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The Process
In order to settle, you must first be able to make an upfront
payment of 35-65% of the existing debt balance with one of your
collectors. You can do this by making a monthly transfer into a
savings account until you reach a potential settlement amount.
You may also find other ways to come up with the money, such as
selling property or using a tax refund. Conversely, obtaining a
loan or other debt to pay off a collection account is one of the
worst things you can do.
Negotiate a Settlement Offer
Your collectors are likely sending you collection letters
that include a settlement offer. You may be able to settle for
less than their first offer. Other collectors may agree to a
settlement offer that you make, even if they did not propose one
to you. Keep in mind that collectors can include both collection
agencies and attorneys.
A settlement should be in writing. It should spell out the
major provisions of your agreement. Never send in payment based
on a verbal promise! Here are some common provisions in
successful debt settlement offers:
- The contract should clearly state identifying
information, including the collector name and address,
debtor name and address, date of the agreement, purpose of
the contract (debt settlement) and the account information
(account number, account balance, original creditor).
- An agreed settlement amount should be stated, and it
should also include a clause whereby payment of the settled
amount would be deemed to fully indemnify the debtor from
any future claims by any claimant regarding the debt.
- Some savvy debtors also get agreement that the collector
will remove any negative information from all credit bureaus
regarding the debt. Credit bureaus disapprove of this
process, but it is still allowed. In most cases, the
original creditor would still show negative information.
- Another common clause is a statement summarizing that
while you do not acknowledge the validity of the debt, you
would like to close the issue.
Any taxes on forgiven debt could still be owed, so make sure
you consult a qualified tax advisor to find out what you could
owe. Keep in mind that when you negotiate your own settlement,
you are taking on responsibilities that might otherwise be
handled by a settlement company or attorney. It is usually
well worth it to settle on your own rather than using these
expensive representatives. However, you should educate yourself to
make sure that you cover all possibilities so that you are
protected from additional legal action.
Avoiding Judgments
If you have numerous collection accounts and are simply
trying to avoid legal action, then you may want to consider
saving money in a savings account in anticipation of future
legal action. Many times, you may be able to negotiate a
settlement or payoff with the collector after you have received
a summons for court. Just make sure that you do this before the
court date. If you cannot satisfy the debt before the court
date, then you should make arrangements for defense of the court
action. Ignoring a summons would likely result in a summary
judgment (automatic loss).
Proactively settling on your collection accounts can help you
avoid judgments. It can also help you improve your damaged
credit rating. If you have the financial ability to settle on
all accounts, then this can be a good step toward improving
credit and eliminating legal liability.
If you are struggling financially, then there are two common
options. The first is to save each month for the purpose of
averting impending court action. In other words, you would use
your savings to negotiate a settlement or payoff only once you
have received a court summons. If no court action is pursued,
then you could continue saving for a rainy day.
The second option is bankruptcy. By filing for bankruptcy,
you may be able to avoid collection attempts and additional
legal action. Bankruptcy is generally seen as a last resort, and
should only be used when it is warranted. Qualified legal
counsel can help you understand the bankruptcy options and the
process. An attorney can explain how bankruptcy may provide some
protection from creditors. For more information, contact a
trusted bankruptcy attorney or your state's bar association. If
you would like a copy of a Chapter 7 Resource Guide, you may
request a free
copy through Vision Credit Education, Inc.
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