You can sue debt settlement companies, also known as credit repair companies, for common law claims like breach of contract and fraud.
This article is about suing a company that you hire to help you settle your debts or repair your credit. This is not the same as a debt collection company, which is hired by the original creditor (a third party) that wants to collect a debt you might owe. If you're thinking about suing a debt collector, please read our article, "Can I Sue a Debt Collector?" which includes general legal information about debt collection agencies.
Companies that provide debt relief and credit counseling are sprawling up everywhere. Unlike debt collectors, debt settlement companies are supposed to be on your side. You might hire them to help you make a lump sum payment to a credit card company or another creditor who might be showing up on your credit report.
If a debt relief company has wronged you, talk to a consumer protection lawyer who can give you legal advice about what to do.
Types of Debt & Services in Dispute
It's important to have an understanding of why you've gone to a debt settlement company in the first place. Was it to:
- settle your unsecured debt, such as credit card debt and late fees?
- obtain a lump sum settlement offer or payment plan from a tough creditor?
- negotiate a debt management plan, repayment plan, or lower monthly payments?
- repair your credit score or credit report with the credit bureaus?
- get general advice about your financial situation?
These are common services that might give rise to lawsuits because of a mistake or malicious action or omission on the part of your debt settlement company.
Before you sue, you have to ask yourself whether the problem you're facing is really being caused by a debt relief organization. For example, you might not have a lawsuit if:
- you never had any debt relief options to begin with;
- the credit repair company never guaranteed that your debt will be settled; or
- the problem you're facing has nothing to do with the debt settlement services you purchased.
Usually, any careless or purposeful harm that a debt settlement company causes you will put you in a worse position than you were in before. This means either that your financial situation worsens as a result of their services, or they fail to improve your situation despite promising you otherwise (and taking your money for it, making you poorer in the process).
Basically, if you paid a credit or debt repair company to settle your debt and they were successful in negotiating a lower lump sum payment, you can't just sue them if you're still unhappy with the results they got for you. However, things might be different if they lied to you, overpromised and underdelivered, or they straight up failed to do what they guaranteed they would do.
Debt Consolidation and Debt Payment Scams
Sometimes the point of working with a credit repair company isn't to find a way to have the full amounts of your debts forgiven, but rather to consolidate them (bunch them up) with a single lender so you're not dealing with multiple debt negotiation as a struggling borrower.
You might be a victim of a credit repair company's debt consolidation or payment scam if:
- You end up owing more than you did before.
- The terms of the new debt that they negotiated for you are even worse due to higher interest rates or tighter payment schedules
- The credit repair company was giving kickbacks, at your expense, to creditors and lenders they work with.
- The lump sum payment they negotiated doesn't go toward paying your creditors, but instead goes directly into the pockets of your debt relief company.
- Your personal information was intentionally or even accidentally leaked by the debt relief company, or they caused you to become a victim of identity theft.
There are many different situations where a debt relief organization might be legally responsible for giving you bad advice. For example:
- If a credit counselor at the debt settlement company tells you that a chapter 13 bankruptcy will erase your IRS debts, they are giving you incorrect information.
- If they tell you that all your student debt will be charged-off if you file bankruptcy, you're being misled. This is rarely true.
- If they encourage you to sign up for a debt settlement with a high interest rate that traps you into more financial uncertainty, they might not have your best interests in mind.
These are common scenarios that do not paint a true picture of how debt settlement works. Instead, the settlement process is much more complicated. To put it plainly, there are no shortcuts to solving past-due medical bills or getting a favorable settlement amount with a credit card company.
A debt settlement advisor that truly has your best interests in mind will give you detailed advice on:
- Frequently asked questions (FAQs) on the risks of default, bankruptcy, and debt negotiation
- How to obtain and organize the phone numbers and contact information for creditors that are affecting your situation
- How to handle phone calls with collection agencies, such as calls to your employer for wage garnishment actions against you.
The possibilities for bad behavior are endless. If you can learn to see a pattern in the differences between legitimate credit repair efforts versus botched shortcuts to take your money, you will learn to avoid common traps that illegitimate companies might use to lure you in.
Suing for Breach of Contract
Your debt settlement agreement with the credit repair company will usually have some basic terms about what you're paying for and what the debt relief advisor is supposed to do for you.
To sue your credit repair company for breaching their contract with you, you have to show there was:
- a valid contract,
- you performed your side of the agreement (you paid the company),
- breach (the company didn't perform, e.g., they failed to settle your debts and repair your credit despite promising to do so); and
- and damages — you wasted money paying the debt settlement company and potentially lost even more money by getting into more trouble with your creditors.
Suing for Fraud
If you can show that the debt settlement or credit repair company's only goal was to bleed your bank account or savings account dry and charge fees for doing nothing helpful, you might have a case for fraud. In general, you'll need to show:
- a promise or statement by the debt settlement or credit repair company that was false;
- the company intended on deceiving you by making the statement ;
- you reasonably relied on the statement in buying the debt relief services; and
- you suffered financial injury as a result of relying on the company's false statements.
It might be harder to prove fraud than it is to prove breach of contract, because you'll have to show that the debt settlement company knew (had “scienter") that they were lying to you and intended to trick you into parting you with your money.
While it's more common that a credit repair organization's carelessness is the real reason you've been ripped off, our earlier examples above regarding scams would potentially give rise to a successful lawsuit for fraud.
Suing Under the Credit Repair Organizations Act
According to the Federal Trade Commission (FTC), theCredit Repair Organizations Act (CROA) is a federal law that prohibits credit repair companies from:
- lying about their services,
- charging you before performing work, and
- failing to give you a written contract that outlines what exactly they're doing for you, what their legal obligations are, and what your rights are.
Under federal law, debt settlement companies also have to be very clear about how long the repair process will take, how much you'll be on the hook for, and what is and is not guaranteed.
Chances are, if you're suing for breach of contract and fraud, those same issues that you've raised in your standard fraud lawsuit will also apply under the CROA.
A court may award you compensatory damages, including ordering the credit repair company to :
- give you back the money you paid them
- pay you extra money for damages, such as debt and penalties you incurred with your creditors, as a result of your debt relief company's bad advice or poor workmanship
- pay you to make you whole for any other harm you suffered as a result of the repair company's breach of contract or fraud
In some cases, you may be able to get even more money to cover:
- liquidated damages, which is a specific and reasonable dollar amount that the debt relief company would have contractually agreed to pay you in case they lose a case against you;
- your attorney's fees and court costs; and
- punitive damages to punish a wrongdoer for extreme and outrageous conduct and to deter others from doing the same
Debt Settlement Gone Wrong? Contact a Lawyer.
If you have been the victim of a scam or bad advice from a debt settlement company, you should consider suing for breach of contract and fraud. Additional claims may be available, but only an experienced attorney, such as a consumer protection lawyer, can advise you about how to approach your lawsuit.
Under state law, you have a very limited time to bring these kinds of lawsuits. The law that controls this limit is called the statute of limitations, and it varies in the number of years depending on where you live. Because contract and fraud cases are time-sensitive, you should speak to a lawyer sooner rather than later before your claim expires.