This is the eighth in a series of posts discussing the most common myths about do-it-yourself debt settlement. When consumers first hear about the debt settlement strategy, one of the first questions they usually ask is: “What happens if I get sued?” In post #5 in this series, I discussed the fact that many traditional debt relief companies try to create the impression that consumers will have lower risk of legal action if they enroll with their program, when the truth is that they a actually increase the legal risk to their clients.
In this post, I’ll focus instead on the so-called “attorney model” for debt settlement, where the company itself is a firm headed by attorneys. We’re talking about an actual law firm, with bar-licensed attorneys owning the company, as opposed to non-legal debt relief companies that may have an attorney on retainer to help with client lawsuit activity.
The theory behind the attorney-model is that creditors will be far less inclined to litigate their claims if they know that you already have an opposing attorney on your side. So when a prospective client asks the question – “What happens if I get sued?” – the sales rep’s answer is: “Once your creditors realize you have a lawyer on your side, they will be far less likely to sue you.”
Here again, there simply is no truth to this sales claim. There is no evidence whatsoever that using one of these companies lowers the risk of legal action, and plenty of evidence to the contrary. A few minutes on Google is sufficient to turn up numerous consumer complaints about so-called “attorney model” debt settlement firms, where an individual enrolled in one of these programs thinking it was a safer way to go, only to see swift legal action anyway – usually followed by total inaction on the part of the company they had already paid huge fees to.
Also, you would think that a law firm would provide actual legal representation in court in the event a lawsuit is filed against one of their clients. This is another common sales claim, “We’re a law firm, so we will take care of any lawsuits that might happen during the program, and we will defend you if it comes to that.”
The reality is that most of the attorney-led debt relief firms have specific language in their contracts stating that legal representation in the event of litigation is not included in the basic contract. Often, there is a separate schedule of extra fees that must be paid by the consumer before any actual legal services would be rendered.
When the FTC banned advance fees in 2010, some attorneys saw an opportunity to carve out a loophole and continue charging upfront. Attorneys are generally permitted to charge in advance of rendering service, so the theory was that such firms would be exempt from the FTC ruling. Leaving aside the fact that there is no exemption under the FTC rule for attorneys who practice debt settlement as their primary business activity, it’s easy to see that the whole “attorney-model” concept was just a cover to continue gouging consumers. These companies have some of the highest fees in the industry, with upfront fees of 25-30% of the enrolled debt being common. There is no possible way that such a fee structure can work to the consumer’s advantage. Hence the numerous complaints we’re seeing against such companies, with lawsuit after lawsuit being filed against them by Attorneys General from numerous states. As a result of such intense regulatory pressure, one of the largest attorney-model companies has recently announced that they are no longer taking on new clients. Hopefully, it’s only a matter of time before most of the other toxic firms exit the industry as well.
Myth busted. Attorney-model debt settlement firms are no better at preventing lawsuits than any other type of debt company, and given the huge front-loaded fees involved, consumers are literally paying good money to increase the risk of litigation and program failure. The key to avoiding lawsuits is to settle your debts quickly, before the legal fireworks begin.