The point is that threatening legal action costs the person you're threatening. Not everyone even has a few hundred dollars to retain a lawyer no matter how briefly. Yes, you might "get it all back" but at great risk even if you are completely innocent and the charges are groundless.
A threatening letter from a lawyer doesn't have to go through another expensive lawyer. Sure, if you try to get clever, you can dig yourself in deeper, but the fact is that if you can't afford to fight the case, then you sure as hell can't afford to do anything at all - even the simplest of letters from your lawyer will not make the case go away every time, but will cause huge bills unless you find a no-win, no-fee lawyer.
Courts are quite reasonable in this regard. You just write back a letter that says "I have received your letter dated XX/XX/XXXX. I believe it to be without merit." (or similar). That's it. Just send it back. Let *them* take *you* to court if you're sure you're innocent. There, THEY have to prove YOU did it. With expensive lawyers and to a legal standard. And once you get there, junior lawyers will often jump for the chance to advise on a case for free. Once it's in court, your legal fees will be paid if you're victorious and it will be stupidly expensive if not so you have nothing to lose. Hell, if you are forced to take out a loan to hire a lawyer, it can often happen that the other side has to pay the loan too. And you will KNOW that it's time to hire a lawyer or face worse problems.
However, before it gets to court, there's no point settling unless you are guilty (and sometimes not even then) as it will only be to your detriment. Settlement paperwork often has clauses that say you were guilty and accept that you did it. It's then an irrevocable fact of law that you can't ever contest. This is also why "no comment" exists, and why you have the right to say nothing when arrested, and why you SHOULD say nothing until a lawyer arrives. However, if you are innocent, there's no harm in saying "No, I didn't do that, etc." By letter, being silent is easily confused with ignorance, disregard, attempts to evade justice, etc. so you just write back and say, in effect, "Nope".
Even if settle only to get away from the case, you are forever taking responsibility for that event. If it later comes up in another case that "if you did X, then you must have done Y" (i.e. if you downloaded that tune at that time on that day, then that MUST have been you driving your car past your house a minute earlier, etc.) then you are stuffed.
Until something lands in court, you don't need a lawyer. It may be prudent if you can afford it, but lots of people can't. And in the same way you don't need a lawyer to go over your terms and conditions of every service you use, or approve everything you say to a sales person, you don't need a lawyer in the early stages of response to threats like that.
I have been threatened with court several times. Funnily, it's never actually happened.
First, over a mobile phone contract (with phone) that never arrived at my door, was never signed by me, and I phoned up to REPORT IT MISSING / STOLEN. They wanted to force me to pay for the contract (for the whole year!), pay for the missing phone, pay for any replacement, etc. They threatened all sorts, in writing and on the phone. I wrote back, stated my side, and let them get on with it.
I can see it from their point of view - I ordered a phone, it might have arrived and I've done a runner with it. Sure. I get that. It's a valid case that there might be a simple answer to or that might need taking to court to get to the facts of the matter.
They harassed me for a month with letters and phone calls and after a while, I just stopped answering or answered only with "Sorry, your company has threatened me with legal action. Therefore, I will not discuss the issue."
In the end, I had the bank force a refund of my money that they'd taken (with zero problems, actually, it took only ten minutes and no paperwork - good old Direct Debit scheme!). Which made them even angrier, and they threatened even more, including recouping their bank default charges etc. And, after a month I received a letter. "We're sorry... " blah, blah, blah. And they "generously" decided not to charge me for the chargeback.
Because, I assume, by that point a lawyer had actually looked at the case and decided that they had no proof of postage, let alone proof of receipt, no received contract, no authorisation from myself for the funds given (they are supposed to be taken only on verification of the contract, and the contract was presumably in the box that never arrived!), no way to prove any sort of malice on my behalf, and I had phoned THEM up to report the phone missing and DEMANDED they place it on the IMEI blacklist that my country uses (so even if I had "stolen" the phone, it would have been useless from that point onwards).
You can threaten all you like. Until it's in court, it doesn't matter and actually until then, the less you say, the better. But silence isn't the best option either. It's only if you're playing dodgy legal games that saying things will hurt your case, though. And even when you get a letter from a lawyer who may have a case, until it gets to a court it still doesn't matter.
Case in point: I collided with a car, in my car. It was a little knock, but my fault. It went through the insurance, all legal. A year later, I get a snotty letter from the other driver's insurance company's lawyer (on letter-headed paper, and with any amount of legal threats) demanding I pay Â£9000 because my insurers hadn't paid out despite agreeing to do so. It threatened court action and taking my money and all sorts. It looked very scary, I give them that, and cited lots of technical legal mumbo-jumbo.
I sent a letter back. It said that they had no recourse through myself, that my insurer was the only entity they had any business talking to, that there were compensation schemes and regulators whom they need to take their complaint to for it to have any merit (and still wouldn't involve me, even in my insurers had gone bankrupt), and that - even if I was wrong - what my insurer agreed as reasonable costs isn't in any way binding on myself.
Additionally, they are lawyers, and they know this - they knew this before they started writing the letter - and they shouldn't be sending me such letters at all. I threatened to report them to their bar. I got a letter back that was equally snotty, but didn't address any of my points. I ignored it. Haven't heard back from them in 4 years. But the guy I hit? He didn't even know anything about it and has had all his work paid for a long time ago, and my insurer's happily reinsured me for years, are still in business etc.
I can only assume there was some dispute over the Â£9000 charge (which seems very excessive for what damage was caused) and the lawyers were hoping to scare me into either paying or pressuring my insurer's to pay it.
I did a little basic research, told them where to go, and at all times made my view clear. It cost me nothing. I imagine it cost them a lot more then it needed to (probably why they charge Â£9000 for a dent). I imagine they couldn't possibly have made me pay that in a court and it would have been laughed out, but they could have made an awful mess of my life in the meantime if they'd tried to. But I also imagine that some people just pay up because it's a scary letter from a lawyer.
I was renting a house once with someone. The plumbing blocked meaning we had no toilet. In law, the landlord (or their agent) is responsible for fixing that, and it's a public-health sort of law, not just "Well, we'll get round to it in 30 days or so". Phoned up the landlord's agent, they refused to send someone out to fix it, or give the landlords details. Not just "that day", but ever. So just kept phoning and phoning and phoning.
They threatened me with ALL sorts. I told them they can do what they like, because when the policeman knocks on my door asking why I'm "harassing" them with phonecalls in their little office, I'll be quite happy to explain the situation. Strangely it didn't happen. Nor their threats to sue me. Strangely, I had a plumber on my doorstep at 9am the next day. Strangely, I also had the landlord come around because he'd heard that I'd "been harassing the agent" and it was then that he discovered that I had proof of paying the rent that the agent said they'd never received from me and never passed onto the landlord (I didn't know anything about that, but it was certainly entertaining when the landlord found out, and he was very nice about it, very reasonable and dealt with me direct from them on, and sued the agency, I believe. But if the situation had continued you could quite easily see the agency throwing me out and not telling me why because they'd told the landlord I'd not paid the rent!).
They threatened me with police, with lawyers, with everything you can imagine. But, in the end, it never materialised. And, in fact, my threat to report them to Companies House wasn't as empty as their threats. And - purely because I wanted to dig down into the agency and find out who was in charge - their absence of prominent display of company registration details on their website, their paperwork, and their place of business (which *almost* stopped me finding out who was actually director of the company) just meant that they had to have a word with a government agency and pay THOUSANDS to replace all their stationery and change their website to include said details. And pay for the emergency plumber. And the follow-up work he recommended. And compensate the landlord. And lose all his future custom on several properties.
Funnily, at no point did they mention the "harassment" after that, or try to sue me for destroying their reputation, etc.
I had a friend get one of the infamous letters from ACS:Law. Told them to ignore it, write back a simple letter saying "No" in posh words. All the people who fought it - even the genuine innocents - lost out when ACS:Law was declared bankrupt by its owner. Sometimes thousands of pounds more than it would have cost to settle. But the ones who wrote back "No"? Never even got to court. They were just ignored by ACS:Law and their cases forgotten about. They knew they were meritless, they were just trying to cash in quickly. The people who took them to court caused the company's bankruptcy because they never expected anyone to actually bother to fight it.
Don't get clever. If it gets complex, call in a lawyer. But 99.9% of these things can be handled by denial or coming to the settlement yourself (a settlement is a two-way agreement, not just what they put on paper, so even if you were guilty of pirating, say, $10 of music, you could offer to pay $10 or even $20 first and see how that goes).
Cooperate, even in the face of ridiculous accusations or outright lies, but that doesn't mean capitulate. And then if it ever does goes before a court, you're extremely unlikely to have done anything to make the situation worse for yourself and quite likely to have made it MUCH worse for the other side. What do you think a judge would make of a case involving the "unauthorised copying" of $10 of music which a lawyer then tries to turn into a $5000 settlement / fight, plus legal expenses, and waste the court's time - when the accused is perfectly happy to pay reasonable recompense from the start?
Don't be an idiot, and you'll be fine. Once it gets to court, bring in backup - at that point it's win or lose so you need to make damn sure you win. Before that? Nothing much matters so long as you don't write "I did it, but ha ha, fuck you".
And 99.9% of everyone who threatens you with court action - even lawyers - know that it would never stand or would cost so much it wouldn't be worth it. And when it would stand up, they'll issue you a court order or similar legal notice first.