Vivian Lum, a debt settlement attorney with McCarthy Law in Los Angeles, gave us a window into the work she does creating a debt management plan for her clients. The majority of them are getting out of debt within two years. Here's her advice for finding someone to help you figure out how to get debt free.
Debt settlement attorneys handle a variety of cases. Clients may need debt settlement because they've already filed for bankruptcy and aren't eligible to so so again (you can only file once every eight years). In some cases, clients earn too much income to file for bankruptcy; there are income limitations that must be observed. Other clients, such as real estate brokers, may have a professional license that they will lose if they file for bankruptcy. Or a client may have a lot of equity in a house that cannot be shielded in a bankrupcy filing. Lum's firm has settled second mortgages on houses that are underwater to avoid a short sale, and also private student loans.
"Consider all your options," Lum advises. See whether bankruptcy or debt settlement is a better option for you. Then be careful about whom you work with. "With debt settlement, make sure you're going with someone who's reputable," Lum says, recommending that you check your state's bar to see if there have been complaints or a license suspension. You can also check the BBB, and Google your attorney's name to look for lawsuits against the attorney or the firm.
The initial consultation is thorough. "A client may come in with a problem with one credit account, but we need to see their whole financial picture to decide whether debt settlement is a good option for them, or whether they should consider bankruptcy. We look to get an idea of their income – how much money they can put toward getting debt free. We have to work within their budget." The aim is to renegotiate the debt so that the client can be debt-free in two years, or three tops.
"We go to the creditor and start negotiations. Sometimes the account has been sold to a collection agency. Sometimes it's with original creditor. When we figure out what makes sense, we give our client a full schedule of what payments will be." Lum says there's nothing typical about how much they're able to negotiate down the debt. "We try to get at least 60 percent savings, and I've had clients where we've gotten 90 percent off."
When you interview a debt collection attorney, ask about fees. Lum's firm charges a percentage of the debt. The larger the debt, the smaller the percentage. She advises getting everything in writing – a retainer agreement that is clear about what services will be offered. Make sure you know who is doing the work, that the firm you have hired is not farming it out.
If you must resort to debt settlement, your credit will suffer. Thirty percent of your credit rating is a debt utilization score. If you've maxed out all your credit limits, it will depress your credit score. Once you've figured out how to get debt free, a credit repair specialist may help fix the damage.
It's no fun getting out of debt, but the process is less painful if you have a good debt management plan.