Debt Settlement Tricks | Credit Card Debt Relief

What Exactly is Debt Settlement?

As they say, a bird in the hand is worth two in the bush. In our case whatever a credit card bank can get from you is preferable to what they might or might not be able to obtain from you months or years out in the future.

How Does Debt Settlement Work?

You signed an agreement and have run up a bill under that agreement. Now that you’re having financial problems, you approach your creditor and ask for them to cut you a new deal that will cut your debt down to a more manageable size. Keep this in mind - this new deal will legally replace the old one.

But why would a creditor accept less than the full balance due? In today’s economy more people than ever are having financial problems. Someone once said that most Americans are but one paycheck away from homelessness.

The credit card banks know that if you file for bankruptcy they will in all probability end up with very little - or nothing at all in many cases.

If they think that you're in financial hot water and really considering bankruptcy, they will - in their own self-interest - grab what money they can while the grabbing is good.

Debt Settlement Tips:

Do whatever you have to do to avoid having your accounts handed over to a collection agency. Once the collection agency takes over your ability to secure a debt settlement deal will be dramatically reduced. Though policies vary widely, most creditors will wait around 180 days before charging off your debt and transferring your account to a collection agency. (But you shouldn’t depend on this time frame) If they threaten to turn over your account to a collection agency on a certain date, act and act fast to avoid this taking place.

If you fear that your account is about to go to collection agents, resuming payments may help halt the transfer. It’s imperative that you communicate with your creditor at this point.

If you pay more than the minimum monthly payment, you’ll be helping to cover the past due balance which will often help restore your relationship with the creditor.

Many creditors will allow you to return your account to normal activity should you catch up on your payments

Check your debt to be sure it isn’t beyond the statute of limitations for your state. Debts expire under state law.

It’s common practice for a creditor or their collection agency to attempt to collect a debt that’s about to permanently expire.

After seven years any old debt should be deleted from your credit bureau file. If you check your file and find an entry from more than 7 years ago you should be able to get it removed with a simple phone call.

Even though the statute of limitations in your state may be three years, the item will remain on your credit report for a full seven years as the two laws have nothing to do with each other.

If a debt is beyond the statute of limitations and it doesn’t appear on your credit bureau file – you can safely ignore it and also ignore any collection attempts. Once the statute of limitations has expired the creditor cannot go to court and obtain a judgment against you.

When you’re negotiating with a creditor, be sure to remember to include a request that they act to help you clean up your credit record cleaned up. If a creditor accepts your settlement offer, the usual practice is to have the creditor send the credit bureau an entry that says “Settled”. This is a negative entry that should be avoided if at all possible.

Never believe or trust what a creditor tells you about the effect that various entries will have on your personal credit. They know little about the subject and couldn’t care less about your future. Many will tell you anything to get your money.

Try to avoid long negotiations. Without seeming too impatient, try to keep things moving along toward a relatively quick resolution. Your negotiations may be passed along from one creditor employee to another. Keep good records and don’t allow anything to fall through the cracks.

There is nothing to be gained from speaking to a collection agency on the phone. They will only attempt to intimidate you. If you must communicate with an agency, the mail is by far the best medium.

Send all letters by certified mail “addressee signature only” which means you’ll get back a green postcard with the receiving person’s signature. Without that card as legal proof of delivery, your credit card bank can claim the document was never received.

Some creditors and collection agencies feel that there’s nothing to be gained by receiving unsolicited mail so they refuse to accept mail they aren’t expecting. You can break through their defenses by writing “Payment Enclosed” on the outside of your envelope. Greed is a very powerful emotion.

Creditors can be approached by phone or an unsolicited debt settlement offer can be sent by mail. Either way you’ll end up negotiating by phone.

Take copious notes during your conversations or tape record your conversations if that’s legal in your state. (Check your local laws first).

You can buy everything you need to record your telephone conversations from your local Radio Shack store. Tell them you need to record your phone calls for business purposes. They will sell you an inexpensive cassette tape recorder and a little black box that will automatically turn the recorder on when you lift your phone off the hook.

Keep careful records. Make and keep copies of each letter you send. You may need them later should you end up in court. Those you deal with will assume you have little or no records and will be shocked when you are able to produce the correct and relevant document.

When you call a creditor, the first piece of information you’ll need is your current account status. You may be surprised at the answer. Or you may be distressed to learn that your account has been given to a collection agent. Be flexible and ready to accept setbacks.

Ask the creditor if they would be willing to listen to a settlement offer. Again, be prepared as they may interrupt you and make an offer of their own. Never accept their first offer. Be prepared to bargain for a better deal.

If their offer seems a good one, ask them to confirm their offer by mail. Ask the rep for his full name and his phone number.

If they offer you what appears to be a really attractive offer but it’s contingent upon you making an immediate initial “good will” payment via “phone check” – run don’t walk. They'll take your money and instantly forget any promises they made.

The "good will payment" ploy is sometimes used just to get the name of your bank and your account number. They then use that information to withdraw funds from your account. Some unscrupulous operators have actually taken more from the account than the agreed upon amount!

Never make any payments until you have a written agreement signed by an officer in your possession. It's the only way to keep them honest and force them to honor their end of the verbal agreement.

If the creditor rep you speak with refuses to entertain your offer, send one in by mail anyway. The person you talk to may not be aware that their firm accepts debt settlement offers on a case-by-case basis.

If you threaten to resort to bankruptcy, the creditor may ask if you own your home or a boat. Creditors know that anyone who owns a home or other major asset is much less likely to file a bankruptcy as he may lose his home in the bargain. If you have no major assets, state that fact clearly.

Renters who own no “secured” assets are the most likely to use bankruptcy. Also, if you are unemployed the odds of a bankruptcy go up even more.

If you have a car repossessed and are now being billed for the balance of your loan not covered by the sale of the car, don’t forget that you can negotiate this debt also!

Student loans can’t be easily dispensed with. The most you can hope for is a reduction in the interest rate and having some of the fees reduced. You'll need to speak to an attorney to get the full details on all your legal options.

If a creditor offers a longer term payment plan, ask for the payment amount and then be sure to ask for the APR interest rate. (You might be shocked to discover that they’re charging you 20% or even more!) If the rate seems too high, make your acceptance of the plan contingent on a substantial reduction. If they fudge and instead give you some other kind of interest rate figure - demand the APR.

If you use a home loan to get together a debt settlement offer a creditor, be very sure that you can easily handle the payments. If you fail here you will lose your home.

Never tell a creditor that you need to clean up the debt because you’re considering a major purchase such as a house. Making such a statement will reveal your purpose and dramatically weaken your bargaining position. You’re interested in a debt settlement but are not in any way desperate.

If the statute of limitations is approaching and a creditor calls to collect on the debt, immediately remind him that the debt is about to expire. That will put you in the driver’s seat and will let the creditor know that you are aware of the law and it's implications.

Intent is important with bankruptcy. This means that if you tell a creditor that you are considering filing for bankruptcy protection and later make any charges on credit cards, those charges are usually excluded from bankruptcy protection and discharge. You must resist the temptation to abuse the bankruptcy law.

Always negotiate to have the entry in your credit bureau file appear as positive as possible. The very best entry is “Paid as Agreed”. If you can, get any other kind of entry changed to paid as agreed. If the creditor says its illegal to make such a change say “Aw come on, you know that’s not true – don’t insult me!” Then repeat your demand.

If you’re forced into dealing with a collection agency, always ask that any entry they’ve made in your credit file be deleted. (Most collection agencies don’t bother with credit bureaus but those who do can mess up your rating.) Having any kind of entry from a collection agency on your file is damaging. Check your file later to be sure the deletion took place.

If a creditor agrees to correct your credit file, ask that they put it in writing. You’ll need the letter as the agreed upon changes may not appear on your record. Armed with the letter you can later force the bureau into making the change.

Remember the creditor (or collection agency) has only one thing on their mind: getting your money. They don’t really care about your credit file. They view the changes you ask for as just another card to be used in the negotiation.

Always speak to creditors in their language. Talk about money, money, money. Always emphasize what they will get, not what you get. Never ask them to do you any favors. Their whole purpose is to listen to you for any weaknesses they can take advantage of to get as much money as possible. They are not your friend and never will be.

In most states medical bills cannot appear on your credit bureau file but if they get passed to a collection agency, their entries often end up on credit bureau files. Yet another reason to avoid having your debts passed to a collection agency.

If you can’t get a “paid as agreed” entry placed in your file, ask for them to change any negative entries to “unrated” and also have any late payments deleted from your record.

If they don’t already know - never reveal your employer or give a creditor your work phone. Giving up such information could leave you open to a wage garnishee.

In the following states a creditor can accept a debt settlement offer and then hire a collection agency to go after you for the balance of the debt. Is this legal?

Yes it is – in the following states: Arkansas, Colorado, Connecticut, Georgia, Kansas, Louisiana, Maine, Michigan, Nebraska, New Jersey, North Carolina, Oregon, Pennsylvania, Texas, Utah, Vermont, Virginia, Washington and Wyoming.

This tactic is illegal in the following states: Alabama, Delaware, Massachusetts, Minnesota, Missouri, New Hampshire, New York, Ohio, Rhode Island, South Carolina, South Dakota, West Virginia and Wisconsin. California has special more complex rules – contact a lawyer before making a debt settlement offer.

Bad tax news – the IRS regards the difference between your debt settlement offer and the full debt balances as fully taxable income (groan). Don’t be surprised if the creditor sends you a 1099 form at the end of the year. If this happens you’ll have to pay income taxes on the difference as if it was income.

An unsolicited debt settlement offer letter:

Dear Mr. Greedy,

Account number -------

Though I’m presently experiencing financial difficulties, I would very much like to pay off all my debts.

I’m hereby offering you the sum of $_____ as payment in full. Also, I’d like any negative credit bureau items that reflect charge offs or late payments removed from my file.

As I have other debts and limited funds, I would ask that you notify me as to your decision as quickly as possible.

If you accept my terms, please sign the enclosed letter of agreement and return a copy to me. When I’ve received the signed agreement, I will forward a cashiers’ via Fedex overnight.

Yours truly,

Letter of Agreement

This letter constitutes a legal contract between (Your name), the debtor and (creditor firm) hereafter referred to as the creditor.

Upon receipt of a cashiers check from the debtor for the sum of $______, the creditor agrees to accept said amount as full payment for the balanced owed on account number ____ and that no other fees or further payments will be due at any time in the future.

Also, the creditor agrees to remove any references to charge offs or late payments concerning this account from the creditor’s credit file.

This contract supersedes all other contracts between the debtor and creditor.

Signed_______ Date:_________

I attest that I am properly authorized to make decisions regarding the acceptance of settlement offers for outstanding accounts for (firm name).

Read, Approved and Accepted by:

_______________ Date:__________

Short Term Debt Settlement Offers

While lump sum offers are the most effective and most likely to be accepted, short term offers are also quite effective. The offer is similar to a lump sum deal except that you’ll be making the payment over several months.

Say you owe $8,000 on a credit card. Your initial offer might be for a total of $5000 paid in five monthly payments of $1,000 each. Your creditor will view this as almost as attractive as a lump sum payment.