One of the most important factors in debt settlement is to know WHEN to begin negotiating. Depending on the timing you can avoid those dreadful delinquency marks on your credit report while saving money all at the same time.
Here’s how the delinquency process works. The moment a consumer stops paying on a credit card or loan, a ticking time clock starts. You generally have anywhere from three to six months before an account gets delinquent enough for a charge off to appear on your credit report. What’s a charge off? To put it simply:
A charge-off occurs when a debtor has become seriously delinquent, typically after 120 days to six months of non-payment. This is also when the original creditor considers the account uncollectable and sends it to a collection agency. The credit report is marked with a negative entry and will remain on the credit for approximately seven years.
3-6 Months of delinquency = “Charge off” shows on your credit report
Just because your account charges off and gets marked on your credit report doesn’t mean the account is no longer collectible. The debt is still legally valid. I’ve had clients in the past who assumed just because their credit report got marked, and a couple years went by without a telephone call from the creditor, that the debt had been “forgiven.” Don’t make that mistake. You have to be in control of your finances and realize that most credit card companies, sooner or later, will try and collect that past due balance.
That being said, there’s an actual gradient delinquency process the debt goes through. It’s essential to know how this works because the rules and regulations apply differently to each agency and to each type of debt. If you get a full understanding of these delinquency timelines, you can make better decisions when it comes to your settlement offer. Depending on whether your loan is secured or unsecured, the delinquency process and the outcome will vary. Let’s begin!
Different Types of Debt
I’m going, to briefly, describe two types of debt so that you have a full understanding of what you’re dealing with. Then, we’ll get into the juicy stuff of how to settle your accounts all by yourself! Yes, that’s right ladies and gentlemen, you can do it too! There are two basic types of debt, secured and unsecured. It’s important to know the difference between these two.
SECURED: A secured debt is a loan backed by an asset or collateral, in other words, actual property. An example would be a car or home loan. If you default on a secured loan, the creditor has the right to repossess the property or vehicle. In most cases, you will not be able to settle these types of debts for less than the full amount, unless the property has already been repossessed, and you have a balance remaining. Here are some types of secured loans:
• HOME LOANS
• VEHICLE LOANS
• FURNITURE STORE LINES OF CREDIT
• CERTAIN STUDENT LOANS
• SOME SMALL BUSINESS LOANS
• TITLE LOANS
• PAWN SHOP LOANS
• LEASED EQUIPMENT (Such as alarm or surveillance equipment)
UNSECURED: This type of loan is typically used to describe credit cards. With unsecured loans, there’s no property attached. These loans are usually given based on credit rating and income alone. Because there are no assets attached to the debt, the creditor has to work much harder to collect the money. Here are some types of unsecured loans:
• BANK CARDS
• MEDICAL DEBTS
• PERSONAL LOANS
• DEPARTMENT STORE CARDS
• PAYDAY LOANS
• BACK RENT (DEPENDING ON YOUR STATE) • ELECTRIC, TELEPHONE AND UTILITY BILLS
Ok, now that you understand the difference between secured and unsecured debts, what does it all have to do with debt settlement? Everything! In order to figure out whether you qualify for debt settlement, you need to know if your debts are secured or not. If they are, you’re at risk of having serious consequences such as repossession and seizure of assets.
For example, I once had a client, Judy D., who hired us to help with negotiating some of her debt. Out of the $45,000 of debt she enrolled, I noticed she had one account for $14,000 that was marked as “Honda Financial Services.” Hmm...I was thinking it was definitely a secured loan, but just to be sure I gave them a call. I explained Judy’s unfortunate financial hardship and offered a settlement which was pretty reasonable. They’re response? “DENIED!” Hoping I could find some more ammunition for my next phone call, I decided to call Judy and probe further into exactly what happened with the loan. What she told me was frightening! Judy explained that she had hired a company which promised to lower her interest rate on her car loan. Not knowing better, she paid them $1500 upfront and quickly signed a contract through her e-mail. After the company processed her payment, quick as lightning, they informed her that she needed to skip several of her car payments in order to get results from the finance company. Poor Judy was “Guaranteed” results from these slimy folks, so she complied and skipped two months of payments.
Everything seemed to be going well, until one morning she opened her door to find her car missing from her driveway. It was repossessed. Long story short, while attempting to contact the company she hired to reduce her interest, her vehicle was sold at auction leaving her with a $14,000 difference from the original loan. What’s truly unfortunate is that the company she hired never got back to her. She eventually found out they had been shut down by law enforcement with the owner thrown in jail, pending trial. What’s the lesson here? Vehicles, mortgages and other secured loans are very important in our lives and need to be considered carefully before jumping into debt settlement. Do not make the same mistake Judy did!
Before you read on, I highly recommend you figure out how much of your debt is secured and how much is unsecured. Make a list and tally it up. What do you have more of? The only time you should attempt to settle a secured debt is if you’re willing to have the asset seized.
For example, your home was burned down in a fire, you found out you were under insured and couldn’t afford to cover the mortgage because you had to rent an apartment in order to live. In that instance, it’s no longer a secured loan. What are they going to repossess? Burned wood? If you can’t afford to rebuild, and decide to walk away from the property, then a settlement would be your best bet. At the end of the day, the bank will charge you, because they’re out the money.
Alright, I think we’ve thoroughly covered that subject. Now let’s get into the delinquency process. As your account “matures” it’ll begin to go through stages of collections. The business of buying and selling debt is quite lucrative. Depending on the type of debt and the original creditor an account can bounce from agency to agency within a relatively short amount of time. Here’s a basic example of how it works:
Joe has a debt of $12,000 to Chase Bank and has been current with his payments for years. One day Joe is informed that his company is closing its doors, and he needs to find a new job. After several months of job hunting and only making unemployment income, Joe can no longer afford his credit card payments. His Chase account charges off and is sold to a debt buyer for $50. The debt buyer attempts to collect the debt from Joe for seven months. In the meantime, Joe finally finds a job and begins to save up emergency funds, hoping to be prepared the next time something like that happens. One day, the debt buyer, sends Joe a letter informing him they’re willing to accept $4000 as a settlement on the account. Joe, realizing this is an amazing deal, cashes in his savings and pays the debt buyer $4000 to wipe out his debt for good. The debt buyer made a profit of $3950! Crazy right!? Aside from debt buyers there are other agencies that can handle an account, let’s break them down:
FIRST PARTY COLLECTION: It’s pretty much what it sounds like. The original creditor will attempt to collect a delinquent account in their offices. Any money recovered is 100 percent theirs, they don’t share the profit. Their collection division is simply a separate department within their company. They could hold accounts in their office for weeks, months or even years.
THIRD PARTY COLLECTION AGENCY: An outside agency that’s hired to collect delinquent debt. They don’t own the account, they’re merely contracted to collect on behalf of a credit card or loan company. Funds recovered are split based on the percentage that’s agreed upon by both parties, usually the collection agency gets 50 percent or more of the amount paid on an account.
DEBT BUYER: These agencies purchase bad debts (usually in bulk for pennies on the dollar) from the original creditors for a fraction of the debt amount owed. Any money recovered goes directly to them. Be wary of debt buyers, some of these agencies have a tendency to abuse debtors through various collection tactics such as:
• Attempting to collect a debt which doesn’t belong to the consumer
• Threatening a lawsuit without having the proper resources to do it
• Failing to provide proof of debt
• Using profanity, harassment, or verbal abuse as a means of collecting
• Disregarding a cease and desist letter
• Calling at work after they’ve been informed to stop
LAW FIRM/COLLECTION AGENCY: Be cautious; a lot of these types of law firms are glorified collection agencies, with one or several attorneys,’ who use their name as legal authority. In other words, the chance of speaking to the actual attorney is slim to none. In this type of company, the attorney will tell the bill collectors that they can call themselves paralegals, so they sound more credible when talking to consumers on the phone. Of course, law firms can file lawsuits against consumers but, so can collection agencies if they have an attorney on staff. I’d recommend finding out who the head attorney is, and check with the state bar to determine their status. There’s a lot more to handling lawsuits which I go over in my other resources.
When an account becomes delinquent you can’t predict how it’ll be handled. Depending on your credit report, assets and previous personal information provided (to the original creditor), your account is evaluated and processed accordingly. They’ll pull your credit report, without asking of course, and decide on the best method of collecting the debt. Depending on your income, marital status, debt to income ratio, mortgage details and more, the creditor will send your account to one of three places:
For those with assets, such as a home, the creditor might send your account to a law firm versus a debt buyer. This is because they consider you a cash cow. They see there’s milk to be had. Sounds funny but it’s the best way I can describe it. Law firms have more weight to their words than a regular collection agency. For most consumers, when they get a collection call or letter from a law firm, that uneasy tingly feeling shoots down their spine and the hairs stand straight out on their neck. When the law firm begins to threaten legal action, most consumers are quick to pay! What does a mortgage on your credit report have to do with sending your account to a law firm?
If you own property you can safely assume that a creditor will have a general idea of how much money you make. You may be asking yourself, “How do they calculate everything?” Here’s how it works: if you own a home, are single, and the mortgage payment is $2800 a month (which shows on your credit report) you probably make a monthly income of roughly $8000 or more. If you’re married, your combined income should be $8000-$10,000. Banks don’t generally approve home loans unless the individual or married couple can afford three times the mortgage amount.
As you can see, a higher mortgage payment clearly reflects your income. Current revolving debt, payment history, previous collections or lawsuits, and many other factors determine the creditor’s course of action.
I can remember a particular client of mine, who happened to get sued by five different creditors within two years! One day my client asked me, “Why do I keep getting sued?” I thought to myself, that’s a good question! I suggested that she pull her credit report so that I could review it. She happily complied, and within an hour I found myself reviewing a 60 page document. After carefully studying each page, I realized there was more to my client than I knew. In fact, I was quite puzzled as to why she hired my company! Apparently my client had only divulged partial financial information upon signing up for our services. From the information we had on file, she had $45,000 worth of debt, owned a modest home and worked part time running a small dog grooming business. According to her credit report she owned four homes, somehow managed to cover mortgage payments totaling $15,000 a month, leased two vehicles (Lexus and Range Rover) and never had a late payment on any other accounts but the $45,000 that we were handling. When I asked her about the four homes she was quick to tell me that they were rented out to tenants. She also said that her husband paid for the cars. The truth remains, no matter what the explanation, the credit history says it all.
Q: Why would a creditor settlement for a lower amount, if the debtor is paying tens of thousands a month on their current debt?
A: They wouldn’t. They’ll either offer a ridiculously high settlement percentage or they won’t settle at all.
If you’re current on some of your accounts and delinquent on others, the creditor will know. Unless your excuse/reason is brilliant and justified, it isn’t going to back up the “financial hardship” story you keep telling the creditor. What’s so interesting is that each person’s definition or measure of a financial hardship will vary – it’s all about their normal living standard. Try telling a creditor you can't afford this month’s payment because you have to cover a mortgage on a $1,000,000 home and the stock market crashed this week. See what they say to that.
Q: What’s the lesson learned here?
A: The credit history and other factors will determine how an account is processed and handled by the original creditor. Nobody can determine or predict the outcome of how a debt travels.
THE PRIME TIME TO NEGOTIATE IS WITHIN THE FIRST THREE TO SIX MONTHS OF DELINQUENCY STATUS “THE PRE-CHARGE OFF PERIOD”
Once the time clock starts, (on the date you made your last payment,) and you reach the three to six month time frame, keep in mind that the charge off date is coming near. Once an account charges off, it officially gets marked on a credit report. If you’re able to settle an account within this time frame, you could save yourself a lot of money and your credit score. If you’re unsure of your charge off date, ask the creditor.
Legally they have to provide this information, and in most cases they want to tell the consumer the date of the charge off, because they use that information as leverage to get a debt collected. Once the charge off date is known, a consumer should mark it down and try to come up with as much money as possible to get the account settled before that time. This threat is a creditor’s ultimate weapon. They’ll tell you that your credit will be ruined, if you don’t pay the account before it charges off, be aware of this because in reality, it's a poor mark on your report.
Q: What’s worse?
A: A bad mark on your credit, or not being able to pay your mortgage and feed your family.
Think about that for a moment. I’ve seen to many people that are so freaked out by their credit score that they literally can’t manage their normal monthly expenses. I’ve talked to consumers that can’t get to work because they don’t have the money for gas, but they keep up with their credit card minimums. I’ve seen where a family of four has gone hungry, and had their electricity turned off, so they wouldn’t have that bad mark on their credit. That is NOT the way to live, and I don’t recommend it. Let’s move on, shall we? Good.
Prior to charge off, creditors will be very forceful. A creditor may call up to four or more times a day during this time. In most cases, the creditor will be more interested in getting the account back on monthly payments than getting a settlement on the account. The reason for this is simple, by getting back on payments consumers will continue to pay exorbitant fees and interest over a longer period of time. This is how creditors make most of their money.
If a consumer doesn’t take advantage of a settlement pre-charge off, it’s not the end of the world! Accounts can be settled at any point after an account charges off, and there’s a possibility that better settlements can be done at that point. On a good note, the moment a delinquent account is settled, the credit bureaus will mark that account as either PAID, SETTLED IN FULL, or PAID NOT AS AGREED. This is considered a more positive rating on a credit report than a bankruptcy.
IF TWO COLLECTION AGENCIES ARE COLLECTING THE SAME DEBT
Sometimes a collection account will be placed with two agencies at the same time. This usually means that the original creditor hired a second company to try to collect an account while the first agency was still working on it. Or it could mean that the original collector is attempting to collect the debt in their delinquency department while also sending it to a collection agency. This is illegal. There CANNOT be more than one company contacting a consumer on the same debt. The best way to handle this is to get a hold of the original creditor and tell them you’re being HARRASSED by a collection agency, and someone in their offices, regarding the same account. This can be leverage to getting a favorable settlement or arrangement with the original creditor.
STATUTE OF LIMITATIONS OR TIME BARRED DEBTS
Consumers often get the statute of limitations relating to debt confused. There are three times lines which occur:
1. How long a debt can be remain on a credit report
2. How long a creditor has the right to sue a consumer for a debt
3. How long a creditor can attempt to collect a delinquent debt
The time line for an account dropping off a credit report is seven years from the last payment made. However, in most cases it’s not automatic. If an account hasn’t been removed from a credit report and is past the statute of limitations, it’s as simple as filling out a form online, making a phone call or sending a letter to the credit bureaus and having it removed.
The time line for filing a lawsuit can vary based on the laws in your state or can default to the federal law which is seven years. In some states, the window of opportunity for a creditor to sue can be between four to fifteen years.
How long a creditor can attempt to collect a delinquent debt is based on federal law, if no state law exists. Let’s say a debt is so old that it’s fallen off of the credit report and the consumer can’t legally be sued for it, but calls are coming in from a collection agency. No matter how old the debt is, the fact remains, it’s still owed. The collection agency can pretty much attempt to collect a debt forever. Of course, all they can do is bug you with phone calls and letters, but, imagine that for 20 years. It can be annoying!
Some creditors make a living from purchasing old time-barred debts. You should be careful, if you pay so much as $5 or even promise to pay, you may restart the debt clock. Again, this depends on your state. To get a general idea as to when the clock started, just ask for the date of your last payment or run your credit report and find out when the last payment was made. That should give you a good sense of how many years it’s been since you paid on your account.
The only way to avoid the problem of never-ending collections is to settle or re-pay your debt. If you’re unable to do this and the collection calls become too much, you can always send them a cease and desist letter. However, this may be a temporary solution. If your account is sent to another collection agency, and they contact you, you would need to send them a letter to stop the calls.
Think about this for a moment. Some creditors will go out of their way to locate and settle an account that may be eight years old or more.
Q: Why do creditors work so hard to revive the dead?
A: Because most consumers don’t know that there's a statute of limitations on debt, and creditors will try any method to get a bill paid. Money is the ultimate motivation.
Keep in mind that bankruptcy, judgments and other financial actions have different time limits or statutes.
As I’ve said before, the statute of limitations can vary by state, a verbal or written contract does play a role. However, the overall agreement for when the time clock starts is generally the same across the United States. I’ve seen creditors go as far as asking a consumer for $5 when they know that the statute of limitations is close. This will extend the time limit for another four to fifteen years immediately because any payment will restart that clock!
To check out the statute for your state, I would suggest visiting www.Nolo.com which is a great website set up to help consumers and small businesses with their legal needs.
WHO TO CONTACT TO RESOLVE MY DEBTS
Remember that little diagram about the gradient delinquency process a debt goes through? If not, go back to page %^%%^^ and check it out. Every time a new creditor buys or is handling an account they must legally send a 30 day letter. It’s essential to keep track of what company has your account so that it’ll be easier to contact them in the long run. Accounts can be transferred to multiple companies, so keeping track of where they are is essential in this process. The FDCPA gives consumers this set period to dispute their debt with collection agencies. I go over more about this later in the book, but, the premise here is that reading every piece of mail is an important part of confronting and ultimately handling your debt! Keep a folder for every piece of mail, by creditor, so that you can quickly reference an account.
Years ago, when I worked at a collection agency, I called a debtor, and she told me that she put the mail from creditors under her couch cushions. She said that she knew she needed to handle them, but didn’t have the money to pay. She didn’t want to throw them away so decided to hide them instead. I asked her how comfortable her couch was, and she told me it was pretty lumpy. I convinced her to go through them, and she finally agreed. She called me later and told me that it was the best therapy she ever had. She confronted and handled the situation and realized that it wasn’t as bad as she originally thought. She was able to work out payment arrangements on her accounts, and was able to sit on her couch for the first time in years.
What about the phone calls? Within a very short time after a payment isn’t made on a credit card or loan the phone calls start pouring in. When the phone rings off the hook, and it’s known that there’s a creditor on the other line, consumers have a tendency to ignore it and let the call go to voice mail. Talking to a bill collector can be scary to most people, especially if they don’t have the money to pay. Bill collectors are known for their aggressive, nasty and threatening nature. I know, because I was one of them for over 17 years!
If you aren’t willing to answer the phone, keep a log of calls, with the name and number of whose calling. When you’re ready to communicate with them, you know who to contact.
Here’s a good example on why this is necessary: Let’s say you have an account with a bank that’s $1,000, you go delinquent for nine months and haven’t written down your voice mails and have thrown all of the mail away. At this point, you want to settle the account. You think the account is $1,000 and with the original bank. When you call, they tell you that the account went to ABC collection agency. You call them, they tell you the account went to XYZ collection agency. You pick up the phone again, and they tell you the account went to MNO law firm. Realize this process could take hours or days. When you call MNO law firm they tell you the account is in their legal department. You’re transferred to that area and notified that the account is $1,800, and a lawsuit is about to be filed. You originally called them with a $500 offer because you thought the account was $1,000.
Let me give you the opposite scenario: Your account of $1,000 does delinquent. You get voice mails and letters from the bank. Then you see a letter from ABC collection agency stating the balance is now $1,200, and you’re getting calls from Susie at an 800 number. You don’t have the money to handle the account at this point. So you wait. You get a letter from XYZ collection agency and it states that if you pay $600 by the end of the month, the account will be settled. You call them immediately, negotiate and pay $500. In this case, you avoided a lawsuit, saved money and the headache of trying to locate that account.
Remember, the mail shouldn’t be put under a couch cushion or thrown in the garbage. Ignoring the mail doesn’t make the problem go away, it makes it worse. I can’t tell you how many of my clients were sued and never knew it until their wages were garnished. They didn’t confront their mail and deleted every message from their answering machine or voicemail. In the long run, they made it harder on themselves because they didn’t know what was going on with their own debt. To make things easier for you, I’ve included a call log in this book, so start using it today!
If the accounts are so old that no phone calls or letters are coming in, then the best way to locate an account is to pull a credit report. Realize there are several websites out there that claim you can get your “FREE” credit report, there’s only one legitimate website that can do that. Www.AnnualCreditReport.com is the official site that allows you to pull your free credit report once every 12 months from all three reporting agencies.
Alright, now that we have some of the basics down, I’m going to give you a quick overview on what deals you might get depending on how old your account is.
ONE MONTH DELINQUENT: The calls will start to come more frenquently. Most of the time, the collector on the other end of the line will, by any means possible, get the consumer back on their normal schedule. They have programs that can help consumers stay on track to keep those minimums coming in consistently. In most cases, no settlement will be available in this first thirty days of delinquency.
TWO TO THREE MONTHS DELINQUENT: More aggressive collectors will start calling. They have the same thing in mind and want nothing more than to get a consumer back onto their normal payments. They’ll go so far as to reduce interest or late charges. They may be willing to settle during this time, but the percentages will be higher. There are credit card companies that have different collectors for each month of delinquency and different people could call every month to collect a debt. At this point, the automatic dialers will be burning up the phone, and when a consumer answers there will be a short lag for someone to come on the line. In some cases, there’s a recorded message to call a certain company back and the human element is completely missing. This process saves the banks a fortune in wages.
Q: Wouldn’t it be nice if they passed that savings onto Americans?
A: Yea, like that’ll ever happen!
THREE TO SIX MONTHS DELINQUENT: The eligibility for a settlement is very high. The closer you are to the charge off date, the more willing the creditor will be to settle the account, and give you a better percentage. However, their main objective is still to get you back on regular payments. A debt of $10,000 could be settled for 65 percent off; that’s a savings of $6,500. At this point, the most important thing to do is to pay attention to the charge off date and save as much money as possible to try to settle the account.
SIX MONTHS TO ONE YEAR DELINQUENT: The account has inevitably charged off and is probably with a collection agency. Some credit card companies will send an account to one agency, if not collected in a short time, will send it to another agency and so on. The account could change hands many times during the process. The account could stay with the credit card company’s collection department and never be sent to a collection agency at all. The account balance will certainly grow in size because no payments were made and interest and late fees continue to accrue on the account. Realize that a collector may offer a 50 percent settlement, but in reality, because of late fees and interest, the percentage could be only 20 or 30 percent off the original balance. I’d highly recommend offering 10 percent of the balance or less when starting to negotiate with a creditor, that way there’s room to move up, and it could net the best deal.
MORE THAN A YEAR DELINQUENT: Even though a consumer could get sued at any point in the process, even three or four months after delinquency, a year delinquent is the prime time that creditors consider lawsuits. If a consumer has assets, such as a home or a good job, there's a higher possibility that they'll be sued. Either way, anybody can get sued for non-payment of debt. A lawsuit will prolong the amount of time they can collect a debt and, if a home or job is involved, the law firm is more likely to recoup some of their money on the account. There’s a lot more information on lawsuits and judgments that I go over in my other resources. If a lawsuit hasn’t been filed at that point, settlements are the best way to go in resolving an account. Again, start out at 10 percent of the balance and work up from there. If a lawsuit was filed, usually the settlement percentages are much higher, typically 65-80 percent of the balance. That’s a big difference!
Remember, collectors are only human, believe it or not. They’re doing the job that nobody wants, but as they say, somebody has to do it.
In the next Chapter, I get into the types of companies that you’ll be dealing with and what, by statistic, they’ll be willing to settle for. Even though there’s no guarantee on any settlement, I’ll be giving you my experience on each type of company and what to look out for.
