Legal Commentary

doubts over debt negotiation fees

By David A. Giacalone

Our mention last month of an upcoming FTC Debt Settlement Workshop attracted some “comment spam” from NetDebt, a for-profit company that “negotiates” with creditors in an attempt to reduce your overall debt. NetDebt calls itself a “100% online debt settlement solution” and emphasizes the participation of lawyers in providing its services (apparently, you never meet your lawyers). They claim that “In some cases, your total debt will be cut in half.”

I first heard of NetDebt on June 9th, when they tried to plant a link from f/k/a to their affiliated weblog, in order to increase NetDebt’s online profile. When the Comment showed up for “moderation,” my response was: “I just looked at your ‘NetDebt’ web site and have many questions about your services ? especially the fees. Until I get a chance to review it more fully, I do not want a link from this weblog to yours, and have removed your URL.”

Having now looked more deeply into NetDebt, I want to present my continuing concerns about their fees — which are 15% of the amount of debt you bring to their program (regardless of results or the number of creditors it must deal with), plus a “small” monthly service fee of $50.

For example, the so-called “flat” 15 % fee would be $1500 if you have $10,000 of debt in the program; $3000 for $20,000 of debt; $6000 in fees for a $40,000 debt load. The $50 monthly service fee quickly adds up, too, and would add another $2700, if you stay in their program the full 54 months.)

Although many debt negotiators make no mention of the cost of their services at their websites, it appears that similar percentage-based fees have become common among debt settlement firms. (See, for example here and there) I hope that legal ethics counsel or professors, other lawyers, and consumer advocates will help us determine if or when such fees are “reasonable” or appropriate for lawyers to charge. At a time when many in the legal profession are promoting the use of “alternative” and “value-based” fees instead of hourly billing — while offering so little guidance on how to make the switch in an ethically-responsible manner — it would be especially useful to hear what standards or criteria they believe should be applied to prevent excessive fees under our professional and fiduciary principles. My assumption is that “what the market may bear” is not an appropriate test for protecting consumers — especially unsophisticated ones in dire economic straits — from unreasonably high legal fees.

There are many voices on the internet warning about “debt settlement scams” and the money wasted due to the high fees. [For example, this post at the ZipDebt Blog, and this article.] Unless the purveyors are engaged in actual fraud or deception, regulators can’t do much about non-lawyers charging excessive fees for a questionable service that exploits desperate people, beyond providing information and warnings. However, the legal profession can hold lawyers to a higher standard and should require lawyers engaged in debt settlement to charge only reasonable fees. As with many similar easy-money schemes, my guess is that the services would not be offered by members of the Bar, if only a fair price could be charged.

Full post as published by f/k/a . . . on July 21, 2008 (boomark / email).