{"id":23572,"date":"2026-03-11T21:52:47","date_gmt":"2026-03-11T21:52:47","guid":{"rendered":"https:\/\/budgetadirect.com\/?p=23572"},"modified":"2026-03-11T21:52:49","modified_gmt":"2026-03-11T21:52:49","slug":"debt-settlements-legal-loophole","status":"publish","type":"post","link":"https:\/\/budgetadirect.com\/?p=23572","title":{"rendered":"Debt Settlement’s Legal Loophole |"},"content":{"rendered":"
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Debt settlement companies technically aren\u2019t allowed to charge fees until after lowering a consumer\u2019s debt. But a loophole in the Telemarketing Sales Rule \u2014 and a mish-mash of federal and state laws \u2014 allows predatory firms the opportunity for exploitation.<\/p>\n

A growing corner of the $23 billion debt relief industry has used a workaround regulators have dubbed the \u201cattorney model\u201d \u2014 taking money to the tune of tens of millions of dollars from consumers, according to Consumer Financial Protection Bureau actions since 2010. In this scheme, settlement companies masquerade as law firms, sometimes \u201crenting out\u201d a law license \u2014 since lawyers are allowed to collect advance fees, this provides a nifty if questionable way for these companies to cash in before doing any work. More often than not, however, these companies don\u2019t actually connect consumers with attorneys.<\/p>\n

Debt settlement is meant to fast track getting you out of the red when you\u2019re in debt. Instead of walking away with less debt, consumers who fall prey to the attorney model can end up with ruined credit and money spent out of pocket. That\u2019s what happened to Coya Davis, a 31-year-old ex-project manager in Atlanta.\u00a0<\/p>\n

Davis was almost $27,000 in credit card debt when she learned about the Clear Creek Legal Debt Resolution Program in November 2023. After enrolling, Davis received a welcome email from the company telling her she\u2019d made a smart choice and, with its help, would have her debts negotiated, settled and resolved for a fraction of what she owed.\u00a0<\/p>\n

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As is common practice, Clear Creek instructed Davis to stop paying her creditors and redirect her monthly payments into a trust account that could be later used for a settlement. It was the solution Davis thought she was looking for.\u00a0<\/p>\n

\u201cMy minimum payments felt too high,\u201d she says of her debt. \u201cI wanted something that streamlined everything, maybe even a lump-sum option.<\/p>\n<\/div>\n<\/div>\n

While you can \u201cDIY\u201d debt settlement, hiring a reputable debt settlement company to negotiate your balances can be helpful when you\u2019re juggling multiple creditors, interest rates and payment schedules. Though some firms can help consumers get out of debt sooner, others see financial anxiety as a means to line their own pockets. That\u2019s what happened to Davis: When she left Clear Creek\u2019s program, her debt was no lower than when she enrolled and her credit score had gone from the 700s to the 400s, she says. Davis was also out nearly $500, despite the clear Federal Trade Commission and CFPB rules that prohibit these companies from charging upfront fees.<\/p>\n

The size of the debt settlement industry waxes and wanes, but it historically rebounds in high periods of financial stress. Although it currently remains below Great Recession levels, the U.S.-led global debt settlement market is expected to expand from $4.8 billion in 2024 to $7.2 billion by 2032, according to Credence Research, even though we\u2019re not in a recession.<\/p>\n

For Davis, her debt was a result of losing one of her two jobs. With her income slashed in half, the bills began to pile up. \u201cI felt overwhelmed,\u201d she says.<\/p>\n