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Know Your Options – The Pros and Cons of Debt Settlement and Relief Companies

Posted by J. Edward Richards | Jun 21, 2023

                   “I'm making payments to the debt relief group.

                                                                                                  “But I disputed this!”

“How is there a lawsuit when the settlement company told me they were handling it?”

These statements are some that the attorneys with Holland Law Group have heard with increasing frequency across the Florida panhandle down through the southern tip of Miami-Dade as Floridians struggle with record inflation and an increasingly uncertain economic atmosphere. Before making a decision on how to handle that collections letter or judgment, knowing your options can be the difference between a successful resolution or one that may snowball out of control. As the attorneys at Holland Law Group handle debt disputes from pre-suit collections, to active lawsuits post-judgment garnishments, we often assist clients who have unsuccessfully attempted to utilize assorted debt settlement and relief companies before consulting an attorney. Before making the determination to proceed forward with such a company, make sure that you know what kind of service will actually be provided to you.

As not all companies provide the same services, below is a list of some information to help you decide if engaging a certain company is right for you.

Debt Relief Service

The broadest term that encompasses the most companies, a debt relief service could provide any sort of “relief” to a debtor. From renegotiating a debt, settling outright, or in some way changing the terms of a person's debt (such as interest rates, reduced balances, or outstanding fees). The method in which this is done would be the next question to ask such a service.

Credit Repair Companies

These companies often review credit reports for inaccuracies that may impact credit scores and assist with disputing inaccurate information with the goal of removing the information from the credit report and raising your score. Unless otherwise noted by the company, this service would not necessarily include negotiating a settlement or payment plan on an outstanding debt or bringing a lawsuit against a creditor for that inaccurate information. A credit repair company may not automatically be a debt relief service.

Debt Consolidation

True debt consolidation usually involves a debtor taking out a new loan or line of credit in order to pay off multiple other debts – thereby leaving the debtor with a single payment to the new entity. Many companies claim to offer debt consolidation services, but they take the control away from the debtor and actually offer debt settlement services.

Credit Counseling

These services may advise you on how to manage your own money and payments. They may sometimes negotiate payment plans on the full balance of a debt in order to lower your monthly payments, and may negotiate interest rates. You pay the service, and the service then pays the creditor. A credit counseling service will not usually advise you to stop making payments on the debts in the interim (a decision that could be detrimental to your credit score and the amount of your debt overall).

Debt Settlement and/or Debt Negotiations Companies

The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) have a lot to say about these companies, and they advise using these companies as a last resort. Such companies claim they can negotiate with your creditors to reduce the amount you owe, and they usually offer to arrange settlements for a price.

With these companies, debts are paid out of funds you have saved up prior to reaching settlement. Those funds are paid into an account administered by an independent third party (and are technically under your control). Negotiations often do not begin until a certain amount of funds are saved up. These companies are obligated to disclose to you how long negotiations may take, costs, possible negative consequences, and information about the independent party accounts

So what are risks and possible negative consequences associated with these services?

1) The CFPB advises that debtors are often told to stop paying the creditors. Such advise results in late fees, penalties, accrued interest, and possibly increased collection attempts. This increases the amount of the debt you will owe! Missed payments rack up on your credit report, negatively impacting your score. If the company does not settle all or most of your accounts, the fees, interest, and penalties that accrued due to the missed payments may wipe out any savings the company achieves on the settlement.

2) Not all creditors work with every company, and sometimes the companies don't let you know that. The attorneys at Holland Law Group have heard from clients that they were not made aware that a creditor wasn't working with their chosen settlement service until the creditor's attorney mentioned it at a pre-trial conference. If the creditor does not settle with you, you're now stuck with a higher balance (and likely a collections lawsuit).

3) The independent party managing the bank account for settlement funds may charge fees to manage the account.

4) All debts may not be settled.

5) Collections actions may be filed against the debtor in the midst of negotiations.

6) You're likely still going to get contacted by the creditor through letters, phone calls, emails.

Before deciding if engaging the services of a debt settlement company is right for you, consider the following observations:

1) It is very possible that you cannot settle all your debts…could bankruptcy have gotten rid of every debt all at once?

2) Forgiven debt can be considered taxable income, so consult a tax profession before engagement.

3) Could you have tried to reach out to the creditors yourself? Sometimes, the deals struck before a lawsuit is filed can be struck by the debtor themselves – saving fees and costs in the process.

4) If a lawsuit is filed, you would end up settling on a higher overall balance and may pay to retain an attorney to help you as well.

Reaching out to an experienced attorney upfront may help you make the best decision for your financial circumstances at the start – avoiding increased fees, interest, and stress. If you have a question about a debt at any stage of the collections process, reach out to Holland Law Group.

We handle cases in Miami-Dade, Pinellas, Orange, Hillsborough, Brevard, and all other counties in Florida and we can let you know your options – whether the debt settlement company is advantageous to you, or whether bankruptcy or attorney-guided negotiations would be your better option. Give us a call to learn how we can help!

About the Author

J. Edward Richards

Edward Richards is from Pensacola, FL. He received his J.D. from Mercer University, as well as a certificate fromthe school's prestigious Advanced Legal Writing Program. He returned to Florida as a prosecutor in Bradenton beforemoving to auto insurance litigation. Edward's focus in the high-volum...

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