Mark recaps Part 1, then covers the preliminary issues in settling one debt: having enough settlement funds, eliminating available credit, the effects of stopping payments, and finding out who you will negotiate with.
Transcript
A quick recap of Part 1
Today is Part 2 of our series, How to save money settling one debt. Let's do a quick recap of the key points from Part 1. In some but not all situations, it is possible for a Canadian to eliminate a debt by making a one-time lump sum payment for less than the outstanding balance. Negotiating a settlement is possible for any type of consumer debt. It is not, however, available for eliminating monies owing to the government, nor child support or spousal support.
Creditors will not entertain a settlement offer unless no payment has been made for a minimum of six months. Creditors are under no obligation to accept a settlement offer, and they and their authorized collection agents have the right to insist on payment of 100% of the outstanding balance. If you are going to settle your debt for less than the full amount, then you must make a one-time lump sum payment. It is not possible to settle a debt using installment payments.
In today's video we are going to focus on a number of preliminary issues in connection with settling one debt. Some of these issues may apply to your particular situation and some may not. If you go to the description, you will see that there are chapters with a timestamp. This gives you the option to only watch those sections that are relevant for you. Of course, you may decide to watch this video in its entirety.
Have enough settlement funds first
If you successfully negotiate a settlement, then your creditor will insist upon receiving the settlement monies as a one-time lump sum within five to ten business days. This means that there is no point commencing settlement negotiations unless you have sufficient settlement funds available. As a rule of thumb, I suggest that you have a minimum of 25% of the outstanding balance before you have settlement discussions with your creditor or its authorized collection agent.
If you do not have adequate settlement funds at the present time, then you do have some options. Number one, you can wait, save up additional monies and commence settlement discussions at a later time. Secondly, you can contact family members and see if there is a possibility that you might be able to raise additional settlement funds in the near future.
Eliminate your available credit
Your creditor and its authorized collection agent will almost always have access to your credit report. This means that they might know your total available credit on your credit cards and lines of credit. It may be difficult to negotiate a generous settlement when your credit report reveals that you have sufficient available credit to pay your account in full, if you were to take out a cash advance from either a credit card or your line of credit.
I learned about this issue when I was a consumer lawyer and I was attempting to settle a debt on behalf of a client. The collector had my client's credit report, and he pointed out to me that my client had sufficient available credit on his credit card to pay the outstanding account in full. The collector then informed me how to get around this problem. He advised me that my client should eliminate the available credit by taking a cash advance and then waiting several months before attempting to settle the debt.
Accordingly, I recommended to my client that he eliminate his available credit by taking a cash advance. We then waited 90 days and attempted to do a settlement. We were able to do a favourable settlement, and my client used the monies that he had taken out on the cash advance to fund the settlement.
If you are currently making payments
You may have an account that you are currently paying and that you would like to eliminate by way of settlement. As noted earlier, your creditor will not entertain a lump sum settlement for less than the full amount owing unless no payment has been made on your account for a minimum of six months. This means that if you want to obtain a settlement on your unpaid account, then you will have to stop making payments for a minimum of six months.
I want to raise two issues that arise in circumstances where you have been making payments on an account and then you stop. Number one, the impact on your credit score and some of the negative consequences arising from that. Secondly, avoiding being victimized by a creditor's exercise of a right of set-off.
If you do not make payments on your account for six months, then you should anticipate that this will have a negative impact on your credit score. This may result in a number of adverse consequences. You will have difficulty borrowing money, and when you can borrow it will be at a higher interest rate. You may pay higher car insurance premiums. You may find it more difficult to rent an apartment, and in some circumstances you may find it more difficult to find employment.
If you have a bank account at a particular financial institution, and at that same institution you want to stop making payments on a credit card, line of credit or personal loan, then you will want to avoid being a victim of your financial institution's exercise of its right of set-off. Say you have a bank account with ABC Bank, and you have a credit card, personal loan or line of credit obtained through ABC Bank. If you stop making a payment on that credit card, loan or line of credit, then ABC Bank can exercise its right of set-off and take monies out of your bank account to cover the missing payment.
In order to avoid this, you should close your bank account at that financial institution before you stop making any payments on a credit card, personal loan or line of credit from that same institution. Otherwise, you could be a victim of its exercise of its right of set-off.
Identify who you will negotiate with
If you have an unpaid account, then someone has been assigned the responsibility of collecting it from you. This is the person you will want to be speaking with to settle your unpaid account. Sometimes it is very straightforward. If, for example, you are receiving collection calls from John White at the XYZ Collection Agency, then you know that you would be attempting to settle a debt with Mr. White at the XYZ Collection Agency. In many instances, however, it is not clear who you are going to be speaking with in order to attempt to settle your outstanding account.
Your original creditor is the firm that provided you with goods, services or credit. For the first three to six months that your account has not been paid, you will be receiving collection notices and collection calls from employees who work in the in-house collection department at your original creditor. If your account has not been paid for six months, then your original creditor has a number of options. Number one, it can place your account with a collection agency on a commission basis. Number two, it can hire a law firm to collect your account. And number three, it can sell your account to a debt buyer.
When your account has not been paid for six months, the most common scenario is for your original creditor to assign your account to a collection agency. One collector working at the collection agency will then be assigned the responsibility of collecting your account. It is important to appreciate that a creditor can only place your unpaid account with one collection agency at any given point in time. Creditors routinely place an unpaid account with one collection agency for several months. At some point your creditor will recall the account for a few days and then assign it to a different collection agency.
It is also possible that when your account has not been paid for six months, your original creditor will hire a law firm to collect your account. There are two scenarios when it comes to law firms. Some law firms operate in virtually the same manner as a collection agency. There are also law firms that will sue on an account on behalf of the creditor. It is possible to negotiate a settlement when your account has been placed with a law firm. It doesn't matter if you've been sued, it doesn't matter if a judgment has been obtained against you, and it doesn't matter if a lien has been placed on your home.
Sometimes an original creditor will decide to sell a block of unpaid accounts to a firm called a debt buyer. The debt buyer steps into the shoes of the original creditor, and it has the same options when it comes to what to do with an unpaid account. If your unpaid account has been sold to a debt buyer, then one of its employees will be assigned the responsibility of collecting your account.
How to find out who has your account
In order to identify the firm which is attempting to collect your account, you should go to the website for your original creditor, obtain the phone number for the main switchboard, and call it. You can then identify yourself and your account and ask for the name of the firm which is attempting to collect your unpaid account. The person you speak to at your original creditor almost invariably will be able to provide you with some very helpful information.
If your account has not been sold to a debt buyer, then I would expect that you will be told whether your account is with the in-house collection department at your original creditor, or has been placed with a particular collection agency, or whether your original creditor has hired a law firm. In that circumstance you can request the name of the organization and a phone number. It is also possible that you may be informed that your account has been sold to a debt buyer, in which case you can ask for the name of the debt buyer and a phone number.
The purpose of this video is to teach you how to save money settling one debt. You can do this yourself. You do not need to hire a debt settlement firm to represent you. If, however, you would like some assistance, you may want to hire a debt coach. I am a debt coach, and if you would like to take advantage of my three decades of experience in both the debt collection and debt relief industries, I would invite you to get in touch with my firm, Debt Coach Silverthorn.