Credit Card Settlements

Considerations and Tips to Help You Figure Out if You Should Negotiate and Settle or File Bankruptcy

You are drowning in credit card debt; unable to make even the minimum monthly payments. Take off the rose colored glasses, go through all of your expenses and create a budget so you know whether you should file bankruptcy or negotiate a settlement with your creditors.

• Successful settlers know what they can afford and do not allow creditors or debt collectors to bully them.
• Smart people file bankruptcy so they can get on with their fresh start and rebuild their credit.
• Deniers die a slow traumatic painful credit score death in which they often make their situation worse.

Bankruptcy prevents a creditor from collecting a debt¹ that came due before you filed bankruptcy, against you personally, forever. If the debt was a ‘secured’ debt, like a mortgage or automobile loan, and you fail to pay the creditor, the creditor can still foreclose or repossess the item.

Settlement means the creditor will accept less money than what you owe to settle the account. Settlement can be a lump sum or monthly payments.

There are tax consequences when you settle. The Creditor will send you a 1099-misc income form for the amount the creditor agreed to forgive, which means you have to include this amount as income. If you were ‘bankrupt’ when you settled, which means the value of your assets was less than the amount you owe your creditors, file a form with your tax return to take away the effect of the 1099. In Bankruptcy, it is presumed you are ‘bankrupt’ and the creditor usually does not file a 1099-misc income, but if a creditor does, notify the IRS that the debt was forgiven in bankruptcy.

If you find your budget has room for a ‘settlement’ expense and you have multiple creditors, prioritize the creditors and target one or two to settle first. Your goal is to prevent a lawsuit. The risk of being sued usually goes up if you have not made a payment in 6 months because that is when many creditors ‘charge-off’ an account. A charge-off means the creditor wrote off your debt as ‘uncollectible’ and reported your debt is a ‘charge-off’ to the credit bureaus. Better to settle your debts before a charge-off occurs. The creditor may hand off your debt to a third party collection agency or sell it to a debt buyer. You are still responsible for your debt.

You may hire a debt settlement company. Make sure you have enough money to pay both the Debt Settlement Company’s fees and the Settlement Amount with your Creditors. Some of Creditors may end up suing you if they don’t like the settlement amount offered by your Debt Settlement Company. The Debt Settlement Company may not be able to stick to your budget. It may be hard to tell if your budget will work because you start paying on the settlement agreements as they are finalized. You may have a creditor who refuses to settle. Some Debt Settlement Companies wait until you have paid their fees before they negotiate, while your credit score continues to go down. It is very important to know the total amount you can afford to pay to settle your debts and still maintain a minimum lifestyle². You may pay on Settlement Agreements with some of your creditors while other creditors will sue you. You may not be able to settle with all of your creditors for the amount you can afford to pay on Settlements. This is a financial decision, if your goal is to rebuild your credit, the journey may be quicker by declaring Bankruptcy and using your credit wisely after.

If you are sued, and don’t intend to file bankruptcy, don’t ignore the summons and deadlines. Normally you have 30 days to respond. If you fail to respond then the court will allow the creditor to have a default judgment. Once the creditor has a default judgment, collection actions begin. The Judgment creditor may garnish your wages, levy your bank account, subpoena you for a Debtor’s Exam and record a judgment lien with the county recorder.

Tips for responding to a collection lawsuit:

• Determine exactly who is suing you. If it is a Debt Buyer, you may be able to settle and settle for less. A Debt Buyer buys other companies’ debts usually, for very. If it is a Collection Lawyer hired by the Original Creditor, they may not be so willing to settle.
• Determine when your last payment was and the State Law that applies to your credit agreement, you may be in California and the State Law that applies to your agreement might be Utah. Each State has a Statue of Limitations on how long you can be sued for payment of a debt; the State’s Laws vary from 3 to 6 years. If you make a payment of even one cent during the limitations period you have reactivated the debt. If you admit the debt is yours, in some cases, you have also reactivated the debt.
• Keep your hardship statement helpful, short and truthful.
• Stay calm, if you find yourself losing your temper, hang up and try when you are calm.
• Take notes and if you do agree to settle, make sure you get it in writing. Usually you will pay the Court’s response fees ($200 - $400), enter into a stipulated judgment that is filed with the Court. The stipulated judgment will detail the amount you will pay and that the case will be dismissed when you finish the payments.
• A judgment isn’t always final. If you were sued and not served you can file a Motion with the Court to Set Aside the Default Judgment.
• Judgments can expire after 10 years unless renewed.

Successful Settler Tips:

• Make sure the debt is valid, the Debt Collector or Creditor is required to send written notice of the debt. There are a lot of scammers out there, be sure and report them to the Consumer Financial Protection Bureau at https://www.consumerfinance.gov/.
• Save all your correspondence and if you receive one with a Consumer Notice, follow the instructions and request the Creditor to validate the debt.
• You have rights against Debt Collectors, check the Federal Fair Debt Collection Practices Act found at 15 U.S.C. §§ 1692 – 1692p and the Rosenthal Fair Debt Collection Practices Act found in the California Civil Code §§ 1788 to 1788.33. Take notes when a Debt Collector calls, write down the date, the Debt Collector’s Name, the name of the Debt Collector’s Business, their Address, and what the Debt Collector said. You can ask them to stop calling; to make all future communications in writing.
• If you reach a Settlement Amount, do not pay anything until you have it in writing. Some consumers, years after paying the Settlement Amount, are hounded for balances they thought were resolved. Also, make sure the debt isn’t past the Statute of Limitations for collections; see above tips for settling a lawsuit.
• Catching up on a delinquent account, or paying off a collection account, won’t improve your credit score unless the creditor agrees to remove the late payments reported to the Credit Bureaus. Late Payments stay on your credit report up to 7 years from the original delinquency; Charge-offs remain up to 7 years from the date the creditor wrote the debt off their books as a loss and Collection accounts remain for 7 years plus 180 days from the date of the delinquency immediately ahead of the collection activity. If your debt changes hands it does not restart the clock.
• You can dispute erroneous debt collection accounts on your credit report. Each reporting bureau has its own procedures.

You can sue a Debt Collector:

• Robo calls to your cell phone without your consent are not allowed thanks to the Telephone Consumer Protection Act (TCPA), unless they are on behalf of the Federal Government, and they are limited to three (3) calls a month.
• A debt collector cannot call you for a debt you do not owe. Make it clear that you are not the person they are looking for and if they continue to call you, consult with a Consumer Attorney. Attorney fees are statutory, which means your attorney can collect their fees from the wrongful acting Debt Collector. It is important to take notes, see above in Successful Settler Tips.
• A debt collector cannot call you if you tell them you have an attorney, the name of the attorney and that the attorney is handling your debts.

Tip: dealing with your debts is a financial decision. Consult with knowledgeable experts so that you reach your goals as quickly and efficiently as possible. Economist will tell you that bankruptcy relief actually helps the economy so don’t feel guilty, if you need the relief, seek it. It is very difficult to function when you are unable to pay your bills, your wages are garnished, your bank account is emptied by a creditor or your home is sold to pay a debt. If you use your credit wisely after a bankruptcy discharge, your will rebuild your credit so you can save and make a big ticket purchase. Many auto lenders have special programs with reasonable interest rates for low maintenance, better mileage vehicles and a good payment record will help build your credit score.

¹Unless the debt is for child support, student loans, traffic tickets, certain taxes, there if fraud involved, or death or injury caused by driving under the influence and a few other exceptions. 

²Minimum lifestyle includes paying your rent or mortgage, transportation expenses, food and clothing, utilities, health insurance, and other basics, depending on your situation.