2020 Best Invention

Debt Settlement Attorneys: How Can They Help?

4 minute read Upsolve is a nonprofit tool that helps you file bankruptcy for free. Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card. Explore our free tool


In a Nutshell

One way you can get debt relief is through debt settlement. A good debt settlement attorney can help you settle your debts. They should also be able to provide advice on other debt-relief options like debt consolidation, debt management, and bankruptcy. A debt settlement lawyer may be able to help you get a better overall settlement deal. Perhaps most importantly, they can help you avoid the stress of communicating with aggressive debt collectors. This article will explain debt settlement and the benefits of hiring a debt settlement attorney.

Written by the Upsolve Team.  Reviewed by Attorney Andrea Wimmer
Updated September 13, 2021


Simple bad luck can cause anyone monetary misfortune. A medical emergency, job loss, or any other unforeseen event can result in a significant loss of income and crippling debt. When something like this happens, how do you pay for housing, food, and other necessary items, let alone monthly obligations like credit card debt and student loans?

What can you do in this situation? One way you can get debt relief is through debt settlement. This article will explain debt settlement and the benefits of hiring a debt settlement attorney. 

How Does Debt Settlement Work?

Debt settlement is when you negotiate with a creditor to settle your debt for less than the full amount you owe. You may be able to settle for as low as 10% of the original debt amount or up to 50% or more. You can settle a debt with a monthly payment plan or a lump-sum payment. This eliminates the debt and closes the account forever.  

For a debt settlement to work, you need enough cash on hand to meet the terms of your settlement quickly. Most creditors are wary of allowing a borrower too much time to pay a settled debt if they’ve already failed to pay a debt according to its original terms. So this may be an option if you’re anticipating getting a sum of money from a tax refund, inheritance, or property sale. 

Borrowers who fail to repay the debt after settling it risk further collection actions like a lawsuit. After a creditor files a lawsuit to collect a debt, it’s still possible to negotiate a debt settlement, but it’s more difficult. The lawsuit will put the creditor in a better bargaining position for any settlement negotiations.

While debt settlement can bring some relief, you need to be aware of the consequences. The IRS considers forgiven debt taxable income. You should consult with an attorney or accountant to ensure that you are aware of all the tax consequences of any debt settlement.

What Kinds of Debt Can Be Settled?

When you incur a debt, you have a legal obligation to pay the full amount of the debt. A creditor is never obligated to settle a debt. You’ll need to determine whether your creditors are willing to work with you to settle your debts. Some debt collectors are more willing than others.

Also, not all types of debt can be settled. Debt settlement is rarely an option for secured debts since the creditor can typically recover more of the original debt by selling the collateral. Debt settlement is more commonly used to address unsecured debts like medical bills, credit cards, personal loans, and payday loans. Because these lenders have no collateral as protection, unsecured creditors are more willing to settle a debt since it gives them some chance of recovery.

How Will Debt Settlement Affect My Credit Score?

Settling a debt will hurt your credit score. Most likely, your creditor will report that the account was settled for less than the full amount. While this is better than having an account in collections, it’s still a negative event on your credit report. The account will also be closed after the debt settlement, which can increase your credit utilization ratio and decrease your credit score. Even after the debt has been settled and paid, the information will stay on your credit report for seven years.

Is Debt Settlement Worth the Effort?

Debt settlement is probably not worth the cost savings if you currently have a good credit score and aren’t overly delinquent on any debt because it can have a negative effect on your credit. In this case, you have other options. If you’re concerned about communicating and negotiating with your creditors on your own, a debt settlement attorney can do it for you. If your creditors are pressuring or even harassing you, an attorney can help.

Many free accredited nonprofit credit counseling agencies are available to provide professional advice about alternatives to debt settlement. These additional options include a debt management plan that allows you to pay a debt over time. This is a good option if you don’t have the funds available for debt settlement. Consulting with an attorney can help you learn a lot about your options. A debt settlement lawyer may also know bankruptcy law and other debt-relief options like debt consolidation.

Hiring a Debt Settlement Attorney

An attorney can provide legal advice and help you settle your debts. A debt settlement attorney has experience settling debts with clients in a variety of financial circumstances. In debt settlement negotiations, an attorney may be better skilled and provide more leverage than a debt settlement company. It’s possible to negotiate your debts without an attorney. But if you are uncomfortable with any aspect of the settlement process, a debt settlement lawyer will help reduce that stress. A lawyer will act on your behalf to communicate with difficult debt collectors like collection agencies. 

When To Hire a Debt Settlement Lawyer

If you have limited financial resources, you should first seek the free help of a nonprofit consumer credit counseling agency. Also, most bankruptcy attorneys offer free consultations that can help you learn about debt relief. In addition to negotiating any settlement, a good debt settlement attorney should be able to offer advice about other debt relief services, including debt consolidation, debt management, or bankruptcy. 

When hiring an attorney to settle your debts, look for a licensed attorney who has experience negotiating with different types of creditors. A good debt settlement attorney should know which debt relief option is best for you and how to make it work.  

There are several benefits of having a debt settlement attorney represent you. A debt settlement attorney can:

  • Stop unwanted creditor harassment

  • Help you organize your finances 

  • Help you control your spending

  • Help you formulate a budget

  • Assert your legal rights

  • Negotiate with creditors

How Much Does a Debt Settlement Attorney Cost?

Debt settlement attorneys’ fees vary depending on your location and the amount of your debt. They are required to inform you of their fees in advance. Most debt settlement attorneys work on a contingency fee basis. In this fee arrangement, you pay nothing in advance. You’ll only pay a fee if the lawyer helps you reach a settlement. The fee will be a percentage of the settlement amount. Make sure that you understand exactly what your debt settlement attorney will try to accomplish and how much it will cost you.

Let’s Summarize...

A good debt settlement attorney can help you settle your debts. They should also be able to provide advice on other debt-relief options like debt consolidation, debt management, and bankruptcy. A debt settlement lawyer may be able to help you get a better overall settlement deal. Perhaps most importantly, they can help you avoid the stress of communicating with aggressive debt collectors. To learn more about debt settlement, read about the debt settlement letter and how it helps you settle your debt.



Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

Attorney Andrea Wimmer

TwitterLinkedIn

Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

It's easy to get help

Choose one of the options below to get assistance with your bankruptcy:

Free Web App

Take our screener or read our bankruptcy F.A.Q. to see if Upsolve is right for you.

Take Screener
7,742 families have filed with Upsolve! ☆
or

Private Attorney

Get a free bankruptcy evaluation from an independent law firm.

Find Attorney

Bankruptcy Learning Center

Research and understand your options with our articles and guides.

Go to Learning Center →

Already an Upsolve user?

Read Support Articles →

News

    + Show Articles

    Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

    To learn more, read why we started Upsolve in 2016, our reviews from past users, and our press coverage from places like the New York Times and Wall Street Journal.

    Close

    Considering Bankruptcy?

    Try our 100% free tool that thousands of low-income families across the country have used to file bankruptcy themselves. We are funded by Harvard University, will never ask you for a credit card, and you can stop at any time.

    File Bankruptcy for Free