The Chance To Improve Credit
If your debt is not near its statute of limitation or credit reporting deadline, your unpaid debts may be causing harm to your credit score. As your payment history makes up 35% of your FICO credit score, making payments towards your debts may be just what you need to give your score a boost.
You Still Have To Pay Back Time
That being said, I want to tell you right up front that just because the statute of limitations may have passed does not mean that you do not still owe this debt. You do and you will until it has been paid or successfully settled.
But there is not much a collector can do to actually collect on the debt besides contact you constantly, as you have discovered. They cant continue to do that if the debt is time-barred and you inform them in writing not to contact you again.
However, old debts have a habit of resurfacing because they get packaged and resold in bulk to other collectors on a fairly constant basis. Your debt could be resold in one of these transactions and then you may have to go through the same process of asking for verification and informing the collector in writing that the debt is past the statute of limitations all over again.
This means that the calls could continue for a long time and each time you will have to do the same thing.
Make Payments Over Time
If you say you can pay the debt in monthly installments, the agency has little incentive to compromise for less than the full amount. It still has to chase you for payment, and it knows from experience that many people stop paying after a month or two.
Before a collection agency will consider accepting monthly installments, it might have you fill out asset, income, and expense statements. Two points to keep in mind:
- You could be giving the collection agency more information about you than it previously had, like where you currently work and bank, and that might not be to your advantage.
- Don’t lie. You might be signing these forms under penalty of perjury. It’s unlikely that you would ever be prosecuted for lying on the forms, but if the creditor later sues over the debt, lies can only hurt your case.
If you reach an agreement with the collector, get a written confirmation. For help in crafting a payment plan offer, get Nolo’s eForm Offer to Pay Debt in Installments.
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Settling Debt For Less Than You Owe
If you cannot afford to pay off your credit card debt in full or manage minimum required payments, then the next option is to settle your debts for less than you owe. You pay a percentage of what you owe, and the creditor agrees to discharge the remaining balance.There are two ways to settle your debt:
The recommended method to settle debt is with a Consumer Proposal through a Licensed Insolvency Trustee. The trustee will determine how much of your debt you can reasonably afford to repay. Then they will set up a repayment plan. You make monthly payments to the trustee that they distribute to your creditors. Once you complete the payments, the remaining balances are discharged.With a debt settlement program, a private company will help you find a monthly payment you can afford. They keep those payments in an account until there is enough money to make settlement offers to your creditors. They offer your creditors a percentage of what you owe and if the creditor agrees, the money is paid out. Then the creditor discharges the remaining balance.
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If you are struggling to make your monthly credit card payment, or cant catch up with your past-due payments, we may have solutions for you. The sooner you contact us, the sooner we can determine what help may be available. We will review the nature of your hardship and your financial information to determine what payment solutions you may qualify for.
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Determine If Youre A Good Candidate
Answer these questions to decide whether DIY debt settlement is a good option:
Have you considered bankruptcy or ? Both can resolve debt with less risk, faster recovery and more reliable results than debt settlement.
Are your debts already delinquent? Many creditors will not consider settlement until your debts are at least 90 days delinquent. Bovee, the debt settlement coach, says youll have a better chance of settling a debt with the original creditor that is around five months delinquent, which is around the time many creditors will sell the debt to a third-party debt collector.
Do you have the money to settle? Some creditors will want a lump-sum payment, while others will accept payment plans. Regardless, you need to have the cash to back up any settlement agreement.
Do you believe in your ability to negotiate? Confidence is key to DIY debt settlement. If you believe you can, you probably can. If your confidence is wavering, DIY debt settlement may not be the best route for you, Bovee says.
You Wont Have To Pay Any Fees Until Your Debts Are Settled
In 2010, the Federal Trade Commission enacted the advance fee ban on debt settlement companies. The rule prohibits any debt relief company from charging fees before settling or reducing a customers credit card or other unsecured debt.
This means a debt settlement company cant charge you any fees until theyve officially settled at least one of your debts. So, you shouldnt be required to pay any setup or monthly administration fees on a debt settlement program. If you do, then the company must offer a money-back guarantee. If they dont, its a sure sign of a debt settlement scam.
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Debt Settlement Might Create Income Tax Liability
Example. Claire owes $12,000 on a credit card and successfully negotiates with the credit card company to settle the debt for $8,000. She pays $8,000 to the credit card company, which forgives the debt and reports it to the credit reporting bureaus as “paid in full.” The credit card company reports the settlement to the IRS, which notifies Claire that she must pay taxes on $4,000, the amount the credit card company forgave. To the IRS, the settlement was equal to the credit card company giving Claire $4,000.
Pennies On The Dollar Can Be More Money Than You Might Think
Debt settlement companies tend to use the catchphrase pennies on the dollar. That almost makes it sound like you can get out of debt with the loose change stuck in your couch cushions. But thats not really the case.
According to the American Fair Credit Council, the average settlement amount is 48% of the balance owed. So yes, if you owed a dollar, youd get out of debt for fifty cents. But the average amount of debt enrolled is $4,210 and the median amount is $25,250. That means you should still expect to pay a hefty sum to get out of debt. The more you owe, the more money youll need to settle your debts.
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Benefits Of Diy Debt Settlement
The primary benefits of pursuing a do-it-yourself debt settlement revolve around cost. A DIY settlement avoids the fees you might pay to a professional debt settlement company.
A debt settlement company may charge fees totaling 15% to 25% of the settled amount. So, if youre settling a $10,000 debt for $5,000, you could be hit with a fee as high as $1,250 or even more.
If you choose to negotiate a DIY debt settlement, you dont relinquish your personal control over the timing of the process.
What Should I Do First When Negotiating Debts
If you’re sure you want to settle your debts rather than filing bankruptcy or some other option, understand the following key points before you start negotiations with the debt collector or collection agency.
The collection agency didn’t lend you the money or extend you credit initially. A debt collector doesn’t care if you owe $250 or $2,500. It just wants to maximize its return, which might be a percentage of what it collects or whatever it can collect over the pennies on the dollar it paid for the debt.
Time is money. Each time the collection agency contacts you, whether by letter, call, email, or text message, it spends money. The agency has a strong interest in getting you to pay as much as you can as fast as possible. It has less interest in collecting 100% over five years.
Review your debt priorities. It’s also important to review your debt priorities before you start negotiations. If you don’t have the cash to make a realistic lump-sum offer or to propose a payment plan, don’t even talk to the collectorâyou might make promises you can’t keep or give the agency more information than it already has. Or, worse, you could say something that turns an old time-barred debt into a brand-new debt.
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Dont Forget Your Taxes
You may have to pay taxes on the amount of forgiven debt, which is the amount you ended up not having to pay because of your settlement agreement. Take this into account when planning your budget for the year. You dont want to settle your debt just to get into tax debt later.
Some Real Examples Of What Debt Negotiators Can Do For You
Debt.com works with a network of debt relief providers, including the two types of professional debt negotiators that we described. So, lets look at two examples of real people that worked with a professional debt negotiation team. Both people had similar amounts of debt, but different needs and goals.
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Tips For Getting The Right Credit Cards For Your Needs
- Most Canadians dont need to have dozens of credit cards in their wallet. Of course, having several increases the likelihood that you will face challenges with debt.
- As such, you must only get new credit cards when you have a clear need and the means to manage the debt.
- Review your budget carefully before you apply for a new card to make sure you can afford the monthly payments.
- Always try to maximize your score before you apply for a new credit card.
- If you have balances on your current cards, try to pay them off before you apply.
- Only get a balance transfer credit card if you can afford to pay off the consolidated balance in full during the 0% APR period when you first open the card.
Accept That You Cant Win Them All
Even though most companies are willing to talk about wrapping up a case before it goes to court and are interested in settling with you, you wonât always be able to settle a debt before it goes to court. There are unreasonable companies and unreasonable people who are unwilling to budge. There are also times when both sides are just too far apart to make a deal, and negotiations fall apart. As difficult as it can be, thatâs just the way things play out sometimes.
Additionally, if you arenât able to settle one or more of your debts, you could consider filing bankruptcy as a different way to seek debt relief.
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How Credit Card Debt Relief Affects Your Credit
If you cant eliminate debt on your own, then you can expect your credit to take a hit as you get out of debt. Any debt solution that repays what you owe on an adjusted schedule will result in at least some credit damage. Solutions that dont repay everything you owe will damage your credit more.The more drastic a solution, the worse you can expect the credit damage to be. However, these types of solutions can give you the clean break that you need from debt. Then once your debt is gone, you can begin rebuilding.
Remember, nothing in credit lasts forever. Even the credit score damage caused by bankruptcy and debt settlement will drop off your credit report in six years. Whats more, even before the penalties expire, you can begin rebuilding your credit.
The important thing is to get out of debt first, then you can focus on improving your score.
How To Negotiate Credit Card Debt In Seven Steps
Negotiating credit card debt can be an extensive process. It can go a lot smoother if you prepare ahead of time. Start with the following steps:
Negotiating Credit Card Debt: Do It Yourself Vs Hiring Help
Try and negotiate with your credit card company yourself first. Youll need to go in armed with as much information as possible on your financial situation, including your current balance, credit history, and financial goals.
It depends on what youre negotiating, says Black. For example, negotiating a lower APR is usually not too hard. is the annualized interest rate plus loan fees.
You also could work with a credit counselor or debt settlement company, or consider bankruptcy, although the latter is a last-ditch resort to be considered only by people in deep debt. A bankruptcy stays on your credit report for up to a decade, and will affect your ability to get credit during that period.
What Is A Debt Settlement Scam
Unfortunately, debt settlement scams are not uncommon. For-profit companies claiming to “eliminate your debt” for a high fee may be scams. These charlatans will typically ask you to pay a high amount for their services but do little or nothing on your behalf. These companies may say they have ways to “fix” or remove adverse credit from your report, which is not possible to do.
In addition, a debt settlement scam can put you into even more debt if the company claims to have contacted your creditors, and they don’t, leaving you to believe your debt is paid off. Always look up debt settlement companies online via the Better Business Bureau or your state’s attorney general’s office before signing up with one.
Start A Paper Trail If The Collection Calls Continue
Note that I said in writing, because you will need to establish a paper trail with each collector until the debt stops being resold. Mailing your letter registered, return receipt requested, is what I always advise in these circumstances so you can prove you contacted the collector to tell them the debt is time-barred and not to contact you again.
That being said, not all collectors abide by the terms of ethical collection practices. Others may not pass on that you demanded not to be contacted when they resell your debt into the secondary market. To be on the safe side, I suggest you find a friendly and inexpensive attorney and have them write the no-contact letter. This should carry more weight.
Now this all may become tedious for you and you may reach the point where you want to just pay it and be done with it. If you decide to go this route, just be aware that any payment will start the clock ticking again on the statute of limitations.
See related: How do I tell when card debt legally expires?
Understand Why Credit Card Companies Negotiate
If you’re going to try and negotiate with a credit card company, then you should know what often motivates them to do so. Credit card companies, many of which are owned by banks, have several priorities. The first is to generate profit for the parent company and its shareholders.
When it becomes evident that someone may be unable to pay his or her balance, a shift in the credit card company’s priorities happens that can work to your advantage. The bank or credit card company becomes concerned with getting as much of the balance back from you as possible and closing or restricting your account. This allows them to avoid charging off the entire amount on their income statement, which would cause their stock to fall, management to get lower bonuses, and perhaps even dividend payments to shareholders to be reduced.
Absent some sort of unique set of circumstances, a bankruptcy filing would be the worst-case scenario for the credit card company because it stands to lose everything it has extended you. It means that they may be willing to forgive a large portion of the debt balance in hopes of getting back something rather than nothing.
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