Family Eating Dinner Why Law Firms Offer Settlements

Summary: Getting sued for a debt is serious. If you can't afford to pay the amount you owe in full, don't panic. Law firms representing debt collectors are more than happy to negotiate settlements because it often saves them time and money. If you're thinking about settling debt, Solo is here to help.

Many people who are contacted by debt collectors do nothing. They hope that if they ignore the collector, the problem will just go away.

It would be wonderful if that were how things worked. Unfortunately, if you ignore a debt collector for long enough, the collector may sue you for the debt. You'll then have to deal with a law firm instead.

Debt collection law firms have a reputation for being tough negotiators, but that doesn't necessarily mean that you'll end up on the wrong side of a court judgment. The law firm might be willing to cut you a break and settle the debt for an amount that you can actually pay.

Why would a law firm accept less than you technically owe? Here's a closer look at why law firms offer settlements, as well as why this arrangement might be the best option for you.

Read our debt settlement guide to learn more about how to settle your debt and save thousands.

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Debt settlement gets you out of debt for less

When you settle a debt, you and the company you owe the debt to agree on a certain amount. Once you pay that amount, the company will consider the debt resolved. It won't pursue you for the remainder of the debt.

Settling makes it possible to resolve a debt that you otherwise wouldn't be able to pay. However, it does have consequences. When it comes to your credit, it's better to pay a debt in full than to settle it.

Why? When you settle, you're not paying back everything you owe. Lenders can see this, and they're less likely to extend you credit.

When a debt gets charged off or sent to collections, your credit score suffers some damage. Unfortunately, you can't undo this damage right away. Under the Fair Credit Reporting Act (FCRA), the collection account (along with late payments and other derogatory marks) will stay on your report for up to seven years (15 U.S.C. § 1681c).

However, depending on the actions you take next, you may be able to mitigate that damage:

Paying the debt in full will stop the damage from getting worse.
Settling will act as a red flag to lenders for a while.
Not paying the debt at all will cause the most damage.

Check out this video for more information on how settling debt impacts your credit score:

Learn why law firms offer settlements to debtors

Are you wondering why law firms offer settlements when they have the legal right to collect the full amount of the debt? Here are a few reasons that settlements are common.

1. The law firm's clients make a profit even when they settle

Many third-party debt collectors represented by law firms are debt buyers.

When you fail to pay a debt you owe, the original creditor may sell it to a collection agency. These agencies usually pay pennies on the dollar for debts, so even if they settle, they're still turning a respectable profit.

To see how this process works in action, let's consider an example.

Example: Jay owes his doctor's office $5,000. He loses his job and can't pay the bill. After six months, the doctor's office writes it off as a loss and sells it to a debt buyer for 10 cents on the dollar. This means that the debt buyer pays just $500 for the right to collect the debt. Next, the buyer hires an attorney, who sues Jay. Jay can't pay $5,000, so he offers $2,500. The attorney accepts. When Jay pays, the attorney and the debt buyer split $2,000 in profit.

2. Litigation is expensive and time-consuming

When debt collection law firms file lawsuits, they're usually hoping to recover the debt without having to go to court. Taking a case to trial is expensive, and it takes time. Most law firms would rather spend this time collecting debt from someone else.

3. Law firms want to avoid the risk of losing in court

When you're in front of a judge or jury, nothing is a sure thing. A law firm might go into the courtroom with plenty of evidence, but there's still a chance you'll win. If you do, that means the law firm has spent time, money and energy for no return.

That's why law firms are usually more inclined to accept a guaranteed settlement than risk going to court and getting nothing.

4. Judgments can be hard to enforce

In many cases, law firms would rather collect a portion of a debt immediately than get a judgment that's difficult to enforce. Debt collectors and law firms know very well that getting a judgment against a debtor isn't a guarantee that they'll recover the money.

Federal law places restrictions on how much of your wages a debt collector may garnish (15 U.S. Code § 1673). If you don't make much money, it may take a long time for the law firm to recover the full amount you owe.

Law firms also know that many debtors are judgment-proof. This means that the debtor has little to no income and few assets. Some types of income, including Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI), are exempt from garnishment (42 U.S.C. § 407).

Being judgment-proof doesn't actually stop a court from entering a judgment against you. It just means that a debt collector or the law firm representing it can't collect the judgment.

Want to negotiate a settlement with a debt collector or law firm? SoloSettle makes it simpler.

Follow these tips to negotiate a settlement with a law firm

Although law firms will usually accept settlements, you have to ask to settle a debt. Here are a few tips to help you start negotiating.

Step 1: Verify that the debt is yours

Before negotiating your settlement, look into the debt to make sure you recognize it. If the debt isn't yours, you may be able to get the lawsuit thrown out.

Step 2: Calculate how much you can pay

If you're already being sued for debt, you probably won't be able to set up a monthly payment plan. Most law firms ask for settlements to be paid in a lump sum.

Take an honest look at your finances, and don't offer more than you can afford. Failing to pay an agreed-upon settlement could mean ending up in court.

Step 3: Send an offer

We usually suggest that you offer to pay 60% of the debt or less to start. You should also begin negotiations with less than the maximum you're willing to pay. Law firms rarely accept the first offer, so you want to leave room to negotiate.

Step 4: Get the agreement in writing

If you come to an agreement, get it in writing before paying anything. You don't want to pay the settlement only to see the law firm turn around and sue you anyway.

Once you have the agreement, you should keep it in a safe place in case you need proof that your debt was settled.

Key takeaways: Why law firms offer settlements

If you're being sued for debt and can't pay, you may be able to negotiate a settlement with the law firm. Often, debt collection law firms agree to settlements because:

They don't have to worry about losing in court.
They don't have to risk being unable to enforce a judgment.
The debt collectors they represent can still earn profits because they buy debts cheaply.

While a law firm may be willing to settle your debt, it probably won't make the first move. If you're facing a debt lawsuit, kick off the negotiations by reaching out to the law firm with a settlement offer.

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FAQ

Why do lawyers prefer to settle debts?

By settling, a law firm is guaranteed to get at least some of the debt. It can avoid the time and expense of a trial, and it can also avoid the challenges that come with trying to collect on a judgment. While many law firms are happy to settle debt, however, there's no guarantee that your negotiations will be successful.

Is it worth getting an attorney for a debt collection lawsuit?

It could be. An attorney can handle communications with the debt collector or their attorney, and they may also be able to negotiate a more reasonable settlement than you could on your own.

However, if you're being sued for debt, there's a good chance that you don't have the extra money to hire a lawyer. That's where Solo comes in. We offer a suite of tools to empower you to resolve debt without an attorney.

What is the purpose of debt settlement?

A debt settlement lets you resolve your debt for less than the amount that you owe. Paying a debt in full is better for your credit than settling, but settling is better than not paying anything. It also means that you won't end up losing a debt lawsuit.

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Why Law Firms Offer Settlements