Mitchell Allen is the founder and CEO of the Debt Education Certification Foundation, an organization that provides credit counseling certificates and debtor education courses for those who are filing for bankruptcy. He’s also the founder of legal services marketing agency LeadRival. He’s the author of numerous books on debt and bankruptcy.
Mitchell is not an attorney and his answers should not be considered legal advice. Please consult with an attorney about your legal situation. Full Bio
What is debt settlement?
In the fight to pay off debts, people may believe that their creditors have the upper hand. When it comes to monthly payment amounts, the due date for the debt to be paid off, and even how people can pay their debts each month, creditors do seem to have an unfair advantage over those who simply want to get out of debt as quickly as possible.
However, instead of making seemingly endless payments against a bill that grows with interest and other fees, people may opt for debt settlement. Before they attempt this resolution, they should understand its consequences and why it can be vital to hire an attorney to help with the process.
Debt Settlement Explained
Simply put, a debt settlement involves paying a creditor a lesser amount than what is actually owed on the bill, with the goal of permanently settling the obligation and closing the account. While this action can often have a negative impact on someone’s credit rating, it can also be a viable option for a person who cannot satisfy the debt through traditional means.
Rather than perpetually pay on a bill that grows with interest, late fees and other incurred expenses, a person may settle the amount owed by paying the principal or another designated lower amount, and then closing the account permanently.
Retaining Legal Counsel for Debt Settlement
While the explanation of debt settlement may compel people to believe that the process is relatively easy, it can involve complexities that many people are ill-equipped to handle. In fact, unscrupulous creditors may still try to take legal action against people after a debt is paid off; they also may continue to report the debt to credit bureaus long after the account has been settled.
Having a lawyer throughout this process can offer several key benefits. As negotiations get underway to settle the debt, an attorney may be able to stop these common collection activities taken by creditors:
- Wage garnishment
- Bank liens
- Court actions and judgments
- Liens put against personal property like homes and cars
Furthermore, a lawyer can help debtors negotiate the ideal amount for the settlement and then make sure that the account is closed off for good after that amount has been paid. After the creditor gets the final payment from the client, the attorney can protect the client’s interests by:
- Obtaining a receipt or proof that the debt has been paid in full
- Obtaining documentation that the debt will no longer be reported to credit bureaus
- Negotiating releases of all liens on property, wages and other assets
Use Caution with Debt Settlement Companies
If you have racked up a huge amount of credit card debt, you may have feelings of helplessness. There are many companies out there that promise to reduce and even erase your debt for a small charge. The Federal Trade Commission (FTC) cautions borrowers to slow down and consider this option, and try to get out of debt without spending a lot of money in the process.
Be on your guard if a debt settlement company makes inflated claims, such as guaranteeing to settle your credit card debts for 30–60% of the amount owed. Some companies may even try to collect their own fees from you before settling any of your debts—a definite red flag practice that the FTC bans under the Telemarketing Sales Rule (TSR).
Sometimes, it may seem like creditors have all the power in the fight to pay off debts. However, people can wield their own power by hiring an attorney and deciding if debt settlement is right for them.