ll teach you how to successfully implement the debt settlement strategy without the huge fees!
Very well done!
“Think about this for a minute. If you owe the money fair and square, what good would it be to have an attorney represent you anyway? If you get sued, the creditor can easily prove you owe the money (a freshly printed stack of copies of all your monthly statements should do the trick), and the attorney will then just advise you to set up payment arrangements on the full balance in order to avoid having a judgment recorded against you. Or maybe he can get you an 80% settlement. Big deal! You can negotiate 80% settlements or 100% payment arrangements by yourself, before or after a lawsuit gets filed. You don’t need an attorney’s help and an extra $5,000 or $10,000 in fees just to wind up paying back 80-100% anyway!”
Having defended consumers in credit card litigation I do not agree with the above statement. A rather large number of these cases are brought by debt purchasers with severe evidentiary issues. Amazingly, a lot of the claims brought by original creditors are also defensible. “$5,000-$10,000”? “80% settlement”? Where are you getting these numbers? Please do not include the consumer collections defense lawyers with the third-party settlement folks. We are not the same.
In reply to James Woodruff’s comment above, I totally agree that consumer collections defense lawyers are *not* the same as third-party debt settlement attorneys as described in my post. Mr. Woodruff is a member of NACA (National Association of Consumer Advocates), a nationwide network of attorneys who practice in the general field of consumer law, and many of whom specialize in credit and collection law. Here at ZipDebt, we often receive inquiries from consumers who are simply too far down the road into legal collections for us to assist. Once a lawsuit has been initiated, it’s time for some professional legal help, and in many instances, we refer people straight to the NACA website (www.naca.net) to locate an attorney.
Let’s clarify the paragraph above that Mr. Woodruff commented on, so readers are not confused. I wrote that comment about litigation coming from the *original creditor*, as opposed to lawsuits filed by debt purchasers. Here’s the problem: Most people who enroll in a settlement company program are just starting to fall behind 1-2 months on their payments. Most of these firms immediately send a Power-of-Attorney when take a client on board. As I noted in the original post, this tactic causes the creditors to escalate by moving the files sooner than expected to outside agencies. With some major creditors, the minute they receive such a Power-of-Attorney, they immediately place the file with an attorney in the client’s home state. The result is often a fast-track lawsuit that the client is basically powerless to defend against.
When a consumer *who is enrolled in a debt settlement program* is quickly sued by their original creditor, the only “settlements” available are at very high percentages. Hence my comment about 80% settlements. Of course, since the consumer facing this situation has very little money to work with while they are paying those stiff fees up front, they cannot settle for this type of figure. The result is commonly a “stipulation for judgment,” where the debtor agrees to repay 100% of the balance over a period of time. This is just “the way it is” in the context of third-party debt settlement.
The point about fees of $5,000-$10,000 is based on the industry standard of 15% of total debt enrolled. Take your “average” consumer debt load of $50,000, multiply by 15%, and you wind up with $7,500 in fees. This is what the vast majority of third-party settlement firms are charging. Some of the attorney-model firms charge even more than this.
So I want my readers to understand that Mr. Woodruff is referring to is a different side of the industry. He is quite correct that it’s much easier to defend against lawsuits filed by debt purchasers, for exactly the reason he states – the purchasers seldom have adequate documentation to verify their claims. The reality, however, is that most debt accounts do not get sold until the second year of default. Unfortunately, the majority of traditional settlement clients don’t make it through the first 12 months of the process without seeing multiple lawsuits. When you examine the pattern of complaints associated with some of the companies shut down by state AGs or the FTC, the theme is clear. Consumers get sued *faster* when they hire these firms, and this is true whether or not the firm is operating on the attorney model.
But – NACA and its attorney members are on the side of the consumer, and we have seen a number of successful case outcomes when we have had to refer clients for legal assistance to a NACA attorney.