Mark shares insights from three decades in debt collection and settlement: when speed matters, how limitation periods and the calendar affect settlements, hardship programs, written settlement letters, and what to do after you pay.
Transcript
Today is Part 4 in our series, How to save money settling one debt. The goal of this series is to teach you how to obtain great results eliminating one debt by making a one-time lump sum payment as settlement in full. Anyone can settle a debt for less than what they owe. The real challenge is to obtain the best available settlement and to save the most money possible.
In today's video I am going to share with you some of my insights about settling a debt, gained from working three decades in the debt collection and debt settlement industries. If you watch to the end of this video, you should learn how to obtain some of the biggest savings available and how to avoid making some big mistakes.
We are going to make several assumptions. Firstly, you have enough money available in the next five business days to make a payment of 25% of your outstanding balance. Secondly, you have identified the firm that is attempting to recover your unpaid account. Finally, you have identified the particular individual responsible for collecting it.
When you need a quick settlement
In most scenarios where an individual is attempting to settle a debt, a quick settlement is not required, nor highly desirable. There are, however, two special situations where it is very important or very helpful to obtain a settlement as quickly as possible. The first arises where you apply for a loan or credit and you are informed that there is an unpaid account appearing on your credit report, and you will not be able to obtain credit or a loan until this item is removed. The second arises where you have been sued.
Make no mistake, you are at a significant disadvantage negotiating a settlement when you have a short window of time to do so. The most generous settlements typically occur when you are under no time pressure. If you need to settle an account so that you can obtain a loan or credit, then it is very important that you do not disclose this fact to your creditor's representative. Such a disclosure might result in the collector insisting upon payment of 100% of the outstanding balance.
If you have been sued and you do not have a good defence on the merits, then it is in your best interest to resolve your unpaid account as quickly as possible. There are two reasons for this. Firstly, the longer the lawsuit drags on, the more money your creditor is going to spend, and accordingly they are going to want to recover these additional costs. Secondly, if your creditor does sue you and obtains a judgment against you, then your creditor will be in a position to obtain more money from you in the future.
Time, limitation periods and your credit report
I am now going to discuss how the passage of time and the calendar impact settling one debt. If the date of your last payment is more than six years ago, then your unpaid account cannot legally appear on your credit report, in which case I do not recommend that you settle this account. If your unpaid account no longer appears on your credit report, then unless you feel morally obligated to settle it, you derive no benefit from settling.
A word about statutes of limitations. Most Canadians live in a jurisdiction where the statute of limitations is two years. In Quebec it is three years. In the three territories and a few provinces with small populations it is six years. If the statute of limitations has expired on your unpaid account, then for all practical purposes your creditor has lost the opportunity to successfully sue you. This puts you in a better bargaining position negotiating a settlement. Your creditor or its authorized collection agent will not entertain a settlement offer until a minimum of six months have elapsed since the date of your last payment.
The best times to negotiate
You might be surprised to learn that more generous settlements are available at specific times of the year. The best time of the year to negotiate a settlement is during the last two weeks of December. December is the worst month of the year for collection agencies in terms of revenues, and they often find it difficult to break even. I can recall one collection agency that I worked for as a collection agency lawyer, and it would routinely lay off 5% of its total staff during the month of December. Many Canadians would rather purchase Christmas presents for their kids than make credit card payments in December. This means that collection agencies are highly motivated to entertain generous settlement offers during December, particularly the last two weeks.
Collection agencies also live in a world of quarterly results. Executives and managers are paid bonuses on the basis of quarterly results. There are four quarters in a year: one ends on December 31st, and the others end at month end in March, June and September. This means that every effort is made to recover monies during the last two weeks of a quarter, so the last two weeks in March, June and September are a good time to attempt to negotiate.
Large creditors typically divide their portfolio of unpaid accounts amongst four to ten collection agencies each month. These agencies are in competitive races to determine which has the highest recovery rate. At the end of each month, the top performing agency will likely be rewarded with additional accounts, and the worst performing agency might be dropped by the creditor altogether. You can take advantage of these races by making your settlement offer sometime between the 15th and the 20th of the month. You should avoid making an offer too close to the end of the month, because that will not allow sufficient time for the creditor to accept your offer, provide you with a satisfactory settlement letter, and give you time to make your payment before the last business day of the month.
Hardship programs and making your offer
Some creditors in Canada, particularly major banks, are more inclined to accept generous settlement offers from individuals they consider to be financial hardship cases. If you are dealing with some major hardships in your life, then I recommend that you ask the collector if your creditor accepts settlements on the basis of financial hardship. If your creditor has a financial hardship program, then it will require you to provide certain information and possibly some documentation, including details regarding household expenses, household revenues, your assets and your liabilities. It is common for Canadian banks to have a financial hardship form which needs to be completed and submitted.
If you have had a consultation with a Licensed Insolvency Trustee about making a consumer proposal or filing for personal bankruptcy, then I would disclose not only this fact but also the name of the Licensed Insolvency Trustee to the creditor's representative. Because of the pandemic, Licensed Insolvency Trustees have been permitted to do consultations online. If your creditor believes there is a real chance that you might make a consumer proposal or file for personal bankruptcy, then it might be more willing to entertain a generous settlement offer from you.
As a general rule, I recommend making an initial offer equal to 25% of your outstanding balance. There are a couple of scenarios where your creditor is likely going to want to recover significantly more. One is where you owe less than $1,000 to your creditor; in this situation you should not be surprised if your creditor seeks somewhere between 25% and 50% of the outstanding balance. If your creditor has sued you, you should not be surprised that your creditor is seeking somewhere between 75% and 90% of the outstanding balance.
Your settlement offer will be met with one of three responses. Number one, silence or no response. Number two, outright rejection. And number three, a counter offer. If your creditor makes a counter offer, then you have a number of options. You can reject it, you can accept it, or you can make a counter offer for an amount that is more than your original offer. This may result in another round of negotiations where the parties move closer to one another. The bottom line is this: if you are not able to obtain a settlement offer that you are happy with, then you have the option of breaking off negotiations and trying again at a later date.
Get a written settlement letter before you pay
Once you have negotiated an acceptable settlement with your creditor or its authorized collection agent, it is critical that you receive a written settlement offer before you make any type of payment. Failure to do so may result in your creditor accepting your payment as a partial payment, and you still being responsible for the balance. Under no circumstances whatsoever should you make any type of payment to your creditor or its collection agent until you receive a satisfactory written settlement letter. The letter may be from your creditor, or from your creditor's collection agent, which in many instances will be a collection agency and in some instances a law firm.
A satisfactory settlement letter should include the following. It should be on the letterhead of your creditor or its authorized collection agent. An individual's name should appear at the bottom of the letter, and ideally their signature too. The letter should include your name and your address. It should list the name of your creditor and your account number. It should state the amount of money that your creditor is going to accept, with a reference that it is being accepted as settlement in full. It should provide a deadline for receipt of your payment, and it will typically include detailed instructions regarding a method of payment.
After you pay
You are not finished settling your debt when you make your payment. It is important that you retain any and all documents relevant to your settlement. I am referring to the settlement letter from your creditor and also your proof of payment. If you settled your account with a collection agency, then a couple of weeks after the date of your settlement you can either call them or send them an email requesting a document referred to as a release letter. Release letters are typically provided by a collection agency's accounting department and not by the people in the collection department that you had been dealing with.
Creditors are large bureaucracies and they make mistakes. From time to time a person who has settled an account may receive a collection notice from another collection agency on that same account. In this scenario you simply provide the collection agency and your creditor with a copy of the settlement letter and your proof of payment, and this should be sufficient to resolve the matter. I have found that in these situations the creditor will quickly close the file.
Ninety days after your settlement, you should pull a copy of your credit report at both Equifax Canada and TransUnion to verify that it has been updated to show that the account in question is listed as SIF, or settled in full. If your account has not been updated after 90 days to show that it is settled in full, then you should follow up with both the credit reporting agency and your creditor and the collection agency.