Can I Be Sued While Working With a Debt Settlement Agency?

By the time a debt has gone to collections, there are only a few advantages to paying them off. On newer credit scoring algorithms a paid off or zeroed out debt will be ignored while credit scoring. And paying off collection agencies can certainly make your phone stop ringing, eventually.

Yet the number one reason to pay off collection debts is usually because you’re afraid of getting sued, and you want to avoid that outcome.

Here in New York there are a number of “debt settlement” companies that offer services that they say will help you get your debts under control. But you have to be careful: because you absolutely can still get sued while working with a debt settlement agency. Worse, a fair number of them are fraudulent scams that will set you back even further. 

How Debt Settlement Companies Work

Debt settlement companies encourage you to stop paying creditors on your own. Instead, they ask you to pay them a monthly amount. 

Some of them then use that amount to settle the debt for less than what it’s worth, which means taking a big hit to your credit reports. It also could mean generating a big bill at tax time, because forgiven debt counts as income. 

Others, called Debt Management Programs, make “micro” payments to collection agencies. This  method of handling your debt is often worse than useless.

Some collection agencies won’t even accept such small payments. Others will be pleased to get any money at all.

But if the debt is large enough, many of these collection agencies will absolutely go ahead and press a lawsuit instead. That’s more profitable for them than waiting around for a debt settlement. It can take time for these companies to get enough money from your payments to settle anything with anyone. And if you’re paying off a $1200 debt with $3 a month, there’s a very good chance the collection companies will opt to sue you, instead.

Keep in mind that many charge fees, and that’s money that could be going to other things. Many cost almost as much as filing for bankruptcy, if not more. It can take as many years to complete the process as it would take you to get through a Chapter 13. 

Debt Settlement Scams

There are a number of scams out there that ask for high payments up front and then disappear into the wind without doing anything at all about your debt. You should make sure they’re licensed, and be aware that they often misrepresent their typical responses and success rates.

Some companies will even use tactics that prompt debt collectors to get more aggressive than ever. The Attorney General recommends checking to obtain a reliability report from the BBB before using any debt settlement company. We recommend using non-profit debt management companies instead, if you’re going to go that route at all.  

What to Do If You Get Sued

For many customers, debt settlement just won’t get the job done, and neither will debt management. Sooner or later a collection agency files a lawsuit. Often, these come without any warning.

Don’t ignore the lawsuit. Reach out to our law firm to get help immediately. Filing bankruptcy might be the only way to prevent judgements and wage garnishments at that point.

And if you’re in enough trouble to be considering debt settlement or debt management, you might just want to file bankruptcy anyway.

See also:

The Consequences of Collection Accounts in New York: Here’s What You Need to Know

Are You Languishing in the Pre-Bankruptcy “Sweatbox?”

How Does Wage Garnishment Work in New York?


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