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Attorney-Based Debt Settlement: Walking off a financial cliff

Excessive credit card debt carries a nasty stigma. With each minimum payment that fails to produce tangible progress, debtors feel as though they are being shoved toward the edge of a financial cliff- where they inevitably fall to ruin. Debtors’ search for timely alternatives to bankruptcy has never been more important, and many sift through various debt settlement options for relief. As the current climate of the debt settlement industry rapidly changes, consumers must beware that turning to the attorney debt settlement model will hit them where it hurts the hardest- their pocket books.

In the face of consumer advocacy, the Federal Trade Commission (FTC) has issued a rule in which debt settlement companies cannot charge fees without settling at least one account. This rule goes into effect on October 27th, 2010. Thus, many unscrupulous debt settlement companies are in panic mode and will either close their doors or scramble for a loophole.

Enter- a ‘wolf in sheep’s clothing’ – the attorney-based debt settlement model. In attempts to salvage their businesses, many companies are turning to this model because attorneys may be exempt from the new Rule due to the protection of their state bars and the face-to-face nature of the majority of their consultations. The new rule exempts transactions that include a face-to-face consultation before the delivery of any goods or services, as deceptive trade practices are less likely to occur in such circumstances. Further, consumers buy into the ‘allure’ of using an attorney because of the false security of working with legal representation.

A slap in the face for consumers and the FTC

Contrary to the spirit of the new regulation, the attorney model allows debt settlers to continue charging upfront fees, negating the purpose of the FTC ruling. If a consumer doesn’t have a lump sum to offer as settlement to a creditor, the creditor will not honor the settlement, and will continue with collections or even sue the debtor.

Attorney-based debt settlement might as well be dubbed financial self-sabotage. Research conducted by Superior Debt Services on one national attorney-based debt settlement company reveals a harmful fee structure that is exactly what the FTC aims to eradicate with its new ruling. Regardless of whether or not a settlement is actually made, the company takes 15% of the client’s total debt load over the first 18 months of a 36-month long program. So what does this look like in real life for the consumer? Based on our research, take a look at a hypothetical example below:

Client: Carries $20,000 total credit card debt on two cards: 1 with a balance of $15,000, and another with a balance of $5,000
Attorney-based settlement company: Sets the client up with a 36-month long program. The first monthly payment is $362.50, while the remaining 35 payments are $357.19. Remember that the company takes the monthly fees over the course of the first 18 months. These fees are 15% of $20,000, or $3000, stretched over 18 mos. This equals $166.67 paid to the debt settlement company each month over the first 18 months. Thus, only $190.52 is contributed toward real settlement money during the company’s fee collection period.

Timing is everything: Bottom line for the Consumer

So how does the attorney model affect the client above, and consumers everywhere? Upfront fees do not address the critical issue of timing in the debt settlement industry. Many creditors will offer prime settlement rates when an account is between 150-180 days past due, or right before it is about to charge off. In the case above, the small amount actually going toward settlement funds is simply not enough to take advantage of the great settlement deals that happen when critical timing is taken into consideration. Simply put, sufficient funds must be available at the right time.

Let’s take a deeper look at the client example above. Say a creditor is willing to take 30% of the total debt owed for a settlement. At the rate money is deposited into the client’s settlement account, only $1143.12 will be available for settlement by the time she’s been in the program for 6 months. She would need at least $1500, or 30%, to settle the card with a $5,000 balance.

And this is just the client’s small balance. If the client’s creditor will accept a $4500, or 30%, offer on the balance of $15,000 at the 6-month mark, the client will be even further away from having enough funds to secure a great settlement. At the rate of only $166.67 going toward the settlement fund each month, it will take the client an additional 18-20 months to save enough for the settlement. By this time the offer will be null and void, and the creditor will pursue other means of collecting the debt, such as suing.

Further, a $20,000 debt is the low end of the spectfrum for those who seek debt settlement. The average debt-profile of a consumer in a settlement program is around $36,000 and up. Thus, it would take even longer to accumulate enough funds for an adequate settlement. This example also does not take into consideration those accounts that have already charged off and are not with collection agencies or lawyers.

If the attorney-based debt settlement firm chose to abide by the FTC ruling in the best interest of the consumer, and applied the all funds toward settlement for at least the first 6 months, the client would have $2143.14 in 6 months. This is at least enough to settle the smaller balance of $5000 at 30%, and begin building up funds toward the settlement of the larger balance.

The bottom line for consumers is that upfront fees do not go hand-in-hand with common sense. Services should not be paid for until they are actually rendered, especially when the client is deeply burdened with out of control debt.

Looking past the attorney ‘aura’

Hiring an attorney to fight your debt battle for you is not as foolproof as it might appear. Logically, consumers might think lawyers are more equipped to deal with their debt problems. In reality, lawyers are trained in law, not finance. Many lawyers who practice debt settlement also work on other cases, and may not have the time available to directly deal with your creditors all day long, the way many reputable debt settlement companies do.

Many lawyer-based debt settlement services guarantee results due to their in-depth knowledge of credit card regulations. Even while researching; it was difficult to not buy into some of the claims made on some attorney-based debt settlement websites. Even in the midst of such claims, it is critical for consumers to understand the way fees are collected. If the fee structure is not conducive to helping the consumer accumulate enough funds for timely settlement, then the ‘legal’ aspect of the settlement firm is of no benefit. Effectually, the attorney debt settlement model just might funnel many consumers into bankruptcy- the conclusion they were so desperate to avoid in the first place.

Further, attorneys who fail to follow FTC regulations for debt settlement are caught in a conflict of interests. Theoretically, lawyers are supposed to adhere to very strict ethical requirements. When clients must choose bankruptcy after entering one of these programs, either because they weren’t good candidates in the first place, or because upfront fees hindered the ability to secure good settlements, lawyers double-dip into consumers’ pockets. In this bleak situation, the client not only pays money toward the failed debt settlement program, but also toward bankruptcy and attorney fees. Not to mention the scar of bankruptcy.

So, the ‘aura’ of bankruptcy isn’t all it’s made out to be. Sure, it may feel comforting to have a lawyer on your side when you are in the midst of financial chaos, but don’t let the stress impair your ability to understand exactly what it is you are getting into.

After the dust settles following the October 27th, 2010 deadline for debt settlement companies to no longer charge upfront fees, consumers will see the attorney-based model for what it is- all talk and image with little ability to deliver real results for the consumer.

 

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