A good first step is to contact a Credit Counseling Agency to assist you in organizing and evaluating the facts of your particular situation. You may be eligible for a Debt Management Program in which all of your creditors agree to take a pro rata share of the monthly amount you pay and agree not to sue you as long as you keep making payments. This approach has a higher chance of success than attempting to settle with creditors one at a time.
In order to effectively settle a debt you have to have negotiating leverage, which comes from the ability and willingness to file for bankruptcy protection. How much leverage you have depends upon if you qualify for Chapter 7 which requires no payments to creditors or if you have to file Chapter 13 which requires payments for 3 years for below median income debtors and 5 years for above median income debtors.
- Calculate your “Debt-to-Income Ratio”. If over 35% consider bankruptcy since your chances of successfully settling with all of your creditors are poor. If under 35% consider a global settlement by offering a pro rata share of your payment amount or lump sum to all creditors. DO NOT ATTEMPT TO SETTLE WITH CREDITORS ONE AT A TIME – I have had many bankruptcy clients who wasted a lot of money doing so.
- Calculate the “Median Income for your Your Family Size”. If your debt-to-income ratio is under 35% and you are eligible for Chapter 7, and willing to file if necessary, then you have strong negotiating leverage. Tell all creditors in a written cease and desist letter (NEVER TALK TO CREDITORS ON THE PHONE) that you contacted a bankruptcy lawyer, are eligible for Chapter 7, would prefer not to file, but will be forced to file if the creditor sues. Then wait. Time is on your side as a debtor. Settlement opportunities ripen with time – they cannot be rushed.
- If you are not eligible for Chapter 7 and have to file Chapter 13, then let creditors know that if they sue you, you will be forced to file and they will receive some payment over 3 years or 5 years.
- IF YOU ARE NOT WILLING TO FILE FOR BANKRUPTCY PROTECTION IF NEEDED THEN YOU HAVE NO NEGOTIATING LEVERAGE.
The Means Test
Be aware that not all creditor’s counsel has settlement authority from their client. I have offered settlements to creditor’s counsel who said they would gladly accept, but their client won’t let them. Sometimes creditors need to write off the loss more than they need any payment from you. That is why I have had clients receive their partial payment checks back in the mail.
Bankruptcy is a last resort after all other options have failed. I have had a small number of clients whose families bailed them out and paid their debts once they told them they were going to have to file for bankruptcy protection. This is rare, but if you have such a family – be grateful for it.
The important thing to do with debt collection is to ignore calls, emails, and faxes and only respond with a letter when you receive a letter in the mail. Scan the letter and email it to me. Then, mail the letter back to the creditor with the attached cease and desist letter. You can include a copy of proof you don’t owe the debt as well. The point is to redirect communication away from you to my office, and to demand proof that you owe the debt.
Many creditors stop pursuing you once you do this. Less than 2% of debtors have counsel, so just sending the letter puts you ahead of 98% of other debtors. It is important to understand that for creditors to make money it is a numbers game. They are testing for non-responders so they can sue and get a default Judgment and garnish wages. That is why responding with a letter to every letter is so important. Keeping communication through the mail is also important because mail fraud is a federal crime, so creditors are much more careful in the mail than they are on the phone.
Get a free credit report at annualcreditreport.com and dispute all incorrect entries online with PDF documentation. Many creditors don’t respond to inquiries by credit bureau’s either. By consistently responding and being diligent about checking for errors on your credit report, you decrease the chances that the creditor will file suit against you. If that happens, then you can look for a civil litigator who can defend you in the lawsuit if that is what you wish to do. I don’t do litigation. Follow the steps above and a suit against you is much less likely. You only need to get into the merits more carefully if you are sued. No news is good news, so if you stop hearing from the creditor that is a win.