Today we’re going to play a game that I love. Negotiations with debt collectors! Also known as debt settlement. In the recent Los Angeles Times article, Making a Deal with Debt Collectors, by Liz Weston, she provides such a shallow and generic approach that I am immediately propelled into blog writing mode. This article is my in depth response and never to be humbled opinion on getting out of debt by paying less than what is owed, which is the art of debt settlement.
Here’s what the reader wrote to liz:
Dear Liz: After struggling financially for seven years, I’m getting a good lawsuit settlement. After taxes, I’ll be set. I want to pay my bills, but the actual company-for example, the credit card company, not some bill-collecting clowns that threatened me with “the sheriff will come over and arrest you” or “your brother and sister will inherit your debt” and other lies. I also don’t want to pay these inflated fees from bil collectors that have no rhyme or reason and sound like they are throwing darts at a numbers board. Finally, I’ve asked a couple of the bill collectors to provide me with the name and contact at the original company so I can verify that they have authorization. But with data being compromised every day, how do I know they are legit?
While Ms. Weston covers the basics in her response to this reader, I must start with the elephant in the room. This reader, like many of my clients, are struggling financially for YEARS. I get it that this reader was in litigation and just got a hefty settlement. This is where I start. I really wish folks would stop struggling with debts for so long because they lose something that can never be regained; TIME.
Validate That Debt
Before we ever consider repaying a debt in any manner, we must first answer the question of whether we even owe the money. Let’s talk about debt and third party debt collectors. Generally, a debt is sold to a third party debt collector when you have fallen behind on payments; hence the struggling part. This reader could have eliminated that struggle with a structured and 0% interest pay plan in bankruptcy, making it an important contender in the game of getting out of debt. Here’s an important tip: late payments and collections have a greater impact on your credit score than the act of filing for bankruptcy. That’s because bankruptcy eliminates the debt; and when there is no debt to credit line, credit scores increase.
The first step in dealing with a third party debt collector that you did not originally borrow money from is to Validate the Debt. This can be done with letters provided by the CFPB. What’s important is to be clear of your intent in the letter. Also important is that you only send this letter when you believe you do not owe the debt; cannot determine the validity of the debt from your credit report; or the third party collector will not provide the information to you over the telephone.
Time Barred Debt Collections
The Creditors don’t want you to be informed, but with the internet, information about time limits that creditors have to sue you to collect on a debt is known as the Statute of Limitations. This time limit varies by state and in California, it is four (4) years from the date you last used the credit, or the date of your last payment; whichever is later. Once this time has passed, the creditor loses many of their rights, but can still send letters and call you. However, any payments on your part AFTER this time has passed are now VOLUNTARY.
Set Up a Payment Plan
A payment plan bankruptcy can eliminate many, if not all debts within five (5) years, and you might not be required to pay back 100% of all your debts. In fact, credit card debts in a payment plan under Chapter 13 of the Bankruptcy Code can be paid anywhere from 0% to 100%, based upon your ability to pay. That means that we look at your budget to be certain we have included lesser known expenses, so that all contingencies are addressed for a longer term payment plan. So, in the first sentence, this reader could have been on a payment plan for five years, so that when that lawsuit settlement arrived, they could enjoy it free and clear and DEBT FREE. If it will take you longer than five years to get out of debt, then call a bankruptcy lawyer immediately! Bonus: All debts discharged in bankruptcy incur NO INCOME TAX CONSEQUENCES!
Negotiate and Settle Those Debts
The best way to avoid bankruptcy is to negotiate and settle debts. That is, to pay less than what you owe. Ms. Weston’s article will refer readers to a website that provides advice from someone who is NOT an attorney. I take offense to much of the advice given by supposed ‘experts’ giving legal advice when they are not lawyers! Pro Tip: ONLY LAWYERS CAN GIVE LEGAL ADVICE! However, just about anyone can help negotiate and settle debts, though I find that my leverage as a bankruptcy lawyer gets me better deals than most. Also, the older and more stale the debt is, the better the deal. However, you must be willing to sacrifice credit score points to get the best deals.
Also keep in mind that when you settle a debt for less than what is owed, the creditor may issue an IRS form 1099 on the cancelled debt and you MAY OWE TAXES ON THE CANCELLED DEBT. So, let’s say you owe $10,000.00 on a credit card and you negotiate to pay half, or $5,000.00. Not only will you pay $5,000.00 to get out of debt, but you’ll likely owe income taxes on the part that you didn’t pay.
- Determine whether the debt is even owed;
- explore all your options for getting out of debt;
- create a plan of attack that will get you to your goal quickly, effectively, and efficiently;
- pay as little as possible to accomplish this goal to save for the important things in life