A debt-reduction law firm is a company headed by an attorney who specializes in helping people settle their debts for less than the actual amount owed. Because the accounts are past due, usually 90 days or more, the creditors usually accept the settlement. In some cases, the payment is reflected on a credit report as "Paid As Agreed" once it is paid off. However, in the interim, your credit score will suffer as a result of letting the accounts go past due during the process.
The Settlement System
A person must allow an account to be turned over to a credit bureau in order for the debt-reduction law firm to be able to negotiate a settlement. Once the account is turned over, the debt-reduction law firm contacts the credit bureau and offers a settlement of 40 to 60 percent of the actual amount owed. From the time you sign up with the law firm until the account is paid, you aren't allowed to have any contact with the creditor.
Fees Charged
Debt-reduction law firms charge between 10 and 20 percent of the total actual debt owed. That means that a person who owes $10,000 in credit card bills will have to pay $1,000 to $2,000 in fees alone.
Who is Involved?
When you work with a debt-reduction law firm, you are usually assigned a paralegal who will work with you on a regular basis. The attorney is present when questions come up that the paralegal isn't prepared to answer, and the attorney's name is on the correspondence sent to creditors.
Benefits
According to the Fair Debt Collection Practices Act, once you hire a debt-reduction law firm to handle your case, all of your creditors must stop contacting you in regards to your bills.
Considerations
People who aren't behind on their bills and want to protect good or fair credit score shouldn't work with a debt-reduction law firm. Instead, these individuals should contact their creditors and try to set up an alternative payment plan.
