Suing Illegal Debt Settlement Companies for Damages

Debt settlement companies promise to negotiate and settle your debts for less than you owe. But some of these companies are scams that take your money and provide little or no services. If you’ve been ripped off by a shady debt settlement company, you may be able to sue them and recover damages. Here’s what you need to know.

How Debt Settlement Companies Work

Debt settlement companies claim they can negotiate with your creditors to settle your debts for a fraction of what you owe. You make monthly payments to the debt settlement company, which holds the funds in escrow. Once enough funds accumulate to make a decent settlement offer, the company negotiates with creditors on your behalf. If a settlement is reached, the debt is considered paid in full.

Settling debts yourself is possible, but debt settlement companies tout their experience and relationships with creditors. They also claim to protect you from collection calls and lawsuits while debts are in settlement.

Pros and Cons of Debt Settlement

Settling debt can resolve balances quickly and for less than you owe. But there are risks involved:

• Your credit score will drop drastically and remain low for years.
• You may face tax consequences on forgiven debt.
• Creditors can still sue you until settlements are reached.
• Settlements are not guaranteed and you could end up paying more overall.

Debt settlement makes the most sense for unsecured debts like credit cards and medical bills. It’s not recommended for secured debts like mortgages or auto loans.

Warning Signs of a Debt Settlement Scam

While there are legitimate debt settlement companies, many are scams. Here are some red flags to watch out for:

• Charging large upfront fees before providing any services.
• Guaranteeing they can eliminate most or all of your debt.
• Telling you to stop communicating with creditors.
• Pressuring you to make decisions immediately.
• Refusing to provide a contract or other written information.
• Claiming there are “new government programs” to erase debt.

Scam debt settlement companies prey on vulnerable consumers struggling with high debt burdens. They make big promises but fail to deliver.

Your Legal Options if Scammed

If you realize you’ve been scammed by a debt settlement company, you have options to pursue legal action and recover damages:

Breach of Contract

If the company failed to provide the services outlined in your contract, they breached the agreement. You can sue them for monetary damages in civil court. Gather documentation showing what you were promised and what services you actually received.

Fraud

If the company lied about their services or credentials, they committed fraud. You may be able to recover compensation for your losses. Proving fraud requires showing the company knowingly deceived you.

Violations of Debt Relief Laws

Federal and state laws like the Credit Repair Organizations Act govern debt relief companies. If the company violated these laws, you can report them to regulators like the Federal Trade Commission (FTC) and your state attorney general. The FTC has sued debt settlement companies for deceptive practices.

Recovery of Fees

You may be able to recover some or all fees paid to the debt settlement company for services never received. Keep records like cancelled checks and bank statements showing what you paid.

Punitive Damages

If the company’s conduct was truly egregious, you may be awarded punitive damages on top of actual losses. This serves to punish the company for malicious behavior.

Tips for Pursuing Legal Action

Here are some tips if you plan to sue a debt settlement scam:

• Consult a lawyer experienced with these cases. They can advise if you have a strong case.
• Gather and organize all evidence of the company’s wrongdoing.
• File complaints with regulators to establish a record.
• Send a demand letter to the company seeking a settlement first.
• Be prepared for a lengthy legal process – these cases can take time.

An attorney can help calculate actual damages. You’ll need to show how much money you lost from the company’s failure to deliver services.

Alternatives to Suing

Suing is not your only option for recourse. You may also consider:

• Reporting the company to the Better Business Bureau.
• Leaving negative reviews to warn others.
• Filing a complaint with your state attorney general.
• Reporting the company to the FTC.
• Contacting your state consumer protection office.

While these steps may not recover your losses, they help expose shady companies and can lead to investigations and enforcement actions.

Beware of Debt Settlement Scams

Debt settlement often sounds too good to be true – and it very well may be if done through unscrupulous companies. Do your research, read reviews, and contact your state consumer protection agency before choosing a debt settlement provider. If you do become the victim of a scam, consider legal action to recover damages. With help from an attorney, you can hold these companies accountable.