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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.
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.
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:
- You can settle debts on your own without the need for third party interference.
- There are reputable companies offering debt settlement services who do not charge fees in advance, like members of the AACC.
- 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.