Can a debt settlement company keep me from being sued?
Unfortunately, the answer is “NO, you can be sued even though you are in a debt settlement plan.”
A “debt settlement company” is a company that promises to help you settle with your creditors. They are the companies that advertise on radio and television with ads that say “If you owe $15,000 you may qualify to settle your debt” or similar statements. Examples are Freedom Debt Relief, in Tempe Arizona, and National Debt Relief, in New York City.
The basic plan for a debt settlement company is that they tell you to stop paying your bills-- at least the ones they accept. Usually, they have you send them money each month. Some or all of that money is used for the fees of the debt settlement company. Once some money is accumulated they will contact the creditor and say something like: “He owes you $2,500.00. We’ll pay you $1,250.00 if you call the debt paid in full.” Sometimes the creditor will accept that settlement – it may be more likely if the original credit card company has charged off the account and sold it to a debt buyer because a debt buyer usually pays a fraction of the face amount of the debt. This is very common with credit card debts – the credit card company will “charge off” your account and sell it to, for example, LVNV or Portfolio Recovery for literally a few cents on the dollar. (By the way, you may get a 1099-C at the end of the year for the amount written off.)
Frankly, I think you can do this yourself. If you can raise some cash, you can offer to settle a debt without paying someone in Tempe Arizona to do it for you.
The problem, from your standpoint, is that a debt settlement company simply cannot stop a lawsuit. They are usually not lawyers; even if they are lawyers, they are likely not licensed to practice law in Minnesota and therefore according to court rules cannot represent you in court. Their only tactic is to tell the creditor: “Hey, we can get you some cash if you settle the debt”, but it is up to the creditor whether they will take less than full payment.
What I usually see is that you have been paying their debt settlement company $300 a month for six months, but the creditors has not settled and now gets impatient and sics their lawyers on you. You call the debt settlement company in a panic and say “I’ve been sued” and the debt settlement company says: “You have to defend yourself”.
If you are in a debt settlement plan and get sued anyway:
a) You can try to settle the debt yourself. The problem is that the debt settlement company has your money!
b) You can defend the suit. Once in a great while the suit is actually against the wrong person – maybe they sue Robert Anderson Jr. for a debt owed by Robert Anderson Sr. If you can show that the debt is owed by that other Robert Anderson you can beat the suit. Or perhaps the debt is too old to collect.
c) You can file a bankruptcy. That’s where I come in. Very often filing bankruptcy is cheaper than continuing with the debt settlement company, immediately stops garnishments or other collection efforts, and because your debts are now behind you, you may be able to rebuild your credit score sooner.
Bankruptcy is not for everyone, of course; but if you are curious if it will help you, I’d be happy to discuss it with you. Call me at 320-252-4473.