"How Do I Know If Debt Settlement Is Right For Me?"

April 13, 2012

images[10].jpgAt the Law Office of Linda C. Garrett, an online virtual online law office, providing full-scope and limited-scope legal services in the practice areas of consumer law, mortgage law, bankruptcy law and family law, to include unbundled legal services, I have talked with many consumers, fearful and confused about the concept of debt settlement. Many people, including lawyers, have strong opinions about debt settlement. On the one hand, consumers are told "don't do it, just file bankruptcy and get a fresh start," or, on the other end of the spectrum they are told, "It's great because if you can negotiate a good settlement, you can avoid filing bankruptcy--which is less harmful to your credit score and not as expensive as filing bankruptcy."

The purpose of this blog post is to discuss the pros and cons of debt settlement.

First, let's discuss what it is and the goal of debt settlement:

Debt settlement is a means by which a debtor and creditor reach an agreement to resolve the issue regarding an outstanding debt owed by the creditor by the debtor in order to cease any and all future collection efforts, to include filing a lawsuit by the creditor against the debtor. The intended goal of debt settlement is that a debtor and creditor negotiate a settlement that achieves a win-win situation for both parties. For the consumer, he or she pays but a percentage of the total amount owed. For the creditor, he receives money on a debt that would otherwise be impossible or nearly impossible to collect on in the future.

Benefits of Debt Settlement

  • Avoiding bankruptcy. Debt settlement is a favorable option when the debtor has little consumer debt.
  • A better alternative than completely defaulting on the debt--in order to avoid risking a lawsuits being filed against the debtor.
  • No fear of lawsuits
  • No fear of liens

Timing of Debt Settlement

Timing of attempting to settle a debt is important--if attempted too early, the consumer can expect little to no results; if attempted too late, the consumer stands the risk of a lawsuit being filed against him, garnishment of sages and/or levy of bank accounts, or a lien placed on the debtor's real property if he owns real-estate.

Should A Consumer Use Debt Settlement Companies to Settle Their Debt?

Personally, I don't recommend that a consumer use a debt-settlement company to negotiate their debts. First, fees are too high, and settlement can be done for free--by the consumer! Also debt-settlement companies have limited powers:

Illustration: Sweeney Todd has a good job and approximately $50,000 in credit-card debt. Because the barber-shop business is struggling from the recession, he has, after paying his basic necessities, insufficient funds to pay his creditors; therefore, he considers bankruptcy. The current problem is that for a period of six months, Mr. Todd was unemployed and had relied on credit-cards to carry him through his unemployment period. Additionally, Mr. Todd was unable to keep up with is credit-card payments--resulting in hefty late fees. To make matters worse, Mr. Todd's creditors increased his modest interest rate of 2% APR into the double-digits--making it nearly impossible for Mr. Todd to pay down his credit cards.

After doing some legal research, Mr. Todd reconsiders the idea of filing bankruptcy, and instead, considers settling his debts with his creditors. Acting responsibly (so he thought), Mr. Todd called a debt-settlement company that he had seen advertised on television. The company promised to settle/negotiate with all his creditors. All Mr. Todd had to do was send approximately $700/month to the debt-settlement company for approximately 18 months. The debt settlement company would allow the collected funds to accumulate into a sizable amount--sufficient to allow for future settlement negotiations.

For approximately nine months, Mr. Todd paid his $700/month faithfully to the debt-settlement company, amassing an amount of $6,300. One day, to Mr. Todd's surprise, Mr. Todd received a notice of wage garnishment. This was the first time Mr. Todd learned of the lawsuit. The notice reflected that his employer was required to garnish 2% of his take-home wages until his $10,000 debt with the creditor was paid off in full. After deductions, his take-home pay was $2,300/month; and, 25% of $2,300 is $575.

The next morning, Mr. Todd contacted the debt-settlement company to explain the situation with the hope of receiving legal assistance. Mr. Todd also asked the representative at the company to assist with the lawsuit--since he felt it was their fault for not settling the debt sooner. To Mr. Todd's shock and surprise, Mr. Todd was directed to read the fine print of his contract--which reflected that they were not responsible for any lawsuits filed against him. Realizing the company's limitations, he asked to cancel his contract with the company since they had not negotiated any settlements on his behalf after nine months. Surprise number two came a few weeks later when Mr. Todd received his check for $5,040. Assuming it was a mistake, he called the company to find out what happened to the remaining $1,260. Mr. Todd was told that there was a 20% fee charged against all amounts paid by Mr. Todd to the company. In other words, twenty-cents on the dollar was going into the pockets of the debt-settlement company!

Mr. Todd's story illustrates the conclusion that using a debt settlement company to settle debt is an unwise thing to do. Mr. Todd's story is not about filing bankruptcy, nor, is it a story about the pitfalls of debt settlement. In Mr. Todd's case, no debt settlement was ever undertaken by the debt-settlement company! In other words, using a debt-settlement company is a bad thing; settling a debt (if facts and circumstances are favorable) can be a good thing.

The key factor to a successful or unsuccessful debt settlement is how much a consumer understands about the nuances of debt settlement negotiations. Negotiating a debt settlement can be a tricky thing. In some ways, it's like playing poker--where each player is bluffing and doing their best to get the other to "fold." In the case of a debt settlement, the "bluff" includes convincing the creditor that it is in their best interest to settle the debt. If the debtor is unable to succeed in "bluffing" the creditor, then the creditor will refuse to negotiate or will be unyielding in the amount they are willing to settle. A good settlement is approximately 10-15% of the amount owed. While this is a worthwhile goal for debt settlement, the success (or lack thereof) of your settlement will heavily depend on the unique facts of your case.

Need Help?

At the Law Office of Linda C. Garrett, Ms. Garrett, California consumer, mortgage (HAMP), bankruptcy and family law attorney, is able to provide coaching in connection with debt settlement. Ms. Garrett is also available to provide legal services in connection with debt settlement. There are several benefits to using an attorney to negotiate settlement:

An attorney adds "muscle" to the settlement process--the creditor knows the consumer is serious about settlement;

  • Ms. Garrett can explain the pros and cons of settlement--enabling the consumer to make an informed decision about debt settlement.
  • Ms. Garrett can also explain potential tax liability in connection with settled debt. For example, Ms. Garrett is able to explain IRS exceptions relating to settled debt.

What to expect: During the paid 2-hour consultation, Ms. Garrett will undertake a financial evaluation of the individual's entire financial history to ascertain the strengths and weakness of their financial situation, as well as determine the consumer's additional options to debt settlement, e.g. judgment-proof letters or bankruptcy.

In follow up to the two-hour initial consultation, Ms. Garrett is available to provide additional coaching in order to assist the client to achieve the best possible settlement; or, at the client's request, Ms. Garrett is available to directly negotiate settlement with the client's creditor(s).

Other Bankruptcy and Creditor Related Blog Posts:

What Exactly is a Creditor Lawsuit and Do I Have Options Besides Bankruptcy?

I'm Freaking Out!--I've Just Been Served with Legal Papers From My Creditor!

Are You Judgment-Proof?--Take theTest

Is Bankruptcy Right For Me and Will It Solve My Financial Problems?

Some helpful links:

Contact the Law Office of Linda C. Garrett--to set up a 30-minute free consultation or paid consultation

Services--to learn the types of services the Law Office of Linda C. Garrett provides

Practice Areas--to determine the other areas of law the Law Office of Linda C. Garrett can provide consumers.

Attorney Profile--to learn more about Ms. Garrett, Ms. Garrett's goals, Ms. Garrett's philosophy and how she "Gives Back".

California Family Law and Divorce Blog