A relatively new approach to debt resolution, debt settlement or debt negotiation is the process of negotiating with creditors to lower the amount that you owe, typically by as much as 50 to 60 percent. A settlement offer is only attractive to a creditor when a consumer is behind on their payments. The reason why this is the case is that statistically a past due debtor is far more likely to either 1) file bankruptcy; 2) never pay the creditor at all; or 3) cost so much money in any collection efforts that a settlement offer is more profitable for the creditor. The financial incentive of debt settlement is clear for the consumer: you are able to cut your balance in half and presumably eliminate interest altogether. The main downside is that since you have to be past due in order for a settlement to be reached your credit will most likely suffer.
Debt Settlement and Consumers with Good Credit:
The impact should be pretty significant, particularly in the short-term. If you have high balances, however, then even your positive credit history is being weighed down by the negative effect that the amount you owe is having on your credit. This being the case other factors that you should consider are
1) when you anticipate using your credit again and
2) what other options are available to you.
If you’re retired and not planning on getting another mortgage, then debt settlement is still probably your best option. If you’re 30 years old and planning on buying a home in the next year or two, I’d probably reconsider. And by reconsider, I mean I’d reconsider debt settlement and getting a house.
If you’re buried in minimum payments, then the last thing that you should be thinking about is adding on more debt. If you have no real assets (equity in your home, for example), then debt settlement may be a suitable solution because you don’t have any options at your disposal that don’t affect your credit negatively. On the other hand, if you have a lot of equity in your home, then it may be your best option to tap into it because the credit impact of debt settlement may cost you more in the long run if you try to refinance or buy another home.
Debt Settlement and Consumers with Average Credit:
As a result of debt settlement you will still take a sizable hit in the short-term, but it will be far easier for consumers with average credit to restore their score to where it was when they entered the program versus consumers with good credit. Keep in mind, if you’re the sort of consumer that has always made payments on time, but you’re still stuck with a mediocre credit score, then it’s probable that in the long-run debt settlement will help you by eliminating the debt that dragging down the amount owed component of your credit score. With some proactive rebuilding after completing your debt settlement program, you should be in a better position to obtain a loan than when you contacted your debt negotiation company.
Debt Settlement and Consumers with Bad Credit:
For those of us with bad credit (600 FICO score and below), the impact of debt settlement may still be negative in the short-term, but the credit impact will be so negligible that the savings from enrolling high interest credit cards will most likely overcome it. Moreover, if your accounts are already in collections and charged-off, then debt settlement will likely improve your credit score since you’d be paying off seriously past due accounts. If you fit in this boat, then debt settlement is an ideal fit because you save a lot of money while sacrificing much less from a credit standpoint.
So you are getting collection calls? You’re desk is full of unpaid bills. You dread answering the phone. You are having trouble sleeping at night because you are worrying about a bunch of bills. You feel depressed.
Does any of this sound familiar? If it does then, maybe this article can help you. First of all you need to realize that you are not the only one. You are not alone. Then you need to know that there can be light at the end of the tunnel.
This article is not meant to be legal advice. It is to let you know your rights under the law. Perhaps it will steer you in the right direction. As this site is targeted for residents of Jacksonville, I will only deal with Florida statutes. I will explain your rights under the Fair Debt Collection Practices Act (FDCPA). This is legislation that was enacted in 1977 to stop abusive collection practices. I quote the Florida State Attorney General How to Protect Yourself: Debt Collections/Consumer Source: The Florida Attorney General’s Office
You may have questions relating to debt collections if you are contacted by a “debt collector,” someone who regularly tries to collect debts owed to others. A debt collector may contact you if you are behind in your payments to a creditor on a personal, family or household debt, or if an error has been made in your account. A debt collector may contact you in person, by mail, telephone, telegram, or fax. However, a collector may not communicate with you or your family with such frequency as can reasonably be expected to be harassing. A debt collector may not contact you at work if the collector knows your employer disapproves. A collector may not contact you at unreasonable times or places, such as before 8 a.m. or after 9 p.m., unless you agree.
A debt collector is required to send you a written notice within five days after you are first contacted, telling you the amount of money you owe. The notice must also specify the name of the creditor to whom you owe the money, and what action to take if you believe you do not owe the money. You may stop a collector from contacting you by writing a letter to the agency telling them to stop. Once the agency receives your letter, they may not contact you again except to say there will be no further contact, or to notify you if the debt collector or the creditor intends to take some specific action. If you do not believe you owe the debt, you may write to the collection agency within 30 days after you are first contacted saying you don’t owe the money. The agency may not contact you after that unless you are sent proof of the debt, such as a copy of the bill.
A debt collector may not harass or abuse any person. For instance, a collector may not use threats of violence against the person, property or reputation, use obscene or profane language, advertise the debt, or A debt collector may not use false statements, such as: falsely implying that they are attorneys, that you have committed a crime, or that they operate or work for a credit bureau or misrepresenting the amount of your debt, the involvement of an attorney in collecting a debt, or indicating that papers sent to you are legal forms when they are not. Debt collectors may not tell you that you will be arrested if you do not pay, that they will seize, garnish, attach, or sell your property or wages, unless the collection agency or creditor intends to do so and has a legal right to do so, or that a lawsuit will be filed against you, when they have no legal right to file or do not intend to file such a suit.
If you have a question about whether the collection agency which has contacted you is properly registered, you may file a complaint either with the Attorney General’s office or the Federal Trade Commission, Correspondence Branch, Washington, D.C. 20580. You may file suit against the collection agency for violating state and/or federal law. If you prevail, you may be awarded your actual damages, attorney’s fees and costs. The protection he mentions is from the FDCPA. The FDCPA is not a Florida law. It is a federal law. The law provides for stiff penalties for debt collectors (i.e. the actual collector or the company or agency for which he/she works). This means that you do not have to put up with collection harassment or being insulted or threatened with such things as going to jail, criminal charges, seizing you wages, calling your employer or friends and family to tell them about the debt. You do not deserve this type of treatment and should not stand for it. They may not misrepresent themselves. They can’t tell you they are from the Sheriff’s Office, “warrants processing”, or an attorney’s office (unless they do work for an attorney). Most of the abusive practices are done over the phone. Letters and correspondence will usually comply with the law.
If you feel that a collector(s) are being abusive you have several options : 1) contact the supervisor or owner of the agency. The one on the phone is usually an hourly employee. Higher ups normally want their people to comply with the law as to prevent costly lawsuits against them.
2) You may also notify them that they are not to call you again. This should be done in writing by certified mail with return receipt so that you have proof that you did advise them not to call you. This is a no call request. You should only do this after repeated incidents. Why do I say this? You may get one call where the collector is rude. The next one you get may not be.
Having done collections for many years, I often had calls where the person was angry from the last person they had spoken to. But by working with them I was able to come to a mutually agreeable solution. So because you had one bad experience doesn’t mean they are all like that.
Many collectors strive to stay within the law. But you do have the right to do this under the law.
3) Contact the Federal Trade Commission (http://www.ftc.gov).
4) Consult an attorney. The bottom line is that you don’t have to take abusive practices. Bear in mind also that they can’t harass you. Calling you one time every 3-7 days isn’t harassment. Calling you repeatedly on the same day after they have done spoke to you may be considered collection harassment. Calling before 8 am and after 9pm is against the FDCPA. An attorney can best determine if it is.
Perhaps the problem isn’t that you are being harassed or abused. You are behind and don’t know what to do. You know you owe the debt but don’t have the money to resolve it right now. Lets look at your options. Debt is either of 2 kinds. Secured or unsecured. A secured debt means that there is an asset that secures it, such as a house or a car. Unsecured is normally a credit card or similar account.
With a secured debt the creditor has the right to take possession of the secured asset if you do not pay. You may also be liable for the balance of what was owed less what the creditor sold it for. With an unsecured debt the debt continues going past due until it “charges off”. This means the creditor has to remove it from the books as an asset. This doesn’t mean they just “write it off” and the debt goes away. Typically they will either send it to a collection agency to try to recover or they may send it to a collection attorney to take action. This is up to the creditor to decide which action they will take.
Now less review your options.
1)Keep the lines of communication open between you and your creditor. They want to work with you to resolve it. It does neither you nor them any good if they have to repot your car or charge off your account. If you have run into problems, let them know.
2) Don’t promise something that you can’t do. If you can’t commit to an amount then don’t say you will. Creditors normally keep track of the number of times you break your promises and it some case it may influence their actions later on.
3) Most secured creditors will allow you to skip one or two payments and put it on the back of the loan. Each one has different rules for this.
4) Most unsecured creditors have programs to work with debtors. The most prevalent one is a “reage” or “cure” program. For instance, your monthly payment is $50. You are 4 months behind. You don’t have the money to catch it up. But you could make that $50 a month payment now. I have seen this scenario many times in my years as a collector. The statement is wanting $200 and they can only do $50. With a “reage” or “cure” program they would just have to resume making the $50 a month and after 3 months the account is current. Which means it will report to the credit bureau as current and it will not be getting late fees since it isn’t considered late any more. Call your creditor and ask about a “reage” program. They may call it something else.
5) Credit Card companies have a minimum payment, which is usually something like 2.5% of the balance plus any overlimit amount. I have seen many people get behind and have their credit affected by it because of this. View the example Credit limit balance Payment % Minimum MIN+ ovrlmt 1000 1100 3.0 $33 $133 In this example the payment being requested by the credit card company is $133. The person may get this and be unable to pay the $133. Instead they pay nothing. Hence their account goes past due.
The next statement the the amount is even greater since there was no payment the month before and it is even more overlimit because of finance charges, late fees and overlimit fees. However if the person had paid the $33(3% of balance) the account wouldn’t have went past due. It would still have gotten an overlimit fee but no late fees since it is still current on the payments. Check your cardholder agreement to determine the minimum payment percentage.
I realize this has been lengthy. I hope it has been of some help. Check back again for the next article in this series. If you know someone this can help, please refer them to the site.
Step 4 - Reducing Your Interest
If you have read the previous articles, so far you have learned how wide spread of a problem debt is, the true impact it can have on your life, and how to determine exactly how much debt you have and how much it will actually cost you. The next step is to attempt to reduce your interest rate. There are several ways you can accomplish this.
We’ll start by looking at what are typically known as the highest-interest debt, credit cards. Believe it or not, one of the easiest ways to do this is to simply call your credit card issuer and ask them to reduce your rate. This sounds laughable at first, but quite often it actually works. Credit card issuers typically charge customers much higher interest rates for the money they loan than what they pay to borrow it from others. This leads to huge profit margins, which means they really want to keep you as a customer, especially if you regularly pay your bill on time. They know you have plenty of options available, and are likely to switch to another credit card issuer if you feel you can get a better deal, so they’re happy to make a slightly smaller profit and keep you as a customer by lowering your rate.
If that doesn’t work, a second option is to find a lower-rate credit card and roll your balance over to it. You may be tempted to go with a card that has a 0% introductory rate. This is probably not your best option though, unless you plan on paying off the card within six months. What you want to look for is a card with a low permanent rate. There are several sites available to where you can compare credit cards from multiple issuers such as Creditor Web, http:www.creditorweb.com.
There are also several broader options available for credit cards and other types of debt. One of which is to look into refinancing any loans you have. Interest rates go up and down over time, and it’s quite possible the rate you can get now is lower than what it was at the time you originally financed the loans. Often there will be a refinancing fee involved, so use the amortization calculator from the previous article to make sure the amount you are going to save is greater than the amount you will have to pay.
You can also get a debt consolidation loan. You need to be careful when considering this option though, because although there are several legitimate companies offering debt consolidation loans, there are also several companies trying to make a quick buck at the expense of others. I highly recommend checking out any company you consider getting a loan through with the Better Business Bureau, especially if it’s not a reputable bank you are familiar with. In addition, once again use the amortization calculator to make sure you are actually saving money with the loan. Just because your monthly payments are lower doesn’t mean you’re saving money. £300 per month for 10 years is going to cost you more than £500 a month for 5 years.
The last option I want to suggest is for those of you who own a home. There are actually two options here, you can take out a second mortgage, or refinance your home for its current value and some additional funds, to pay off other debt. As with the one before, this can be both good and bad. It can be good because these loans typically offer the lowest interest rate because they are relatively safe loans for banks. That is also the same reason they are bad; if you do not pay them off, the bank can repossess your house. The other built-in benefit is by refinancing, you can often get a lower interest rate on your house, which can save you a bundle. As with the previous option, there’s often a refinancing fee, so use the amortization calculator, http:www.destroydebt.comcalculatorsAmortizationCalculatorJs.aspx to make sure you are saving money by doing this.
With all of these methods let me stress that you should be very careful not to fall into the same trap many others have. Too often families will take out a second mortgage or debt consolidation loan to pay off their credit cards, but instead of using this is a means to reduce their debt, they charge up all the credit cards again and end up in a worse situation than they were before. Don’t let this happen to you. Once you have refinanced to eliminate any credit card debt, close those accounts. Just keep one open for emergency use only until you get to a later step in this guide where you can destroy that one, as well.
Debt management plans (DMP) work to reduce your unsecured debt. They can also reduce your interest rates with most types of unsecured loans. To know what plan will work best for you, identify your own needs first. Then look for a company that has answers to your questions, reasonable rates, and a good record.
Identify Your Needs
Before you begin searching for a DMP, identify which accounts you want handled. Interest rates on credit card accounts and bills, such as medical, can be lowered with a DMP, but some types of accounts, like mortgages and student loans, can’t. DMP can still handle payments for these accounts, but they will charge you a fee for the service.
Make a list of the accounts you want handled. Include the lenders’ names and account balances. You can use this information to get quotes from DMP companies. Do not give account numbers or social security numbers until you have researched the company and signed a contract.
Compare Pay Off Dates And Information
As with any service, you want to compare companies before choosing one. To find a reputable plan, ask about pay off dates and the process. Legitimate companies will be able to give you specific closing dates for each account based on the balance and creditor’s name. All DMP receive the same low rate from creditors, so pay off dates should be the same.
Companies that require money upfront or give vague dates should be avoided. Such companies are either more interested in taking your money or are not qualified.
Research Rates
With a list of reputable companies, begin researching rates to find the best deal. Some companies have a small start up fee with monthly charges of no more than 15%. Other companies are subsidized in part, and may have a reduced fee, especially if you have poor credit.
Companies that charge a large, partially refundable initial fee are betting that you will drop out of the program before your accounts are paid. They keep your money without providing service. You should be cautious with such plans.
Check With Others
Another step to checking a DMP company is to look up their record with the Better Business Bureau or your state government. You can find records of past complaints online with these agencies.
Taking the time to investigate DMP companies can save you money and headaches later on.
