I have been in the credit card debt relief industry for over a decade now, and have seen many changes take place; some changes that benefit consumers and some that do not. In this article I will discuss the legitimacy, or lack thereof, of the “debt settlement law firm” approach to getting out of debt. Many recent changes in the debt settlement industry have made consumers very confused; this article will open your eyes to the truth of the matter. A fair warning up front this is going to be a long and informative article, so if you’re not honestly serious about finding a solid solution to your debt problem then stop reading right now.
Recent FTC Changes
On October 27th 2010, the debt settlement industry was turned upside down by some major changes that the FTC (Federal Trade Commission) had put into place. These implementations by the FTC will change the way debt settlement companies can conduct business forever; and actually are a benefit to the consumer who understands them correctly.
There were two major changes, the first is the advance fee ban, and the second is full disclosure; both being very important topics to understand.
Let’s first examine the Advance Fee Ban so you have a good understanding why this was implemented and what it has done to the industry as a whole. The FTC stepped up to take action against the settlement industry after years of complaints from consumers about being ripped off and scammed. Many companies were run by people, who had their own pockets in mind first, not the debtor who needs help.
What attracted so many businessmen to the debt settlement industry was the ability to make quick money with very little work. Prior to the FTC changes companies were allowed to charge their entire settlement fee prior to ever even contacting a creditor to negotiate settlement. Needless to say this caused many problems, and untold numbers of naive consumers were paying large fees upfront only to have the company never finish the job; therefore leaving them in a much worse situation than they were already in.
After years of fielding complaints the FTC finally came down and made it illegal for debt settlement companies to charge fees prior to settling. This is great news for consumers, greatly reducing the risk of entering a debt settlement program; at least where losing upfront fees are concerned.
However for the majority of companies in the industry this was TERRIBLE news; but for the legitimate and business savvy companies it is actually GREAT news. It was bad for all the “scammer” operations; no longer could they just blatantly rip people off, now they had to EARN their money by negotiating good settlements for their clients. Almost overnight you saw over 90% of companies bow out of the industry. Even some honest companies stepped down, simply because they did not have enough operating cash flow to continue conducting business without charging their fees upfront.
For the honest, sound companies in the industry this was good news, because:
A) Now there are legal teeth (FTC regulations) to rid the industry of bottom feeding “scam” companies.
B) It means less competition for them; allowing them to focus on what they do best, save people money and get them out of debt quickly.
The second major implementation on behalf of the FTC was “Full Disclosure”. Full disclosure simply means that a representative of a debt settlement company must:
A) Explain all of the various debt relief options available to consumers, not just debt settlement.
B) Fully disclose both the pros and cons of the debt settlement process.
The issue was that many company sales reps would simply lie, or conveniently not inform potential clients about the negative aspects to the settlement process such as: potential lawsuit, creditor harassment, negative credit ratings and that the creditors were not getting paid until settlement (some companies actually deceive people into thinking they are staying current with their creditors during a debt settlement program).
So you may be wondering at this point where I am going with all this and what it has to do with “debt settlement attorneys”, just continue on and you will be enlightened.
The Law Firm Fee Loophole & Deceiving Spin!
At this point in time the only way for a debt settlement company to collect a fee for their service is after they reach a negotiated settlement on behalf of their client; and this is the way fees should always have been collected, and thankfully is now the only way to be collected.
However, law firms and attorneys have found a way around this…..for the moment at least. As of right now it is still legal for a “debt settlement attorney or law firm” to collect their fees before they settle your debt. Keep in mind they are not debt settlement companies so therefore the FTC rulings have not affected them yet.
The majority of attorney settlement model programs are very expensive, often times charging a percentage of the overall debt amount a client owes and a percentage of the amount of money saved when the settlement is reached; typically costing more than a settlement company’s fee.
There are a few things you must realize about what a debt settlement law firm is trying to sell you on to justify collecting large upfront fees. First they give you the impression that they can actually represent you in court if a creditor were to file suit against you, and second many “claim” to be able to stop collection calls.
For starters if you are being sued by a company outside the state the attorney practices in then they cannot defend you, they can simply refer you to another law firm (by which of course you must pay more legal fees to be defended). Second even if the creditor is in your state the law firm in the vast majority of cases will charge you additional fees to appear in court; making the fact that you paid extra legal fees upfront mean basically nothing.
Additionally while some law firms do send out letters to your creditors to help stop harassment, they cannot actually guarantee you that the calls will be stopped. It’s really as simple as that, one of the downsides to debt settlement is creditor harassment; no true way to completely avert that exists.
Now the deceiving spin many sales reps are saying to naive consumers is that their “attorney settlement program” is the only legal approach to a debt settlement program. Which to say the least can be very confusing to consumers, oftentimes paralyzing the consumer with fear of doing anything; especially if they do not have the money to pay the law firm up front.
This is very deceptive of these firms; the only truth in their statement is that they are the only entity who has the LEGAL ability to TAKE YOUR MONEY up front before they settle your debt, and that is the only truth in that statement!
So What Can You Do?
This news may very well leave some people feeling even more lost and unsure about what move to make to alleviate a terrible debt situation. Fortunately I have a few solutions that I can present to you.
The first is an answer to the problem of lawsuit. The majority of people who do sign up with a law firm do so because they feel they are getting some legal protection; therefore eliminating perhaps the single biggest downside to debt settlement.
The reality is lawsuits are a possibility; the creditor has the right to sue for a past due account. The truth is that by far the majority of people going through settlement do not actually get sued; simply because the creditors do not have enough time and money to pursue all the people who owe them money. And the reality is oftentimes even when they do receive a judgment it is still impossible to collect money from some people; the old adage goes “can’t get blood from a rock“.
Also keep in mind each state has different laws concerning how collectors can pursue lawsuits for credit card debt; with some states like Texas having very debtor friendly laws in place, while others like Georgia do not. BUT there is another solution that enables a debtor to take advantage of the FTC rulings with no upfront fees and still have affordable true legal protection.
This solution is “debt settlement insurance”. Some debt settlement companies can refer you to other institutions that can offer an insurance protection program (not available in all states). These plans are typically very affordable and actually provide the necessary legal protection to represent you in court to defend you against the suit; at no extra cost then what the insurance plan cost in the first place.
This really gives the consumer the best of both worlds, therefore offering them an honest way to escape credit card debt and limiting any legal repercussions; all while avoiding having to file bankruptcy.