Seven steps to a great Debt Settlement or Bankruptcy
If you are behind in credit card and other debt, you may be considering debt settlement. Debt settlement is a process where you or a company that works for you directly negotiate with creditors to reduce the amount you pay on the principal in exchange for having the rest of the debt “forgiven.” The problem with doing this yourself is it is difficult, time-consuming, and you have to learn the steps. Don’t worry. I will cover the steps to debt settlement as seven simple rules every debt settlement should follow. You are often better off doing this yourself or having an attorney do it with you. I will also point out how bankruptcy handles settlement a little differently. This article on Debt Settlement v Bankruptcy explains the differences in detail and when you should use one instead of the other.
If you use a debt settlement agency, the likelihood of finishing a debt settlement is low. Only 10% or less of the Debtors who attempt to complete debt settlement with a company is successful. Many of the debt settlement companies like Ameridebt file Bankruptcy themselves after stealing the money they were supposed to be paying to creditors. Other companies often pretend to be a law office. If someone claims they are a “legal group,” they usually just got out of prison last week. The only qualification they may have is they are great at sales.
Some creditors will agree to a partial payment. Others won’t. Every creditor is different, and there is no guaranteed or required rules that creditors have to go by in debt settlement.
What kinds of debt can be settled?
The common debts that can be settled are credit cards and medical debts. Just about every debt can be negotiated, including mortgages where you may attempt a mortgage modification or short sell of the property. Even federal student loans will accept a debt settlement, but they often want a lump sum which the Debtor cannot afford. Private student loans will accept a much lower percentage than Federal student loans, and they will take a payment schedule over a period of time. Most secured creditors will not accept a debt settlement, but if a bankruptcy is filed, many finance companies will negotiate a car loan for far less if you owe more than the value of the auto. They will negotiate on the interest rate and monthly payments if the alternative is repossession and charging off the debt.
Do creditors have to accept debt settlement?
A creditor does not have to accept your debt settlement offer, and some creditors may choose to charge the debt off. Others may decide to sue. Whether you settle the debt or fail to pay, your credit will drop. In the case of Bankruptcy, you no longer owe the debt after discharge. The credit report will generally show account closed instead of account unpaid for 180 days.
A creditor can sue if the debt is in default. Creditors can attach assets after they obtain a judgment. Judgments in some states like Indiana automatically attach real estate. In Kentucky and most states, the creditor has to take the judgment and file it against the property records. They primarily attach wages and bank accounts, including bank accounts you have with other people. Finding out where your bank accounts and assets are by checking auto registrations, deed records, and credit reports.
Creditors don’t like to sue. It is expensive, and they don’t always win. Often the client files Bankruptcy to ensure the creditor does not collect. The creditor has six years to collect on a negotiable instrument after it goes into default. For other debts, the statute of limitations is ten years for debts after 2014 and 15 for obligations made before 2014. Making any payment starts the clock all over again, so making even a tiny one-dollar payment is a bad idea unless you get a complete release as a debt settlement.
Payment plans vs Debt Settlments
Very few of the agencies and debt relief programs are trustworthy. They will prepare and plan a repayment plan and negotiate and deal with creditors on your behalf. But whether or not a lender will settle a debt is entirely up to the lenders. There is no requirement that a bank must accept a settlement or mortgage modification. But with mortgage modifications, the mortgage company must fairly and reasonably process the application if it has a mortgage modification. Government mortgage loans do have a provision requiring the lender to have a mortgage modification program.
There is no guarantee settlements how a creditor reports to a credit bureau. The report must be truthful and relevant. So if the information is too old, it can be deleted. If the information is incorrect, it can be disputed.
By attempting to settle with a credit card, the credit card will often be canceled. If the agency is doing this, you sign over a power of attorney and lose control of its settlement. Typically the creditors will reduce the outstanding balance by up to 50%, and the payment plan will be stretched out for years. The offer will be accepted almost immediately, or it will be rejected. It is entirely up to you to what terms you want in your offer, but the proposal has to be serious, or it will be rejected. This may include the monthly payment, how long the payments are, and how the debt will be reported.
Will I owe taxes if I settle a debt?
The IRS requires the creditor to report the amount “forgiven” as income on a 1099 if the debt charged off was over 600 dollars. This allows the Bank to take this as a tax deduction, and it sticks the Debtor with a tax liability. In Bankruptcy, the amount that is discharged is not income. But if you cannot repay your debts because of a lack of income and assets when you settle a debt, you are also exempt from this 1099 income. The IRS code exempts you from this income only if you are insolvent.
The bankruptcy court order is proof from a federal judge that you had no net income to repay and no attachable assets at the time of discharge. The Debtor has the burden of proof to prove he is insolvent and uncollectible. Bankruptcy automatically solves that problem. If you have any accounting that shows you were insolvent ad the time you did debt settlement, you can do debt settlement and avoid this 1099 liability. But you have to prove you were insolvent.
Step One to a great debt settlement Get it in writing before paying a cent.
My number one rule is to get it in writing before you ever make a payment. Do not expect any lender or debt collector to live by any verbal agreement. If you pay anything on the debt, you have given away your statute of limitation defense in court and other defenses. You made the situation worse, not better for you and your family. The debt collector will threaten you to try to coerce you into paying. You also never agree you owe the debt in a phone call they are recording to use against you. I believe you are far better off using an attorney to do this than using a debt settlement agency.
Step Two to a great debt settlement establish doubt as to collectibility or liability
In negotiating the debt, you should doubt as to collectability or doubt as to liability. In negotiating the debt, Creditors ask whether there is an issue of the ability to pay or an inability to collect. If the debt is past the statute of limitations, you have no legal responsibility to pay the debt. There are well over 100 of these defenses. You may need to show documentation of your assets, debts, expenses, and income.
Step Three to a great debt settlement keep records and writings
It is impossible to keep this in your memory as to what was said. Record conversations and keep records of the dates, times, who you spoke with, and what the discussions said. In Kentucky, you can record most conversations with debt collectors without their knowledge or consent. Follow up on your conversations with a registered letter or fax, so the conversations are documented.
Step Four to a great debt settlement be prepared to actually live up to the settlement
In fairness to the debt settlement companies although they fail 90% of the time to complete these settlements it is the debtor who fails to pay at some point during the plan. If you want to settle, you need some cash to do it with. If you don’t live up to an offer you are making to them, do not expect them to even talk to you later. You have to bring some cash to the table. If they accept, you have made a new contract. They can sue you for both debts. Even if the original debt was not valid, they can sue for the settlement you defaulted. But they can only collect for one debt.
Step Five to a great debt settlement have someone qualified at least review your settlement.
If you are doing this yourself, I would not agree to make partial payments or make payments until you have considered all your options and talked to an attorney. You do not do this every day. Another set of eyes looking over the agreement finds things you missed. A settlement can include terms like reporting the debt as settled. In some cases where you have claims against the lender, you may want to consider filing a lawsuit against a credit card company like Capital One for unfair practices. Then you will be negotiating with their attorney, who may give you better terms. You don’t know what claims you have without consulting an attorney.
Step Six to a great debt settlement establish a range for your offer
Make sure the offer is feasible and something you can repay. But also do not start the offer too low or too high. Your offer has to be credible. If they have filed a lawsuit, you will probably want to start with a 50% offer. Until they get a judgment, the range for a case is about 50 to 70%. The fewer the assets or income and the older the debt, the lower the offer. Over time they lose evidence of the debt. They win only 50% of the time at trial, so don’t be afraid to go to court.
Step Seven to a great debt settlement some items are not relevant and don’t need discussion.
Only share relevant information. If you claim you have the cash to settle, expect the debt collector to want more. It is not relevant whether you have cash. Never brag about your assets. If you brag about how you are buying a home or car, the settlement went up. Do you need to settle immediately? Perhaps you can’t buy a house without settling? The amount went up. Any sign that you are eager will cost you.
If they say no to any offer in the reasonable range, walk away and try again weeks or months later. If you get a different collector, the attitude may change. But remember that some companies will not allow their collectors any authority to settle. One of the nice things about Chapter 13 is you don’t have to get consent from a debt collector about what he will or will not accept. Many of our Chapter 13 cases pay back 10% or less.
