Posts Tagged ‘debt settlement’

Your lenders will generally “write off” a delinquent account as a bad debt after 180 days, or six months. Most lenders attempt to collect their debts for a period of 180 days, and then, after that period,  issue a “charge off.”  This action is reported to the consumer reporting agencies (such as Experian) and will appear as a “charge off” or as “collection” on your credit report.

A “charge off” means that your delinquent debt was sold and/or transferred for collection purposes to a third party.   In all likelihood, after your debts are charged off, you will remain legally responsible for repaying the debt.  In other words, your debt is a contract to repay money, and those rights may be sold, assigned, and transferred to a third party. Some of the large credit card companies use collection agencies to collect their debts.  Here, credit issuers prefer to outsource their collections to aggressive third party agencies who take the risk and rewards in collecting delinquent debts.  In the alternative, many companies and debt collectors are active in the delinquent consumer debt market, and purchase delinquent debt from credit card companies. In these cases, your debt is sold to these companies for a fraction of its full value.

In either instance you have a right to request that the original creditor or new account owner provide documentation that verifies the debt.  You have a right to request a record of assignment and transfer if your debt was sold to a third party.  You also have the right to request an account statement that provides a breakdown of the principal and interest owed, as well as a statement of all credits made to your account. For more information, see the Fair Debt Collection Practices Act, 15 USC s. 1692(g) for the Federal statutes concerning the validation of debts.

If you are considering paying debts that are now owned by a third party, keep in mind that paying off those debts may not improve your FICO credit score. The most important factor that weighs upon your credit score is what the original creditor reports to the consumer reporting agency. This report is weighed upon much more heavily than what is reported by a debt collector or third party assignee of a debt.  In other words, paying off collections accounts does not improve your FICO credit score.

Today I read an interesting article by a self proclaimed “financial expert” who has made himself rich by selling books and advice to people who are in debt. I will avoid using his name; but truth is there are quite a few “experts” like him on the internet; just look for the paid ads in Google that say “Avoid Bankruptcy”, “Bankruptcy Alternatives”. In his article, he states that even if he sees a situation where there is “no way out” that he would try to talk the person out of filing bankruptcy. His article was rattled with lies; such as “bankruptcy stays with you forever” and half truths such comparing bankruptcy to the death of a loved one. However, as I read on, one thing became clear; this expert was using a time tested marketing technique called fear. He was attempting to scare people into buying his product…a subscription to his website, or one of his many books.

This gets me to the point of this post: as financial times get tough, there are more and more unscrupulous companies out there that target and take advantage of people who are going through financial troubles…so be careful. Most people that consult with me have been programmed to believe that they should avoid bankruptcy at all cost and they have this huge social stigma against the bankruptcy; to the point that they are on the verge of becoming homeless. It is this “stigma” that has lead to more and more predators appearing on the internet, in the news paper or on the radio. These companies all have a common theme; they claim “reduce your debt by 60% or more” or that can negotiate a lower payment. I recently saw one site that promised to have you “out of debt in 18 months”. If this sounds too good to be true, well it is. Most people who use one of these services end up filing bankruptcy anyway after they have paid thousands of dollars to these companies while nothing is ever paid to their creditors.

Let me explain how most of these companies work. First is the payment reduction method, or debt consolidation. Through this method, the company sends a letter to your creditors asking for lower payments. They also ask that your creditor pay them a certain percentage of the loan, and may have you pay a fee also. You pay the consolidation company and they pay your creditors. Your creditor may participate in this program, but most don’t. This means that you end up paying the consolidation company for a few of your debts and paying your actual creditor for the rest.
The second method usually used by these companies is the debt settlement approach. Under this approach, the company will have you start making payments to them instead of your creditors. They tell you to stop paying your creditors, and some even say that they have already made arrangements with your creditors. These companies first collect their fees (most of the time several thousand dollars), then put the rest in a bank account. They then wait until your creditor defaults you for not making payments then they propose a “lump sum” payment in full that is a fraction of the outstanding debt.

Don’t get me wrong, debt consolidation and debt settlement do work for a relatively few people; I have done them myself for my clients. So my suggestion, before you waste your money on one of these companies, schedule an appointment with a good bankruptcy lawyer, most consultations are free. Ask your attorney questions about alternatives to bankruptcy and if he insists that bankruptcy is your best option, ask him to explain why. If he gets upset or short, or cannot answer your question, then end the consultation and call another attorney. Because the truth is; bankruptcy is not for everyone and a good attorney will tell you so.