"Debt Settlement" has gotten a bad name due to a number of non-attorney "Debt Settlement Companies" providing bad or over-priced service to consumers.
Take, for example, the case of our client, "Jane" (In this example, and in others cited, we are talking about actual clients of our firm, but using fictitious names). Jane owed about $150,000 in credit card debt, and hired a Debt Settlement Company to negotiate her debt. The company charged her 15% of the total debt (or $22,500) to negotiate settlements for her. After having paid most of the fee to the company, two of the credit cards filed lawsuits. The company was no longer willing to help Jane, since the contract specifically excluded lawsuit representation or other â€œlegal services. In fact, the company could not have done anything to help her with these lawsuits anyway, since they were not licensed to practice law.
Jane ended up filing a bankruptcy. The Debt Settlement Company, when threatened with a lawsuit, refunded half of the fees to Jane. But in most cases, the client is not so lucky.
Nonetheless, Debt Settlement has its place, WHEN DONE BY ATTORNEYS, and there are instances where a client can be better served by Debt Settlement than by Bankruptcy.
"Debt Settlement" could be defined as the negotiation of an unsecured debt whereby the creditor agrees to take an amount less than claimed. The reason it is limited to unsecured debts is that negotiation of a secured debt would be referred to as â€œloan modification.
Following are some real life examples of "Debt Settlement" that attorneys may be involved in as an alternative to Bankruptcy. (The names are changed to protect the innocent, and the figures are rounded for simpler illustrations):
FIRST. Betsy’s husband died owing sizeable credit card and medical debt. Bill collectors were hounding Betsy to pay her husband’s debt, and not knowing that under California law, she is not personally liable for her husband’s debt. [See California Family Code Sec. 910(a) and 11601 Wilshire Associates v. Grebow, 74 Cal.Rptr.2d 912 (Cal.App. 2 Dist. 1998)] she made several payments in order to stop the calls. After Betsy hired our firm, we contacted the creditors telling them to leave her alone unless they had any reason why she was liable for the debt. The creditors ceased their collection efforts.
SECOND. Clayton bought a dental practice from the widow of an older dentist. Due to the recession, and other difficulties (including intentional sabotage of the practice by the seller), he was no longer able to keep up the payments, and was eventually sued for $200,000. For various reasons, Clayton didn’t want to file bankruptcy, but he didn’t want a large judgment against him either. After Clayton spent thousands of dollars paying another attorney to fight the lawsuit (which would have been difficult to win), he hired our firm. We began negotiations with the Plaintiff’s attorney, then did an analysis of Clayton’s assets, liabilities, income and expenses, and prepared a financial statement to show to the Plaintiff’s attorney. The case ended up settling for about 30% of what the Plaintiff was asking for.
THIRD. Bob was sued for $30,000 on a credit card debt. Since his only source of income was retirement, he was essentially "judgment proof," and could have ignored the lawsuit. However, he did not want it hanging over his head if he started making more money in the future. Nor did he want to file bankruptcy for just that one debt. Our firm negotiated a settlement on the debt of about $5,000, to be paid over a period of two years.
There is no guarantee as to how much we might be able to get your debt reduced, but there is a good chance that you will end up paying less than you would otherwise.