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This is not actually a great shock to any attorney who practices in the area of consumer debt relief or consumer bankruptcy, but the Federal Trade Commission now has an article warning consumers about the risks of dealing with Debt Settlement Firms on its consumer information web-site, Debt Settlement Has Risks. As part of their mission to prevent and deter consumer fraud, warning is to help consumers falling for deceptive advertising practices where a Debt Settlement company may actually get a debtor to believe they are affiliated with the creditor and that the consumer is thus dealing directly with the creditor. But, such outright fraud aside, there are numerous other risks to consider.

As the Commission points out, Debt Settlement firms typically ask the debtor to “set aside a specific amount of money every month in savings. Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account [with their company] to accumulate enough savings to pay off a settlement that is reached eventually.”

So, this is essentially a forced savings program. You deposit money into “a special savings account for 36 months or more before all your debts will be settled.” Then the company contacts your creditors and attempts to negotiate a settlement on your accounts. Great Advice: Never trust someone else to hold  your settlement money in escrow, especially not a company that, unlike lawyers, are not even covered by the legal ethics rules!

There are two main problems with this, both familiar to legal professionals in this area. You may not complete the program. Even if you do complete it, their program it may not work, or it may do more harm than good. As the FTC says:

“Many people have trouble making these payments long enough to get all (or even some) of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.”

Even more troubling, are your creditors going to wait around for up to 36 months or more while you get the necessary funds together?

Is the debt settlement company going to be able to settle all or any of your debts with the creditor? The creditor after all does not have to accept any proposed settlement and can proceed to sue you in the meantime because you are not making payment on your debts.

Thus, the debtor is incurring substantial legal risk without the protection of having an attorney to represent them in the event that they are sued. Worse, the Debt Settlement Company keeps a portion of the sum deposited with them as fees so they’ve got your money in their account and you’re going to have an argument with them to get it back.

I had a client who deposited $1,100 a month for 4 months with the debt settlement company, but after their fees were deducted there was never enough money for them to negotiate any of his debts, so they never did anything for him. They ended up failing to negotiate anything, and kept all but around $600 of his money! An attorney that did that could be sanctioned and potentially suspended or disbarred by his state department of attorney regulation, but apparently these companies don’t have to meet any such ethical standards.

  • If you are not going to be able to settle your debts yourself, then you should consider hiring an attorney.
  • Never, ever give your settlement money to anybody to hold in advance of settlement. If a settlement is negotiated on your behalf, you can still make the payment directly yourself.

Whenever I negotiate a debt settlement on behalf of a client, I never hold client funds for settlement and always have my clients make the required payments directly with the creditor so there can be no misunderstanding.

Always try to find an attorney or company to settle your debts who will quote you a flat fee so that you always know up front what it’s going to cost you. If you follow these two simple rules there will be a lot fewer unpleasant surprises when you find out what the bill is!