If you’ve fallen behind on a debt, and the debt collectors are calling, you’re probably under a lot of stress. It’s important, though, not to panic and to come up with a plan of action.
The first thing you should know is that you can negotiate. Debt settlement is one option you have, which means offering to pay a portion of your debt in return for the creditor or debt collector forgiving the rest. You might either pay it back in one lump sum or in installments.
Debt settlement can be risky, though, so it’s important to understand the process and how it will affect your credit.
Know your rights
If you’re feeling the pressure of debt collectors breathing down your neck (even if they’re polite), it can be helpful to know your rights. Keep in mind these rules apply to third-party debt collectors only (not your original creditor) unless the original creditor is using a different name to collect money from you. Some laws include:
- Debt collectors can only call you between 8 a.m. and 9 p.m.
- You can send a letter asking debt collectors to stop contacting you. The Consumer Financial Protection Bureau has a sample letter you can download. But be careful using this type of letter if there is still time for the collector to sue you in your state.
- Debt collectors can call you at work and they can also contact friends, family and co-workers to find out your contact information.
- They can’t threaten you or use foul language.
If you talk to a debt collector, take notes and write down the names and contact information of everyone you speak to. Be careful not to offer information that can be used against you. That said, it’s fine to be honest and explain why you fell behind on your debt. Maybe you lost your job or had a medical emergency. Explaining your inability to pay can actually help you settle your debt. If you are legitimately considering bankruptcy, that’s worth mentioning, too.
Be careful with old debt. There is a statute of limitations (it varies by state and type of debt) for how long a debt collector has to sue you. Most statutes are three to six years. If the delinquent debt is past the statute of limitations in your state, it’s considered expired. But admitting that the debt is yours, or paying a portion of it, could reset the clock or reactivate the debt. So before you do anything, make sure you know what the debt is and how old it is.
Is debt settlement the right route?
Debt settlement makes the most sense in cases where you can’t afford your current bills, but you can afford to pay something, and you want to avoid bankruptcy.
Many people hire debt settlement companies to handle the negotiations with debt collectors or creditors. But these companies often charge a steep fee for their service. Yes, the debt settlement process can be lengthy and complicated, but you can do it on your own, too. Although it’s smart to consult with a lawyer or a credit expert.
If you decide to use a debt settlement company, do your research first. Check out the company’s ratings with the Better Business Bureau. Ask them what fee they will charge you (some can be as high as 20 to 25 percent) and whether their fee is based on your total debt or just the portion that is forgiven. Legally, they can’t charge you any fees upfront.
One big issue with many settlement companies is that their programs can last as long as 36 to 48 months. During that time, they ask you to stop paying your creditors to save up money for a lump sum settlement payment. But in the meantime, you keep racking up interest charges and fees. The longer that goes on, the more you open yourself up to being sued. Ideally, you’d want to settle your debt in 12 months or less, but many do succeed even when it takes longer
Make an offer
If you hire a debt settlement company, they should handle the back-and-forth negotiations with a debt collector. But if not, you’ll be in charge.
Before you make a settlement offer, you’ll need to figure out how much you can afford to pay and whether you can pay in installments or as a lump sum. Only offer what you can afford. If you’re offering a lump sum, expect that you might have to pay it right away, or in the same month you are negotiating.
As with any negotiation, don’t start with your best offer. If it’s a third-party debt collector you’re dealing with, they are often only paid if they get you to pay something. You may have to go through several rounds of negotiations to come to an agreement. Debt collectors can still bug you to pay even when you’re negotiating with them, so don’t let that pressure you into making a bad deal.
If you come to an agreement, get your settlement terms in writing before you pay anything, and when you do pay, make your payments from an account at your bank, or with a cashier’s check or money order issued by your bank. Once your debt is settled, ask for a letter confirming payment (though the original agreement and your bank account showing proof you paid by the date on the settlement agreement is sufficient).
What to expect after debt settlement
Settling a debt doesn’t mean it disappears from your credit report. A settled debt can stay on your credit report for seven years. That’s why you should keep a copy of your settlement agreement and proof of payment in case someone else comes calling one day.
Learn more about how long it takes to rebuild your credit after debt settlement.