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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