Settle debts with big discounts. I’ve been a Los Angeles bankruptcy lawyer for 38 years and I am settling debts all the time for my clients. I’ll show you the same tricks of the trade that I use to settle debts.
Timing is important when you try to settle debts.
The best day of the week to discuss a settlement is always on Friday. People are usually in a good mood on Fridays. It's the end of the week. People are looking forward to the weekend. Bill collectors are no different. They are people, too. I think a Friday is the best day to make a good deal.
Here's why the end of the month is another great time to settle debts.
Collection agencies usually figure commissions and bonuses at the end of the month. I can get a better settlement toward the latter part of the month. That's when the collectors are hungry to make their numbers. Most debt collectors are paid a low salary. They rely on commissions based on performance. That's why the collector wants a fast settlement.
Debt collectors must work within established guidelines provided to them by the owner of the debt.
A collector must work deals within established guidelines. The lowest amount they can take will be established by the owner of the debt. But the owners of old debt don't expect miracles. They usually allow a collector to sacrifice at least 50%, and often much more. Never start negotiating with your best offer. Low ball it. See where the collector can go.
A lot depends on who the creditor is. I find it is easiest to settle with a collection agency than the original creditor. A collection agency is looking for a quick deal. The faster they settle, the more money they make. Fast debt settlements close the file. That means a collector can handle more cases. I have been very successful in settling with collection agencies. I have obtained settlements as low as 15% on the dollar. But a settlement of 20% to 40% is more normal.
What is a debt buyer?
Some collection companies buy delinquent accounts. That means they now own the debt. Others have only an assignment of the account. An assigned account is still owned by the original creditor. Assigned accounts are usually worked for a limited period of time. Usually 60-90 days. If they can't settle the account the collector will have to send it back to the original creditor. The original creditor will then assign it to another collection agency, or perhaps sell it off to a debt buyer.
If a debt buyer acquires your debt, you still owe the money. It makes no difference that the buyer paid pennies on the dollar to buy it, nor does it matter that the original creditor is out of the picture. You still owe what you used to owe, in full, plus all applicable interest.
When you try to settle, be on your best behavior.
Don't act like a sourpuss. Don't show anger at the collector. Your attitude is important when you negotiate to settle debts. Be polite and respectful when you negotiate to settle debts. Show remorse for not previously paying, even if you don't feel any. Say how sorry you are about not being able to pay the full amount. Be ready to explain all the hardships you may have had.
You won't get anywhere if you are angry or rude.
If you give the collector "attitude", the collector won't give you a good deal. You will get a better deal if the collector likes you.
It also helps to acknowledge the courtesy and professionalism of the collector. Also, thank the person for giving you time, and hearing you out.
You can still settle debts after you have been sued.
After you have been sued, you can still settle debts. But don't expect as good a deal as a debt collector might have given previously. The attorney has invested not only time, but court filing fees, service of process fees and other expenses. Adding a lawyer to the debt settlement process means you have an extra mouth to feed. Keep that in mind when you negotiate.
Don't be mad that they took you to court. That generally happens because you would not respond to the bill collector. Or, if you made demands and offers that were silly or unreasonable.
General strategies that you can use to settle debts.
Settlements are normally paid in one lump sum. Offering to do so will get you a better deal. Debt collectors do not want drawn out installment payments. That's because you already defaulted once before on the same debt. Also, debt collectors want their commission pay. Finally, it costs money to service installment payments. The collection agency would have to pay someone to send you bills and keep track of payments. That kills profitability. It is not realistic to expect a collection agency to accept long term payment agreements.
Even when a collector is willing to take payments, you should be very careful. If you default on a settlement payment, the original balance due may return. You could lose the benefit of the discount they gave you. Your payments may be applied to the original balance, not the settled amount. And, each time you make a payment you will revive the statute of limitations.
Tax information you need to know if you settle debts.
After settling a debt, you may receive a copy of an IRS 1099 c form. This is the form a creditor is required to use to report forgiveness of debt income. If the forgiven debt is over $600, the IRS must be notified. You may have to pay taxes on the forgiven portion. For example, if you have a debt of $10,000 and you settle the debt for $3,000 you have saved or been forgiven $7,000. You may have to pay tax on the forgiven $7,000.
Will you owe income tax on the forgiven debt?
Whether or not you have to pay tax depends on whether you are "solvent" or "insolvent" after the debt is settled. Here's an example. Suppose your assets are worth $50,000. Your other remaining debts are $60,000 after you make a settlement. Then you are insolvent. You are insolvent because your assets exceed your liabilities and you do not have pay tax on the forgiven portion. If your assets are $70,000 and your debt is $60,000 you may have to pay tax on the $7,000 forgiven. This could be a small or large. The amount depends on what tax bracket you are in.
But, if you file a bankruptcy instead of settling you are presumed to be insolvent. After bankruptcy you don't have to pay taxes on the debts you discharge in bankruptcy.
How your credit score is affected if you settle debts.
There are two different things that matter. These are your credit score, and your credit report. Debt settlements will remain on your credit report for 7 years. You should expect your report to show that the creditor accepted less than the full balance of a delinquent debt. This is better than if the money was still owed. But settling a debt does not bring your credit back immediately. When you negotiate, tell the collector that you want the debt removed from your report. Sometimes the collector will agree.
However, there is good news as far as your credit score is concerned. The Fair Issac Company is the most prominent credit scoring bureau. Fair Issac recently announced that they will no longer ding your credit score on a delinquent debt that you have fully settled. This means your credit score should improve when you settle old debts. However, those black marks will still be on your credit report. It remains to be seen if this change will really make any difference to your overall credit access.
Get your debt settlement in writing before you pay.
You should insist on receiving a written agreement from the debt collector. Get it in writing before you pay any money. The writing should describe all the promises made by each side. Also, make sure the debt collector is really authorized to collect the debt. Criminal gangs have recently been posing as debt collectors. The try to scare and intimidate people into paying non existent debts. When in doubt, insist on a written validation of the debt. The crooks won't provide that be cause they don't want anyone to know who they are. That's why the crooks want immediate payment by phone. They don't want anything mailed to them. That's because they don't want to be found.
Is it better to file bankruptcy than to settle debts?
Settling a debt does not get your credit back. A settlement resolves the debt. But a settlement does not put you back to square one as you were before you ever defaulted. And, you might owe taxes on the amount that is forgiven. Before you shell out a lot of money to settle debts, talk to an attorney who specializes in bankruptcy. And, the cost of filing a bankruptcy case should be much less than what you will spend to pay settlements.
Many bankruptcy attorneys can be retained to settle debts as an alternative to a bankruptcy. This is something which should be discussed whenever a bankruptcy is considered. This is an effective strategy if you have the money to pay settlements, AND there is some reason why you should not file bankruptcy, like asset transfers, receiving a big inheritance, etc.
Additional resources provided by the author
For more information about taxes and debt forgiveness, consult the IRS web site, Topic Number: 431 - Canceled Debt – Is It Taxable or Not? at https://www.irs.gov/taxtopics/tc431.
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