Written by attorney Nicholas Robin Westbrook

Options to Consider When Facing Overwhelming Debt

Are you facing overwhelming debt? You need a plan of action. In plain terms there are typically three (3) options to deal with your debt: (1) do nothing; (2) negotiation: and (3) Bankruptcy. This article addresses the first 2 options.

Do Nothing

Doing nothing is the most common response for a person unable to pay a bill. Doing nothing is a natural reaction to an inability to pay. If you can’t pay, you can’t pay - right? Doing nothing may also be used in conjunction with rationalizing, making yourself a promise to deal with the situation in the future: “I will catch up my bills with my bonus/tax refund/next paycheck."

The “Do Nothing" option may common, but it is also is the worst response. Ignoring your debt problem only makes things worse. The best example of this is to look at the effects of three missed payments on a typical credit card account. For example, Sarah has a $1,000 balance on her Visa credit card and an interest rate of 19%. Sarah has a steady income and manages to scrape together the minimum 4% payment each month, or $40.00.

Unfortunately, Sarah is laid off for work and is unable to make her minimum credit card payments. Sarah chooses the “Do Nothing" option. After missing several payments, the credit card company suspends her charging privileges and raises her interest rate to 36%, the default interest rate. The credit card company also charges Sarah late fees of $35 each month. At the end of three months, Sarah’s new credit card balance has increased to $1,200.91.

Sarah’s missed payments also significantly impact her credit score. A 90 day late record will affect Sarah’s credit score for up to seven years. The credit scoring models treat 90 day late records as a serious indication that Sarah is likely to pay 90 days late or later in the future. While a 30 or even 60 day late record may temporarily harm a credit score, a 90 day or later record can impact the credit score for years.

To add insult to injury, while Sarah is job hunting and unable to pay her credit card bill, the credit card company has launched a systematic attack to harass and intimidate her into paying. The first wave is from the company’s in-house collectors, who repeatedly call her home and cell phone in an effort to obtain information about Sarah’s financial situation. Sarah also receives regular notices from the card company, sometimes in embarrassing pink envelopes indicating late payment or default.

After 90 to 120 days the credit card company has closed her account and transferred the debt to an outside collection agency. These collectors call Sarah’s family members and neighbors. They monitor her Facebook account and send her emails. One nasty debt collector calls Sarah’s elderly next door neighbor and asks her to walk to Sarah’s house to relay an “urgent message" to call the collector. These tactics are meant to shame Sarah into paying and are very effective.

After a year Sarah’s debt is sold to a debt company for pennies on the dollar. The debt company specializes in default debt and renews a campaign of harassment. The debt company discovers that Sarah is now employed and begins calling her at work, sometimes speaking to co-workers and Sarah’s new boss.

Finally, after two years of harassment, an attorney for the creditor sues Sarah. The attorney sends her documents in the mail labeled “Plaintiff’s First Request for Production." Predictably, Sarah ignores this request. The Judge grants default judgment against Sarah in the amount of $3,237.72 (for principle and interest owed on the account) with continuing interest and costs and attorney fees in the amount of $500. Two months later Sarah discovers that the attorney is garnishing from his paycheck and has seized all the money from her bank account.

Sarah’s horrific story is typical in today's economy. Bankruptcy attorneys see this situation daily. The moral of this story is this: Do not ignore your debts. If you are facing a situation like Sarah’s, please call the Law Office of Nicholas R. Westbrook today. We can help.


Your second option is “Negotiation." This option goes by many different names (e.g. credit counseling, debt settlement, debt mediation, etc.), but the process is the same: the Debtor asks the creditor for more favorable terms in exchange for payment.

The benefits of Negotiation can be considerable and the results can depend on the stage of the debt and the parties involved. In our example above, there are five stages Sarah’s Visa card debt passed through: (1) late payment; (2) default; (3) collection; (4) bad debt; and (5) litigation.

Negotiating during the late payment stage can be very easy. By contacting the credit card company early, before any missed payments, Sarah (from our example above) could have deferred payments and avoided defaulting on the card. If the credit card company had agreed to wait three months until Sarah can resume payments, she would have avoided defaulting and perhaps avoided costly fees and a default interest rate.

The credit card company is less willing to negotiate after the default stage has occurred. The company has already increased Sarah’s interest rate and charged penalty fees. After default, the credit card company may “re-age" the account and restore the original terms, but usually only after a substantial payment and proof of hardship. In some extreme cases they may cancel fees. This re-aging generally does not repair the damage to a credit report, but it does bring the account current. Generally in the default stage the credit card company will try to set up a monthly payment arrangement to bring the account current and restore charging privileges.

By the collection stage the credit card company has washed its hands of the debt. The credit card company and the collection agency is interested in collecting as much as it can, as fast as it can. The whole debt is now due and accelerated. The collection company wants either monthly payments (which continue to incur interest at the default rate) that will pay the debt in 18 months or less, or satisfaction of the debt with one or more lump sum payments. If Sarah is able to pay all at once, the collection agency may reduce the debt to 80-90% of the current amount. In some cases a credit counseling program may be able to negotiate monthly payments at more favorable term.

A word of caution regarding credit counseling programs: these programs may claim to be not-for-profit, but most of them are funded and subsidized directly by the credit card industry. When a Debtor participates in a monthly payment program, the Debtor pays a small fee to the credit counseling program and the credit card company gives a “kick back" to the program. It makes you wonder just who the credit counselors are serving! Additionally, some credit counseling programs will establish a program to re-age the accounts after a certain time, others will not. Re-aging the account brings the account current so your payments are credited as timely (which helps you rebuild your credit report and score). Otherwise the collection agency will continue to record negative items on your credit report each month. Finally, be aware that if you are unable to complete the credit counseling program, all of the “forgiven" interest and penalties will be reinstated to your account.

When the credit card company sells the debt in the bad debt stage, it has declared the debt uncollectible and will take a tax credit for the loss. The debt is sold (and perhaps re-sold many times) to a debt company for pennies on the dollar. Unfortunately, even though the debt company only has a few hundred dollars invested in Sarah’s account, she is legally obligated to the debt company for the entire debt.

Sarah can still turn to a credit counselor to set up monthly payments on more favorable terms, but he now has a new option: the debt settlement company. These companies are notorious for defrauding consumers. The basic premise of the debt settlement company is to negotiate a lump-sum payment. Often this is accomplished through monthly payments to the debt settlement company “on account" until there are sufficient funds to negotiate a settlement amount (generally between 30-50% of the present amount owed). Licensed attorneys will sometimes negotiate settlements at better terms (20-40%), but the fee is greater.

Debt settlement is a tricky business and can take many months. The basic tactic is to wear down the debt company until they figure “something is better than nothing" and accept a pennies-on-the-dollar settlement from the Debtor. Of course, if the original debt was $1,000, and the current debt is $2,000, when the debt settlement company finally agrees to $1,000 you are really paying 100% of the debt (minus fees and interest). During the settlement negotiation you may still receive harassing calls (unless you are represented by a licensed attorney) and you may be sued. Also, after the debt settles, you will receive an IRS Form 1099 to pay taxes on the “forgiven" debt. In the end the results of a debt settlement process are a paid debt in exchange for headaches, ruined credit, and a tax debt.

The final stage is the litigation stage. It is extremely difficult to negotiate any payment terms at this stage since a lawsuit has already been filed. Once a judgment has been rendered against Sarah the attorney can seize property, bank accounts, and garnish wages. To avoid a judgment on her credit report, Sarah may need to spend thousands on an attorney to negotiate a lump-sum settlement.

If these first 2 options fail, you can still file for Bankrutpcy under Chapter 7 or Chapter 13. This may be the best option for your situation.

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