If you’re thinking about negotiating a settlement of your credit card or other unsecured debt, you need to know the bottom line: As any savvy negotiator will tell you, all negotiations are about leverage: who has it and who doesn’t.
What the creditor wants: When you have failed to pay a consumer debt on time, the creditor does not want to give up any part of your claim. They want you to pay in full; with interest and penalties.
Whatever you want: If you can’t pay the full amount of your debt and the high interest rates that come with default, you want to make a deal whereby you can pay off your debts at a reduced amount you can afford and start over; or you want to completely pay off your debts in bankruptcy and start over.
But who has the leverage? If you try to lift a stone without a lever, you will only strain your back.
RULE: Generally, unless you can realistically threaten the creditor that you will lose more money if they refuse to settle with you than they will lose if they settle with you for a reduced amount, you will not do so.
Why should they? Credit card companies are not charities! Don’t expect them to show mercy or make a deal with you just because you lost your job or suffered a catastrophic illness. They don’t care. They still want your money. All of it.
So part of his the leverage to try to get you to call everything is:
TO. Damage to your credit rating. They report your account as delinquent to the credit reporting agencies. Until paid in full or paid off, this information will stay on your record for years, lowering your credit score and making it harder for you to get consumer loans or a mortgage.
b. Harassment. They call you all the time, send you nasty letters and emails. They may contact family, friends or employers. Some (but not all) of these practices violate the Fair Debt Collection Practices Act, but often they do so anyway because few consumers are aware of their rights and fewer are effectively enforcing them. However, a lawyer can stop the harassment.
against Threatening Sue. They may threaten to file a lawsuit against you unless you pay them.
d. Presentation of a claim. The creditor sues you and tries to collect a judgment by garnishing your wages, foreclosing on your residence, and/or seizing your bank accounts and any other assets you may own.
my. Sit and wait. They can simply keep the debt for the statute of limitations (years) without suing and trying to wait. They are hoping that you will eventually acquire some assets that they can garnish or get a job where they can garnish your wages, or you will get tired of the black mark on your credit and agree to pay them off.
What is your leverage?
♦ Your leverage should be that you can’t call and they won’t be able to collect the full amount in a reasonable amount of time by the above means, so they should settle with you, take their losses, and get what they can.
♦ Also, if you can realistically threaten them with bankruptcy, they may be forced to accept less than they would like to avoid becoming an unsecured creditor in a chapter 7 bankruptcy case. (More on this below ).
However, for YOUR leverage to work, you must first be able to protect yourself from THEIR leverage to force them to deal with you, rather than, say, suing you to collect the debt.
In general, they will do what seems easiest and most profitable for them. Typically, this damages your credit rating, threatens and harasses you, and ultimately sues you to collect the debt in full or sell your debt to a debt collector who will do the same.
There are only three ways to successfully defend yourself against creditors:
1. Remain trial proof. If you have few or no assets, rent rather than own your own home, and are self-employed, creditors cannot garnish your wages or garnish your home or property.
It goes without saying that this does not apply to everyone. Also, the amount of exempt assets you can withhold from creditors varies based on state law in the state where you live. For interest, cars worth more than a certain amount may not be exempt (the creditor can repossess and sell your vehicle).
It also won’t protect you from harassment, court orders to complete interrogations about your assets, and other demands from creditors. Creditors may also request to renew your judgment for many years.
2. Negotiate an Agreement. Obviously, if you can get them to agree to accept a reduced amount to fully satisfy your claim, then that solves the problem. The debt is reported as “discharged” to the credit reporting agencies, which is better than a bankruptcy.
3. Bankruptcy. If you can discharge your debts in Chapter 7 bankruptcy, then you won’t have to pay them. If you apply for a Chapter 13 repayment plan, you may be able to pay a portion of your debt based on your assets and income, over a period of years.
(This entire area is extremely complicated and you need an attorney to properly review your situation if you are considering bankruptcy. Under no circumstances should you try to do it yourself. I cannot tell you how many times I have sat in bankruptcy creditors meetings and seen other bankruptcy debtors to appear before the bankruptcy trustee and have their cases dismissed because they did not have an attorney and did not know how to follow the rules. Bankruptcy law is deceptive by Congressional design).
