You may have heard of debt settlement firms before. These are often dubious for-profit companies that promise to eliminate all your debts and wipe your credit report clean — all for a cheap fee. Sound too good to be true? Well, many times it is, and debtors who use these firms often just replace one type of debt with another type of debt, and their headaches only continue. Check out this article, which provides some good reasons why debt settlement firms can be problematic, and read this one about states taking legal action against some debt settlement firms for deceptive practices.
Given that total student loan debt in America has reached $1 trillion and surpassed credit card debt for the first time in history, it’s no surprise that these shady companies are trying their luck with student loan debtors.
Be forewarned: these firms are trouble.
Here are some of my problems with student loan debt settlement firms.
- Most of the time, the people who run the firms are not attorneys. They’ll ask you to grant them Power of Attorney, but because they are not actually attorneys, they haven’t been trained in the nuances of the law or legal representation. In fact, these people may be engaging in the unauthorized practice of law, which can get them in serious trouble.
- Because they are not attorneys, they are also not bound by rules of professional conduct which strictly dictate what attorneys can, cannot, and must do, and protect clients from being taken advantage of. (Obviously there are bad attorneys out there, it’s inevitable, but most of them stick to the rules.)
- Debt settlement firms will often not advise their clients of all their legal options. This could be because they’re not attorneys and so they don’t know the law, or because it is in their firm’s financial interest to push one option over the other. Or both.
- Similarly, debt settlement firms will also not always inform clients of all the long term impacts or consequences of certain actions. Again, either because they don’t know, or because it is in their best interest to withhold the information.
- As some of the above articles alluded to, these firms advertise their services as affordable, when in reality it can cost their clients a lot of money, leaving debtors in the exact same position they were to begin with.
- Just like other debt settlement firms, student loan-focused debt settlement firms often rely on deceptive advertising. For example, you may see promises to “eliminate” or “reduce” your student loan debt. While there certainly are discharge and forgiveness options out there for certain types of loans (I’ve blogged about some of them!), eligibility requirements for these programs are complicated and nuanced, and it’s deceptive for these firms to claim that, on a large scale, they can simply get rid of (or substantially reduce) your student loans.
I’ve had the pleasure of reviewing some of the materials and contracts from a couple of student loan debt settlement firms. It’s not pretty, and there is plenty of room for deception, abuse, and misinformation. These companies can really be bad news, so be wary. And don’t be surprised if you start seeing more and more of them.