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Considering Debt Settlement? Get Informed About Being Sued and How to Deal With It.

The following guest post was contributed by Michael Bovee of Consumer Recovery Network.

If you would like to contribute a guest post, click here.

There are limited options available to people struggling to keep payments current with their unsecured debt. The options you can look to are generally limited to Credit Counseling Associations (CCA) who can set you up in a Debt Management Plan (DMP), filing bankruptcy, or attempt to settle some or all of the accounts for less than the full balance due.

There are pro’s and con’s to each of these three options. Once you’ve researched each option and clearly understand how each will apply to your own set of circumstances you will better be able to make an informed decision about what steps to take to tackle the problem.

I would strongly suggest locating reputable professionals providing each of the three options outlined above as part of your evaluation. While you may hear generalities about each option from individual sources, nothing can take the place of speaking to an actual service provider whose daily work experience makes them an expert in providing their specific service and gives them the ability to provide needed details.

In my experience, most of your determination of which option will likely prove suitable to you will be based on math. For example, boring old arithmetic typically points to your financial capabilities to pay 2 to 2.5 percent of your credit card balances monthly for an average of say 5 years in a DMP. If your monthly cash flow cannot support this type of monthly payment with confidence, most people can then eliminate a DMP as a feasible and workable solution. Consulting with a bankruptcy attorney will help you determine if your income is low enough in order for you to qualify to discharge your unsecured debts in chapter 7 bankruptcy.

There are several reasons to think beyond the math alone when considering bankruptcy and debt settlement as options. I will focus on one such reason:

Creditors do sue on unpaid debts in order to collect.

One of the biggest drawbacks to debt settlement is one of the biggest benefits to bankruptcy.

Bankruptcy will prevent lawsuits from being filed or can stop an existing lawsuit from progressing any further. People who have a shot at avoiding bankruptcy may see debt settlement as an attractive last effort to keep out of the bankruptcy court, only to find them later resorting to filing for legal protection from creditors if their debt settlement approach leads to being sued on one or more accounts.

The debt settlement industry in my opinion too often downplays the risk of being sued when involved in a settlement plan. Many companies’ business practices will in fact be the cause of lawsuits that are filed earlier than normal by certain creditors who take a hard line approach when receiving communications from 3rd party companies identifying themselves as your spokesperson for anything related to the debt. Limited power of attorney sent in by a settlement firm to some of the largest credit card issuers for example, often results in early placement with an attorney for more aggressive collection actions.

So, lawsuits are a concern. That established, how much of a concern and should this concern reach to the level of now abandoning the idea of attempting to settle the debts as a means to avoid filing bankruptcy?

At my company, we use a narrower timeline for underwriting whether we will work with a consumer who can or should use balance negotiations with creditors. We actually spell out known timelines for collection and balance concessions prior to charge off and what happens after charge off during our initial consultations with consumers. This collection and settlement timeline provides any of our prospective members with a clear understanding of why they should be motivated to get any all settlements done and out of the way as soon as can be realized. This will often mean they would not qualify for debt settlement based on income alone, but they at least will know the option is not right for them, or will see the wisdom in accessing funds that are not part of monthly income in order to get the settlements funded quickly and mitigate the risks of being sued.

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Few settlement service providers are, or would be willing, to limit their enrollment to those who can complete settlements in an 18 months window like we do. Fewer still will reveal the fact that the risks of being sued typically begin directly after charge off and that the risk increases thereafter. I will however encourage settlement professionals to begin to test enrollment suitability using the following measure:

Ask the client if they have a funding resource they can tap in an emergency. If you are not going to outline the emergency as one where there account is placed with an in state attorney and should therefore be place on the priority list for settlement prior to being sued, than perhaps consider phrasing it as:

“Let’s say you just funded a settlement offer and have to wait several months to accumulate funds in order to settle the next account on the list, but within weeks there is an offer on the table to settle another account that is more than fair. If you knew that account would cycle out to another collector who may not make as good an offer and in fact this account may never be able to be settled for this low again, can you access funds to take advantage of the offer?”

If the answer to this question is yes, you now know that you are working with a motivated individual who will be better positioned to react to escalated collection actions, or who can indeed take advantage of fire sale offers that do occur. If the answer is no, you are potentially working with someone who is not well suited to settlement in an attempt to avoid bankruptcy.

I recently answered a debt settlement/risk of lawsuit question directed at my company’s specific data that fits perfectly for this article:

What percentage of clients accounts experience any legal activity for a debt that was included in the program? When defining legal activity as being sued by a creditor or debt buyer in their pursuit of collecting an unpaid debt: Less than 2%

Very Serious Warning: Less than 2% is a low number, but don’t read too much into it! Granted, the comparative number of lawsuits to collect a debt verses the record high number of defaults in recent years is low, but thousands of lawsuits to collect unpaid debts are filed across the country every month. Lawsuits can and do happen.

This risk, in my opinion and experience, has been and will continue to be why many people who are ill suited to attempt it, should avoid the debt settlement option. This is one of the primary reasons CRN will not underwrite a new member whose financial situation and access to funding sources mean they cannot complete all settlements inside of 18 months (24 months in certain circumstances).

The risk that you can be sued is a required disclosure. Marketers and promoters of debt settlement tend to down play the risk of being sued by creditors that you are not paying while holding out to settle with them when you are financially able. Many have developed talking points to help you manage the fear of being sued. Warnings and disclosures about lawsuits, even the low percentage risk of it happening, will generally mean nothing to you if you are sued. Being sued is an emotional event for most people. If you experience being served a summons/complaint, nothing anyone will have said will matter. As far as you’re concerned at that point; everyone gets sued because you just did.

You need to carefully assess this risk. You may have creditors who are more prone to sue. You may live in a state where more suits are filed per capita.

Sometimes your risk profile can be identified in advance in order to mitigate the odds one of your accounts is targeted for litigation.

Be sure you speak with a debt settlement service provider who is willing to talk about these risks and how you will be able to overcome them. The key to either limiting or eliminating your risk of being sued is by prioritizing creditors and/or by having access to emergency funds in order to settle if one of your accounts is placed with a collection attorney licensed in your state earlier than normal.

Now that you know you can be sued for unpaid debt before you are able to settle, you should know that lawsuits are routinely settled out of court. The savings is typically not as good as would have been available if that account had not reached the litigation stage of collection.

If you are thinking about debt settlement, you need to know that lawsuits happen. If one does occur, and it is the last account or second to last account remaining to be settled, you will likely still be a success in your overall efforts to get out of debt. If you are sued early on, or multiple times, you may find yourself seeking the courts protection through bankruptcy after all.

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Given federal laws that went into effect in October of 2010, any reputable debt settlement company operating today does not charge in advance for their direct debt settlement service. People are now better protected from past industry issues where they paid a company large fees in advance only to have received no value and where many wound up being sued later on with no ability to react with adequate financial resources because upfront fees were more important to the company than the customers success.

If you have been approached by a company exploiting loopholes in laws passed designed to protect you from the problematic issues associated with charging money upfront for something that has not worked yet (settlements accomplished) you need to know that:

  1. You can settle debts on your own without the need for third party interference.
  2. There are reputable companies offering debt settlement services who do not charge fees in advance, like members of the AACC.
  3. Those circumventing laws put in place to protect you by charging advance fees are not concerned about you as much as they are concerned about themselves and in all likelihood could care less how the program turns out for you (as evidenced by their charging upfront settlement fees – a practice now well recognized to be a detriment to your success).

If you are reading this and have already been sued or have had a judgment entered against you, please review: Can Judgment Debt Be Settled Like Other Debts.




About the author

Michael Bovee

Michael is an experienced debt expert and can be found online at Consumer Recovery Network.

36 Comments

  • Great comment Andy.

    There are perhaps a couple debt settlement service providers who have the infrastructure and funding to be able to adapt quickly to a hybrid model of debt relief.

    There are far more CCA’s that would be able to adapt more readily. The CCA’s have so far been unwilling or unable to walk away from fair share and grants they receive from creditors that creates the inherent conflict of interest that has always been an underlying concern.

    Perhaps IRS reg Q that limits creditor funding to 50% combined with the dramatic decrease in fair share and grant value will coax and or force some of the DMP providers to look to creative and innovative designs for the future of debt relief.

    The 60/60 efforts have gotten little traction and are problematic from the consumer side anyway. I have never published anything about the issues from the consumer and broader economic side relating to the 60/60-esque plans because they never materialized in any meaningful way when introduced in 2006, or since. I have an article planned for this site on this topic soon.

    Debt relief, or at least the debt settlement side of the fence, will look very different 18 months from now in my opinion.

  • I’ve developed a belief that if the debt settlement industry doesn’t start to move in the direction of hybrid programs, it will disappear almost completely. We’re already seeing it and the writing is on the wall. Of course there will always be some demand for it, but there’s just not enough people that are truly qualified to fall behind on all accounts anymore. And it’s the same with debt management, an all or nothing approach automatically disqualifies most people. A hybrid program simply amounts to a better product.

    Yes, like Michael says, the games that creditors play will be an obstacle, but it can be overcome. After all, what is the difference between a hybrid situation and the last couple accounts on a ‘full’ debt settlement service? Not much, we all know that the creditors break balls on those last few, but they still settle.

    A hybrid program can create an entirely different dynamic between the providers and the creditors, and could amount to better dmp offers up front and more forgiveness on the dmp plans in progress. Especially if the providers reject any fair share, things could change.

    I think the most interesting aspect to a hybrid program is the ability to incorporate a debt rollup strategy into the second half of the program. Once a portion of the accounts have been settled, there will be extra cash built into their monthly payments . This surplus can now be piled on top of the dmp payments strategically between accounts. As accounts drop off, the surplus grows and is redirected to the next account, until the debt is gone and everyone wins.

    If a hybrid debt relief program is created, what is the need for full debt settlement or management providers that only offer one or the other? None, the hybrid covers both ends of the spectrum and everything between.

    The question I’m left with is, Who is better suited to create a hybrid debt relief program? An existing debt settlement provider?, or an existing debt management provider? It’s hard to say but if its going to be a settlement provider, they would probably need to have an increased focus on compliance, licensing, bonding, and overall standards. If it’s going to be an existing dmp provider they would need to tell the creditors to go screw on the fair share, in order to do it right. Based on the debt relief industry that I have come to know, I’m not sure if anyone has the guts to do either.

  • Jason, thank you for responding to some of my questions.

    Do you work in the debt relief space in any capacity? Your comments suggest you do. In what way? When you talk about spreading payments to all creditors equally based on ability to pay being fair, is that what you do?

    If you work in debt settlement your comment would suggest that you try, in observance of all fairness, to get the maximum and equal amount of money to creditors on behalf of your clients.

    This would be counter-intuitive.

    I have already agreed in part that navigating hybrid and flexible plans to address problem debt has obstacles. The only way you can do so successfully is to have an extremely deep understanding of all the varied aspects of collection stages and individual creditor behavior. I surmise from your comments that you don’t think a plan with built in agility to adjust is feasible.

    If you do operate in the space and know your work flow and its implementation in the way that you are committed to it, I do not endeavor to change your mind, or your focus. The fact that my work flow and the methods I advocate be understood and implemented where applicable and prudent are different than yours (and are in fact different than what is done throughout most of the industry) is no secret at this point.

    Jason, if a consumer came to you with 5 accounts they were unable to keep current, where 3 of the balances were in excess of 10k and where 2 of the balances were less than 1k, what would be the recommendations you would make to the consumer about settlement?

    Credit reporting and the skip tracing you refer to in your post are part of the equation, which I had pointed out above in response to Andy. You appear to weigh those issues, perhaps too much in some instances and too little in others.

    I would tend to agree with you that many in the industry are limited in their knowledge and understanding of the collection process from day one of delinquency until an account is successfully dealt with. I am going to be making a concerted effort to inform and educate all readers of this site through additional article submissions and comment participation by using my experience and observations. I hope others will contribute, or continue to contribute in the comments.

    I emphatically agree with you that debt settlement is primarily an alternative to chapter 13 and in some limited instances better than opting for chapter 7 when there are knock on effects that should be avoided if possible. The pool of suitable people to attempt settlement is much smaller than many market participants assume. This fact, as can be seen in the article above, and my follow up comments, find us in complete agreement.

    Your point about those who drop a settlement plan due to being sued who then file BK being high is likely a very accurate observation. It in fact helps to make my point about quicker program lengths being the only prudent method for underwriting and accepting people. Your point is so clearly in support of what I have presented that I am not sure why there would be any need to debate it further.

    Thank you for your brief definition of a hardship. Unfortunately, in order for me to comment in the way I had hoped, I would again have to assume more than I am comfortable about your reply. It would now be helpful if you could define “reasonably” as contained in your comment “someone who cannot reasonably afford to pay back their debts in full”.

    Your comment about settlement being done by an attorney who also provides BK services as part of their practice would theoretically be better. It is not the reality in practice today. Not with creditors, collection attorneys and agencies, percentage of savings when inclusive of fees (or likely without fees).

    Articles I am preparing for the coming week will speak more clearly to some of what has developed in the comments section of this one.

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