BACK TO INDEX OF ALL THE REPORTS
SETTLING UNPAID DEBTS
INTRODUCTION
Many of us have, at one time or another, defaulted on a
debt, such as a magazine subscription, a credit card, or
a bad check. Usually, these bad debts show up on our
credit report and haunt us every time we apply for
credit. If this has happened to you, there is a way out,
even if you can't afford to pay off the entire debt. You
can settle the debt with the creditor.
SETTLING WITH YOUR CREDITOR
According to the Citizen's Rights Council, "the average
consumer can settle a debt for about 70 cents on the
dollar ... A professional negotiator will settle an
average debt for about 60 cents on the dollar including
their fee." If you need debt settlement assistance, use
one of the URLS at the end of this document to locate
help.
UNDERSTANDING THE RISKS
You may actually overestimate the risk of overdue debts.
Creditors do have the option of wage garnishment or
property seizure, but but unsecured debts, such as
magazine subscriptions or credit cards, are not usually
collected to the full extent of the law. However, if the
debt relates to a an automobile or a home, the
possibility of repossession is quite serious.
Very few creditors will resort to a garnishment on a
relatively small unsecured debt. Garnishment and seizure
are effective but expensive and time consuming. Even if
the creditor did use these harsh methods to make you
pay, they probably wouldn't be able to recover enough to
offset their collection costs.
BANKRUPTCY
Many consumers fold under the perceived strain of unpaid
debts. Hundreds of bankruptcies take place in the United
States each week for amounts under $5000. They are so
intimidated by their creditors that they flee to
bankruptcy, even though bankruptcy can bring total
credit devastation for the next ten years. If these same
consumers had waited and ignored the threatening letters
and telephone calls, they would have realized that their
creditors were all bark and no bite. Bankruptcy is the
best option for some people, but it is much overused.
When a consumer files for bankruptcy, everyone loses -
especially the creditors.
The risks of judgments, garnishments, and property
seizures must be properly balanced against the
likelihood that such drastic collection measures will
ever happen. The risk, and the decision to take that
risk, are entirely yours if you're in such a position.
WHAT DEBTS CAN BE SETTLED?
An unsecured debt is a debt where their is no
collateral. Unsecured debts include:
+ Medical bills + Credit cards + Department store
cards + Personal loans + Collection accounts +
Student loans + Amounts remaining after foreclosure or
repossession + Bounced checks
Most unsecured debts can be settled. But, utility
companies generally wont settle for less than the full
balance. There are some creditors who will NOT settle,
but most will take a less-than full payment as a
settlement to close a delinquent account.
Secured, collateralized debts, such as a home or
automobile, are another story. If the creditor can
simply repossess the property, why should he negotiate?
You can often renegotiate a short payment relief with a
secured debt, but don't attempt to settle the account
while you still possess the property.
Additionally, the creditor must have a good reason to
want to settle. If the account is paid current, and
there is no recent history of late payment, it will be
difficult to convince the creditor that it is in their
best interest to settle. This is not a recommendation
that you stop paying your bills that are current. If you
stop paying your current bills, you will almost
certainly make your credit situation worse. If bad
credit is not an issue for you at this point and you
feel you must stop paying your bills in order to settle
them and get back on top of your debt load, make that a
decision at your own risk.
GETTING THE UPPER HAND
After an initial period of attempted collection, the
creditors will likely stop calling and the debt will be
filed away for future attention. The longer the money
remains uncollected, the better your chances of getting
a good settlement.
Eventually, the creditor will consider the bad debt a
loss in order to receive a corporate tax write-off. This
does not mean that you don't owe the debt. The
corporation may then collect on the debt themselves,
sell or assign the debt to a collection agency, press
for a judgment and garnishment, or temporarily ignore
the debt. The course of action chosen by the creditor
will vary widely between corporations and debts.
According to the Citizen's Right's Council "Many
consumers lack sufficient funds to repay a debt in full
when a creditor demands payment. In many cases, much of
the debt represents interest and penalties accrued while
the consumer was unable to pay. It will be in the best
interests of both parties if a reasonable arrangement
for settlement can be reached.+
Unfortunately, you cannot expect to reach an affordable
settlement if the creditor thinks he has the upper hand.
If, for example,you tell a creditor that you really need
to get this debt settled to get into your dream home,
you can forget any kind of settlement. The creditor will
insist on the full balance.
It will be in your best interest if the creditor
believes that you have very little money and you are
teetering on the edge of bankruptcy. An attorney who
handles your settlements should approach each creditor
as though this is their last chance to compromise, and
get something out of your debt, before you declare
bankruptcy and they get nothing.
Also remember that time is on your side. Never look too
eager to settle. Take plenty of time to reach an
agreement. Don't accept the first, or even second,
settlement offer. Make sure that they are the ones
calling you to push the deal forward.
You have the natural advantage in debt settlement,
because you have something the creditor wants. You must
hold out for your terms until the creditor gives you
what you want. Once you've written that settlement
check, your advantage disappears. So, get your terms in
writing before you even open your checkbook.
RESTORING BAD CREDIT
The credit reporting system gives consumers very little
reason to pay their debts. If the debt were ignored, the
consumer would have a good chance at never hearing from
the creditor again, and, after seven years from the date
the debt was written off, the negative credit listing
would disappear. If the consumer were to pay the debt,
then that seven year period would begin all over again.
A paid collection or charge off will trigger credit
denial as quickly as an unpaid collection or charge off.
It's like getting time added to your sentence for good
behavior.
Fortunately, creditors make their profits by collecting
from their customers, not reporting negative credit
information. Because creditors can see this "catch-22"
situation, they will often agree to delete any negative
listing upon settlement of the debt.
Collection agencies will always agree more readily to
delete the negative listing than banks or credit cards.
The only case where you should have a real problem with
collection agencies is when they represent a larger,
institutionalized creditor.
Many creditors, though, have an agreement with the
credit bureaus that they will not allow a negative
listing to be deleted upon settlement. Larger creditors,
such as huge credit cards or banks will require more
pressure before they will agree to delete a negative
listing, but virtually every creditor will give in with
the right amount of convincing. Every creditor who
reports to the credit bureaus can also change the
information they report. In most credit organizations,
there are dozens of people with the authority to make
changes on the credit report. Anything a creditor
reports, a creditor can change.
You may take two approaches to having the negative
information deleted upon settlement of a debt:
pre-notification of terms and post-notification of
terms.
Pre-notification of terms: you tell the creditor
up-front that you will require the deletion of the
entire negative listing as a part of the payoff. The
agreement to delete the listing and consider the debt
settled is documented in writing and signed before the
payoff takes place.
Advantage: Time will be saved and you won't be
disappointed at the last moment. It is also less likely
that you will have to fight the creditor later to
actually delete the negative listing.
Disadvantage: When the creditor discovers that your
credit is important to you, he will usually ask for a
larger settlement amount - sometimes full balance - to
meet your terms.
Post-notification of terms: once settlement negotiations
are complete, the creditor receives the agreed payment
with the requirement that the negative listing be
deleted attached to the check. This approach requires
use of a "conditional endorsement" document (drafted by
your attorney) notifying the creditor of your terms.
Advantage: You will almost always get a better
settlement amount. The creditor will often be tempted by
the payoff when the terms arrive and will deposit the
check without blinking at the new terms.
Disadvantage: The creditor often hangs up on the new
term and might send the settlement check back. The
creditor might still ask for more money, or reject on
the deal altogether. If the creditor simply deposits the
check without intending to follow through with your new
term, you will have to fight the creditor later and
force him to delete the negative listing.
Never expect a creditor to meet an agreement that was
made verbally. Everything must be in writing and, even
then, you will probably have to fight to make the
creditor live up to his end of the bargain.
You may find that some of your creditors are willing to
hold out longer than you are willing to hold out before
agreeing to delete the negative listing from your file.
In other words, they will not agree to delete the
negative listing under any circumstance. Once again,
let it be said that every creditor will give you what
you want if you speak to the right person long enough
and you make the right offer. But if you are on a time-
line, and your attorney can't get them to agree to full
deletion, you have a couple of other options:
List the Account as "Paid" only. You may counter-offer
that the creditor simply list the account as "Paid"
rather than delete it altogether. This is a true
indication of the status of the account and many
creditors will concede and agree to this wording. A
"Paid" status is still very negative for a collection
account or an account that will show "Paid Charge-off"
or "Paid repossession." You should only agree that the
account show "Paid" if all other negative notations,
such as "Charge-off," "Repossession," late notations,
and "Collection," are deleted at the same time. A simple
"Paid" notation on a regular trade line is neutral and
should not hurt your credit.
List the Account as "Settled" only. You may
counter-offer that the creditor simply list the account
as "Settled" rather than delete it altogether. "Settled"
is an inherently negative listing but not as negative as
"Paid charge-off." Don't agree to a "Settled" listing
until you have exhausted all other possibilities.
"Settled" will still trigger a credit denial. You should
only agree that the account show "Settled" if all other
negative notations, such as "Charge-off,"
"Repossession," late notations, and "Collection," are
deleted at the same time. If you agree to a "Settled"
notation, you must continue to work hard to delete the
notation through the credit bureau dispute process.
List the Account as "Paid Charge-off" or "Paid
Collection" or "Paid was 30, 60, or 90 days late." This
will be the creditor's first choice, and your last
choice, of what to place on your credit report once you
have paid. These notations are almost as damaging as
showing the same debt unpaid. It is very common, though,
for an account to be deleted (through credit bureau
disputes) once it has been paid. The creditor now has no
compelling reason to keep the negative listing on your
report. For this reason, it is still usually a good idea
to settle even if the creditor won't budge on deleting
or positively modifying the negative listing.
FOR MORE FREE INFORMATION ABOUT CREDIT AND
CREDIT REPAIR, VISIT LEXINGTON LAW FIRMS AT
http://www.uni-sol.com/lxngtn
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