Credit and Debt Blog

Recent legislation bans the long abused practice of debt settlement companies charging huge upfront fees to clients who mostly never received the services promised to them. Instead of complying, many debt settlement companies are exploiting a loophole that allows them to continue cheating customers.

The ban on upfront fees does not apply to lawyers. A law firm who represents a debtor may charge an upfront fee for debt settlement services. Debt settlement companies are exploiting this exception by “partnering” with law firms to get around the advance fee ban.

While a bona fide partnership with a law firm is perfectly legitimate, most debt settlement firms that utilize this approach do not have an actual partnership. They are not using lawyers to provide debt settlement services.

Instead, these companies are paying what amounts to a licensing fee to conduct their own debt settlement services but through the name of the law firm. Lawyers are rarely, if ever involved in any aspect of the negotiation process between a debtor and their debt collectors.

Debt settlement companies are still charging huge upfront fees. Law firms are getting paid for doing nothing, other than lending their name out to the settlement companies for a substantial fee.

While this may seem like a great idea, it is not without risk to the settlement companies or the law firms. Some regulators are calling foul on the practice which is clearly devised to circumnavigate advance fee bans for debt settlement services.

Had the lawyers actually been assigned to and worked on actual debtor’s cases, then it would have been legitimate. However, in the cutthroat world of debt relief, it is financially unfeasible to use actual attorneys on debt settlement work. Instead, debt settlement companies utilize low-paid staff to conduct routine debt settlement activities. Most of their work involves sending out form letters to a client’s debt collectors. Form letters may have been prepared by a lawyer at some point, but then it become a fill-in-the-blank activity.

Debt settlement clients are still paying thousands of dollars in fees even though most of the process involves inserting their name and creditor information into a commonly used letter shared by hundreds or thousands of the company’s clients. The process is so simple that most clients could easily prepare their own letters simply by utilizing one of the hundreds of templates available for free on the internet.

In one massive case, Legal Helpers Debt Resolution was fined by Illinois regulators for exactly this type of scheme. The law firm has since changed its name. Additionally, there is currently a lawsuit between the firm and one of its former debt settlement “partner” firms. Apparently that company is upset that they have been dumped by the law firm who now goes by Macey Bankruptcy Law.

Debtors should be aware that there is no shortcut to dealing with outstanding debt. Hiring someone to help just adds another expense, and it often can cause additional problems that they likely failed to warn you about. Instead, you might want to contact a credit counseling agency that focuses more on consumer education than get out of debt schemes.