Got Debt So Bad It's Defaulted? 3 Ways To Deal
Getting into debt is easy. Winding up in default is easier yet; all you have to do is not pay your bills for several months! So how do you deal when the lender doesn't want to wait around for you any longer and has moved on to more drastic action? Here's three ways, only two of which are advisable.
1. IGNORE THEM
Ignoring your debts is not really a good option, but it is the option many people take, hoping their creditors will forget. But creditors have long memories, and they like to exploit lengthy statutes of limitation. The longer you go without doing something, the bigger your debts will get.
Credit card companies, for example, often hang onto your debt for as long as they can, racking up late and over-limit fees and 29% interest (or more) before they must write off the debt. Then they let it sit—or sell it—while it accumulates interest at that high rate for as long as possible. When they sue you a few months before the statute of limitation expires, the debt is twice what it was, or more.
Ignoring your defaulted debts means serious damage to your credit reports, frustrating phone calls from debt collectors, and possibly a lawsuit down the road. If you are lucky, your debt will be sold a few times and end up with someone who cannot prove they own it. Even if you beat the debt in court, you will have expended many hours and dollars for a Pyrrhic victory, since you may still wind up with negative information on your credit report, plus an attorney's fee.
So option one really isn't an option. Let's look at the other two.
2. NEGOTIATE A SETTLEMENT
You could just pay up, but it never hurts to ask for a discount, especially when a lot of what you "owe" probably consists of ridiculous fees and interest. Always ask to settle the debt for less, and suggest a compromise of your own in return.
A few suggestions:
1. Just like used cars, negotiate for a total price, not for a monthly payment;
2. Negotiate an "installment plan" only after arriving at the total price;
3. Record the phone call, asking for permission if your state requires it—just explain that you want to make sure you have a record of the settlement; and
4. Demand a confirmation of the agreement in writing.
Before you agree to anything, you should also look into the tax consequences of settling. If you admit you owe the debt, any amount the creditor "forgives" may be considered income for tax purposes. Depending on the size of the debt, this could be a lot of money, so it makes sense to talk to an accountant or at least do some research on your own.
3. FILE FOR BANKRUPTCY PROTECTION
Creditors, whether banks, doctors, or debt buyers, want you to think "bankruptcy" is a dirty, dirty act, done only by deadbeats and ne'er-do-wells. It's not. It's a perfectly legitimate tool for conducting business. Witness the number of companies making use of it these days.
Bankruptcy is sometimes called a financial weapon of mass destruction, but I prefer to think of it as a Project Genesis for your finances. Bankruptcy can give you a clean start, hopefully so you can avoid getting into the same problem with credit all over again.
When should you consider bankruptcy? Take a good, hard look at your finances. Can you see a way out of your debt? If not, it is probably time to talk to a bankruptcy lawyer.
Sam Glover is a consumer rights lawyer, enemy of shady debt collectors, previous Consumerist contributor, and writes the Caveat Emptor blog. His column appears the first Monday of every month on Consumerist.
(Photo: walknboston)
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Comments:
Wow! Its nice to see Consumerist portray bankruptcy positively. It gets a bad rap.
Why not try Consumer Credit Counseling before filing for bankruptcy? They re-negotiate interest rates for you with the credit card companies and help you work out one affordable monthly payment. It will actually help your credit instead of ruining it for seven years like bankruptcy does.
I'm surprised Consumerist skipped this obvious step. But then, maybe I shouldn't be. Sad.
Let's not forget bankruptcy stays on a persons credit report for 10 years. Being late on a payment stays on your report for 7 years. That's a long time to pay for your sins.
Also, I thought the credit card companies lobbied for laws to protect credit card debt from bankruptcy.
@ Snickers,
those places IMO, do more harm than good. I've been told on several occasions that those places are owned by the credit card companies themselves... And FYI, bankruptcy doesn't ruin your credit for 7 years. It's only on your credit report for 7years but up to 10. It's been almost 5 years since I filed and my credit score is now hovering around mid 700's.. And I have absolutely no credit card debt, well save for a gas card.. It was the best financial decision I have ever made..
There are a lot of "Consumer Credit Counseling" that are wolves in sheep's clothing. The portray themselves as non-profit and steer the poor sap to their for profit companies.
I'm kinda glad they were skipped. Most can't do anything you can't do yourself anyway.
I have a friend who has, for now, chosen option one. It's gotten so bad I will call and leave messages saying "Hey ___, it's lalaland13, not India! Call me!"
He thinks most of them are calling from India. I'm not sure what to tell him-he knows he shouldn't have gotten in that situation, but he just moved to another state and it's hard to get out now. Hmm.
Stay away from debt consolidation/credit conseling. The date you finished paying DC/CC is exactly the same as the date a bk is discahrged. No kudos for paying the bills over time you could BK and start over faster.
Bankruptcy is a blessing. Do it now. Do it.
@wcnghj: Wrong. You can't just tell them to stop trying to collect on you, but you CAN let them know you want all future contact to be written only and hence no more phone calls.
When I was younger I ran into credit card debt hell. Both mine and my wife's fault at the same time but when we called the CC companies and asked for help, they said they could do nothing to help us unless we missed payments for 3 months. I wasn't going that road.
We went to a very credible debt consolidation service. They told us that we didn't make enough money for their plan and told us they could not help us.
So I called the CC companies back and told them to work with us or we will file for bankruptcy and they get nothing. Again, they can't do anything until we default in 3 months I then told them fine and hung up.
So I called a bankrupt attorney and meet with him. Granted this was back in 1993 so the laws where different. Anyways, he told us it would cost 800 dollars to file and he only needed 500 to get the ball rolling and that day he was given 500 dollars. In a matter of a few months all our debts where gone and we opted to not included the cars in the filing which we could in our state but we could give either car back to the bank at anytime if we choose to.
Yes, it sucked to file but I have no problem admitting it. I did my best to pay the debt but nobody would help us when we begged and pleaded for it. The bankruptcy is no longer on my credit report. My credit has been reestablished but I don't carry CC balances anymore and I learned my lesson.
I actually went through this process. Basically an ex had run up a credit card that was in my name and which I had (foolishly) given him access to.
I made payments on it for a bit, but then became unemployed. The credit card bills were the first to get ignored, and it slid into default (along with some other debts: I negotiated a repayment plan on a second card after defaulting on that too; I also got my student loan into deferral).
Long story short, since I had gotten ornery about this particular debt (I hadn't run it up so I didn't particularly feel like paying it and the ex had nothing so pursuing him was useless) I ignored it. I'd challenge it on my credit report just on the off chance they'd forgotten about me, and I'd get a call from a collections bureau about once a year. In the meantime, I'd gotten my affairs in order was working again and had pushed my credit score up to ~690 even with a current default out there.
Then they decided to take me to court. Total amount claimed with fees and interest was around $15k (the last balance on the card was about $9500). I knew that representing myself was a losing proposition, so I hired a lawyer. We filed a counterclaim based on some minor FDCPA infractions I'd collected over the years and then started negotiating. Total costs in the end: $675 for the lawyer and $4000 to settle (about half the original amount).
Lessons learned:
1) These things don't go away. Deal with them.
2) Keep everything they ever send you. Look for the slightest FDCPA infractions. Keep copies of all correspondence and send it via certified mail. Basically, if you're heading into court, you need all the leverage you can get.
3) If you have the money to settle, make them an offer. Chances are, they'll take the bird in the hand.
4) Threaten bankruptcy. They know they'll be at the end of the line when it comes to creditors, behind the mortgage company, the student loans, etc. But be prepared to follow through if negotiations fall apart.
5) Unless the amounts involved are small, get a lawyer. Even if the lawyer is doing everything you'd be doing, having representation shows them that they'll be in for a fight if they choose to go to court. A good lawyer will also make sure that everything gets settled all fair and square. Keep in mind, lots of lawyers work both sides of the street here, representing creditors sometimes and debtors others. That's a good thing—they know the tricks of the trade. Just make sure there's no conflict of interest. And always be 100% open, candid and honest with your attorney. He or she has got to know everything about the situation.
If yoru options are credit counselors and bankruptcy CHOOSE BANKRUPTCY. Credit counselors pay your bills off for you and get lower rates, BUT, the late payment is still on your credit report. Your score will be low until it is completely paid off, and in most 3-5 year plans yoru score will go lower. A bankruptcy will IMMEDIATELY lift your score. Number one, your debt is now zero, so the likelihood you can pay other debt is good. Number two, you can not file again in the near future so you are able to get credit. I saw people who had scores at the high 400's to low 500's jump to mid 600's just from bankruptcy.Yes, it stays on your credit report. SO WHAT. The purpose of a credit score is to get you credit at the price (rate) you qualify for. A 500 score and no BK or a 650 score with a BK is no comparison in cost.
I wish my wife and I hadn't chosen the bankruptcy option!
We could have given our house back and dealt with the medical bills, but because we let our attorney deal with it, our house went into foreclosure.
Finally after three years of hard work and finding out about Dave Ramsey's Financial Peace University, I'm now about to close on a house.
Never pay a collection agency a dime without negotiating a removal from your credit report. And get it in writing before you give them a penny of your money. Better yet, if you can, never deal with the collection agency, only deal with the original creditor.
If you're having issues with any of this, I highly suggest reading up over at Credit Boards. I've learned so much from that place.
I'm hearing stories like don't pay your bill for at least 3 months and ignore all mail phone calls from that credit card company . After 3 months you ask to settle . I was also told what the poster has stated ; make sure you ask for and get a lump sum offer . Do not even think about a payment plan because they will tease you with lower rates and waived fees for your premissed payments debt.
Apparently alot of credit/debt counseling companies and lawyers recommend the controlled ignore approach . On one hand you're ticking them off on the other they reach a point where they're forced to settle or just write off your debt . Personally I wounld do anything that could preserve my credit rating but many just want to get their credit troubles out of the way .
How ironic after the last set of bankruptcy changes in 2005 the credit card companies starting jacking rates and fees for just about any reason at all .
@fantomesq: Bankruptcy, when abused, is legalized theft. Most people who file are in real need, but unfortunately a number of people take advantage of the system and commit fraud.
@wcnghj: I wouldn't recommend that, it often leaves a creditor with no choice but to sue. A cease and desist letter is not an automatic get out of debt free card.
@lfrandom: LIMITED cease and desist. Tell them they may only contact by US Mail.
OR Full cease and desist. No contcact, and yes, you can force them to comply. If the debt was assigned they might sue, if this is a junk debt buyer you should be fine.
@snickers: Bankruptcy stays on your credit report for up to TEN years. The SEVEN year thing is how long DEBTs stay on your credit report.
If you are close to the seven years on the debts, you may be able to avoid the bankruptcy. Sometimes debts are not collected on. If the debt gets marked uncollectible, and does not get bought by a junk debt buyer that specializes in those, then it may well just go away. It happens.
@foodporncess: Absolutely only ever deal with the original creditor. Only the original creditor can remove any credit report trade line that is in their name. Send a cease & desist to the collection agency, and then contact the original creditor.
Do note that "original creditor" in this case refers to the party that owns the debt. In many cases debts are bought outright and there's a new owner. If a party CLAIMS to be the owner of a debt, then DEMAND PROOF in writing with a trail back to the "first creditor". There are some collection agency scams where the scammer claims to own the debt. And they have all the info about the debt to convince you, though they got that from various stolen collection portfolios. Just because they know the original amount, and the first creditor, does NOT mean they own it now. You could end up paying them money then finding the first creditor never really sold it and is suing you.
I'm really pleased to see Consumerist say something positive about bankruptcy. It's true that it should only be utilized as a last resort, but there are a hell of a lot of folks living paycheck to paycheck, and last resort sneaks up quicker than they expected. I work in a bankruptcy law office, and can tell you that only a very VERY small number of debtors try to abuse the system. The majority of people who file, from my experience and interaction with them, are people in situations exactly like my friends, my neighbors and myself. They're doing the best they can, and get hit by an illness, job loss, or other family emergency. How many of us know we could pay our bills in case of a serious illness (even with insurance) or without an income for several months? 10 years on your credit report=bad. Not paying debts=bad. But when you're talking about just trying to pay for food, rent and transportation to and from a job, your choices look a little different.
Beware of the scam of fraudulent debt buyers.
In many cases, debt collection agencies, which normally are understood to work on commission to collect a debt, will also BUY debts. This puts them in a debt buyer role. They may collect the debts they buy, or they may even place them with other collectors.
The point is, information about debts gets passed around. It gets in the hands of many collection agencies, and either they are crooked, or their security is lax and crooked employees get the info and sell it. In any case, the info gets in the hands of a scammer and then scam begins.
The scammer will claim they bought the debt. They may do any number of means to try to collect the debt, including following all the Fair Debt Collections Practices Act to the letter. Unfortunately, they are also playing with a CRITICAL FLAW in the FDCPA. When you ask for proof of the debt, they will send you what is called "confirmation", which is nothing more than the name of the first creditor, and the original amount. What a "confirmation" tells you is enough to merely identify the debt. Anyone that kept a copy of your debt info can send you this and make a claim.
What the scammer will NOT do is send PROOF that they own the debt. They can't send it because they don't have it. They will then say they are not required by law to send anything more than the confirmation (which, unfortunately, is a true fact).
Stand firm and demand proof. Legitimate debtors know (or at least their lawyers know) that if the debt is taken to court, they can be required to show they have "standing to sue", which is that they are the true owner of the debt that has been purchased. If the matter does get to court, you need to ask the court to require this, AND if produced, show the court that you already asked the creditor for this proof in advance which they failed to provide ... and as a result the creditor is wasting the courts time bring an action that could have simply been settled out of court by showing this proof. You state any diligent person aware of scams will demand such proof.
Sometimes, debt buyers actually do not have this info and may not be able to get it. That is just unfortunate for them. A debt buyer buying legitimate debts needs to be sure they are getting a valid portfolio file (documents) for every debt in the portfolio they buy.
If you fail to appear in court, the scammer gets a default judgment. The scam depends on the fact that more than 80% of people fail to show up in court, thinking there is nothing they can do since they don't have much money. Now the scammer can have the sheriff come take certain property, or they can place liens on cars or real estate. Even though it was all a scam, it is now very hard to undo it and have the judgment vacated.
@Blinky987: Actually, the exceptions to discharge are quite small, and they don't consist of individual industries (other than student loans, of course). Check out Bankruptcy Code Section 523 for all the exceptions. It's mainly student loans, taxes that aren't old enough, governmental fines, certain judgments (such as dui), child support, and obligations incurred fraudulently. There are no exceptions for "debt from industry A" etc.
As for this article I have to say that it makes a great point. I do pro bono bankruptcy filings at my law school, and they are a lifesaver for certain individuals. I no longer think of bankruptcy as being a "bad" thing to do. Also, you would be surprised how many companies will lend to you after you file. Probably because they know you won't be able to file again for 8 years.
Though I will add, ignoring debt can be a viable option if you are "judgment proof." In some states you can't be garnished if you make under a certain amount or get any type of government/state assistance. In these cases, since the debt wouldn't be payed anyways, it makes more sense to just ignore the creditors than it would to file bankruptcy, especially since the debt will fall off your credit report before a bankruptcy filing would.
@lfrandom: The bankruptcy code does not discharge fraudulently incurred debts. I don't think you know what you're talking about.
@snickers: Actually many companies are more willing to lend to bankruptcy filers as they know that the person won't be able to file again for another 8 years. Besides, if you are at the point of contemplating bankruptcy anyways your credit is probably already shot.
@NotYou007: Just fyi to people who might be reading this thinking of bankruptcy, the $800 amount was what his attorney charged to file for them, not the amount of the filing fee. It only costs $299 to file a bankruptcy as of 2009.
The general ignorance of the public about bankruptcy just goes to show you how well the CC industry has "trained" us. I have had people say to me that "you can't file bankruptcy anymore because of the 2005 law change", or "if you file, the courts take all of your possessions". Credit card companies love public ignorance!
I'm having trouble understanding why it's at all acceptable to take money from someone, promise to pay it back, fail to pay it back, then offer them pennies on the dollar for money you've already spent.
We complain about corporate greed an awful lot here on Consumerist - there's plenty of it to complain about...
But this the polar opposite - credit holders (more often than not) letting their greed over rule their ability to pay for goods/services and making someone else to pay for it .
Dave Ramsey has excellent advice on option 1 - get their settlement offer in writing, never go for installment plans as these require either providing EFT access to your checking accounts or postdated checks which also offers them all your banking info, scrape together the lump sum payment & send it as a cashiers check with a copy of their offer letter. Then store your copies of the check/letter, forever(!). I wish I'd known to do these things - in the 1990s, I got very far behind on a BOA credit card - couldn't even make the minimums on an original $2000 debt. after 9 mos of not making the minimums - with penalties, late fees, etc, my account was sold to a collector who calculated my debt at $5200. Yes, in 9 mos it went from $2000 to $5200. I went for their installment plan, at $250/month for 24 months, and their eft actually occured for 30 months 'due to accrued interest on the debt.' I had already paid $800 over the revised 'owed amount.' If I had received their offer in writing, I could have contested this theft. BUT I was young, lazy & stupid...
sorry - Dave Ramsey's advice on option 2 - negotiate with them. And the black mark on my credit report showed debt paid for less than owed. well, I guess BOA didn't get the full amount, it was the debt collector who made out in that transaction, buying the debt for a fraction of it's real value and collecting 200% of it from me.
@Skaperen: I had a debt collector contact me trying to collect on a 'zombie' debt, and when I asked for this proof, they sent me some miscellaneous printouts, nothing with the original debt, or even the original account number. It got as far as a letter from an attorney. I responded with a letter of my own that specifically said that I did not acknowledge the debt, but that I would offer $50 to resolve the matter.
I never heard back from them.
I have an ex-boyfriend who basically took option 1, figuring that he would just wait for them to drop off of his credit report after 7 years. I wonder if that worked out for him or if they've found some way to keep it on there.
Corbin, your assertion that a debtor can not file for bankruptcy more than once every seven years is only partially true.
A debtor can file as often as they wish, but they can only receive a discharge in a Chapter 7 case once within eight years of their last Chapter 7 that led to discharge or once within six years of their last 13 that led to discharge.
They can receive a discharge in a 13 only once every four years if their last case that led to a discharge was a 7 and once every two years if it was a 13.
@EllaMcWho: I know someone going through negotiations with Bank Of American and their advisor said the credit report is only supposed to ' settled ' on it .
We did option 3 a few years back, after encountering a perfect storm of debt: a long period of unemployment, a huge bill from a plumbing emergency, and an unexpected week in the hospital.
Anyways, it's the best decision we could have made. Our situation is much more stable now, and while it's on our credit report, it's not a huge deal because we've been avoiding taking out any loans anyways.
@scoli83: The substance is still the same, even if they *can* file. My mistake for not getting the form right but it doesn't really matter anyways.
No, the substance is not the same at all.
A debtor that only files Chapter 13 can file as often as they want and can receive a discharge every two years.
You would be correct if a debtor only filed Chapter 7, but most consumer debtors are forced in 13 because they fail the means test.
Your assertion that debtors who have received discharges got lots of credit because of their inability to file for bankruptcy is totally incorrect.
@grithfang: I'm actually working with a credit counseling agency right now. They are for-profit, but the fee is low, and they are doing good work. I chose the route where I pay everything I owe over five years, rather than trying to negotiate settlements for less than the full balance. I feel good that I'm paying everything down, they negotiated awesome interest rates for me, my credit score has actually improved quite a bit, and I'm doing way better than I would if I tried to pay everything off on my own. I've heard nightmare stories (more often about ones that settle for "pennies on the dollar"), but there are some good companies out there.
I looked into bankruptcy once just because I was curious, and it seemed like a lot of industries have lobbied their way into being protected themselves under bankruptcy laws. Everybody knows (or eventually discovers!) that student loans don't disappear under bankruptcy, but there were tons of things that I assumed would go away that didn't.