Getting Out of Debt For Less Than You Owe

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When your business is in debt and you don’t want to file for bankruptcy, when you  cannot pay your bills in full, what to do? One option is to try and negotiate with your creditors and see whether any of them would be willing to accept less than full payment.

Here is how to do it: Write a letter explaining to your creditor that you would like to settle your account in full, but that you are simply unable to do so. Your letter should go on to offer a settlement for an amount less than you owe.

Why would a creditor accept such a proposal? Because, you explain, if it does not, you will have no choice but to declare bankruptcy, in which case, it will get nothing. Fifty cents on the dollar immediately starts to look like a pretty good deal.

While you can try and get your creditor to accept monthly payments for the reduced sum, we think you will have a much better chance of success in you negotiations if you can offer to pay the reduced sum in full.

A typical negotiated letter and settlement may look like this:

XYZ Creditor
2734 Marty Way
Sacramento, CA

Re: Account No. 2727

Dear Customer Service:

As I have told you over the phone, I am unable to pay my debt to you any longer. I am writing today to see whether you would be interested in settling my account. I have learned that I could completely erase my all of my debts by filing Chapter 7. I would like to avoid that if at all possible. Therefore, I make the following offer:

1. In consideration for immediate payment of $ _______, (the “Settlement Amount”) which is 20% of the outstanding balance I owe your company I, __________, (“Debtor”) and your company, ____________, (“Creditor”) agree to fully, completely, and forever compromise and settle this debt. (Start your offer low, at 20% or so, so that you can negotiate a bit higher if necessary later on.)

2. Creditor agrees to accept the Settlement Amount as payment in full for all possible obligations Debtor may have with Creditor. (Once your creditor accepts this offer, or something similar, this “Settlement Amount” is all you will owe.) Creditor further agrees to cease all collection activities regarding this debt, to cease all legal proceedings against Debtor, and to fully release and hold harmless Debtor from any further obligations arising from this debt. (These points are negotiable. What you really care about is settling your debt for an amount substantially less than you owe).

3. Within five days of receipt of a signed copy of this letter, Debtor will forward to Creditor the Settlement Amount via cashier’s check or money order. This settlement will only take effect after both parties have signed this letter and the Creditor has received the Settlement Amount. (If you fail to pay, the settlement will be of no effect.)

Considering the fact that I could pay you back nothing by declaring bankruptcy, I think that this settlement offer constitutes a quick and equitable solution to this problem for both parties. If you agree to the terms of this settlement, please have the appropriate person sign below, return this letter back to me, and I will immediately forward the Settlement Amount to you. Thank you for your consideration in this matter.

Very truly yours

Dated _____________ ___________________________ (Your name)

Dated _____________ ___________________________ (Name of Creditor)
By: ___________________________ (Name and Title)

It is important to realize that if this letter does not work, or you otherwise ignore your creditors, you will end up with a very negative credit report, not to mention the peace of mind and future credit you will lose. If you can settle these debts before things get out of hand, you are better off.

What to do if you cannot pay

If you are just unable to pay your doctor bill for example, at some point the doctor will sell your debt to a collection agency. Most original creditors would rather sell the debt at a steep discount than continue to try and pry money from you if you don’t have it.

It is important to realize this up front about collection agencies: their bark is usually far worse than their bite. Yes, they can threaten you, seemingly harass you (which is actually illegal, see below) and cause you to stop answering your phone. But that is about it.

There is much they cannot do. Can they garnish your wages? No. They may threaten to if you do not pay that bill, but the truth is, they cannot. There are only three times when a creditor can garnish your wages:

1. If you owe on a student loan, there are special rules that allow that creditor to garnish your wages.
2. If you owe child support, your monthly payment can be garnished.
3. Any other creditor can only garnish your wages when it has sued you, won the suit, and received permission from the court to garnish. You will know if this is happening to you.

So, if none of these situations applies to you, you should understand that when a creditor threatens to garnish your wages, he is blowing smoke.

Can they have you thrown in jail? No. “Debtor’s prison” was outlawed in this country long ago.

Can they threaten you? Sure. But so what? Most of their threats are hollow. Collection agencies just love to make empty threats and create artificial deadlines. They tell you that if five post-dated checks are not received by the next day, suit will be filed. Or they might say that if $500 is not in hand by Friday, bank accounts will be seized. Baloney.

The truth is, most of their threats are empty, and there is no deadline.

Will the collection agency sue you? Maybe. But only maybe.

Turn the tides

Knowing that a lawsuit is unlikely, it is possible to turn the tables and demand that the debate be held on your terms.

The key thing to remember when dealing with a collection agency is that, believe it or not, you have all of the power. You control the checkbook.

Collection agency harassment got so bad that it took congressional action to rein it in. The Fair Debt Collections Practices Act (FDCPA) is a federal law that regulates what creditors may and may not do when trying to collect a debt.

The essence of the FDCPA is that debt collectors must behave in a reasonable manner and are forbidden from harassing you. Impermissible actions may include:

  • [1b] Calling at the wrong place or the wrong time: A bill collector cannot call before 8:00 a.m. or after 9:00 p.m. If you so desire, the collector cannot call you at work.
  • Making inappropriate threats: The collection agency representative cannot use foul language, or threaten you with violence, seizure of assets, or imprisonment.
  • Using other forms of harassment: The debt collector cannot fraudulently misrepresent who he is or what he is calling about, cannot repeatedly call you, and is forbidden from publishing your name and the nature of the.

Knowing what is acceptable creditor behavior can pay tremendous dividends. Should an annoying creditor persist in calling you at work, tell him to stop. Should he threaten to have your car sold to pay the debt, tell him such threats are illegal. Make sure that when you speak with an annoying creditor, you use the actual words “Pursuant to the Fair Debt Collections Practices Act, you cannot . . . “ This lets him know that you know what you are talking about.

If a collection agency continues to violate the law after being told to stop, you have two options:

1. Contact the proper authorities. The Federal Trade Commission polices the FDCPA. Contact the office closest to you and explain the nature of the problem. State authorities, such as your Attorney General, State’s Attorney, or Department of Consumer Affairs, also may investigate a serious violation of the law.

2. Sue. The FDCPA permits lawsuits for violations of the Act. If proven, the violator could be liable for any out-of-pocket expenses you incurred as a result of the violation, penalties up to $1,000, and possible attorneys’ fees and costs. Such a suit would normally be brought in your local small claims court.

Stopping all creditor harassment

Maybe the best part of the FDCPA is that it allows you to force the creditor to stop all phone calls. If you have ever been subject to a pit-bull creditor who simply will not leave you alone, you do not have to be told what a relief this is.

The FDCPA also prevents a creditor from talking to your boss or co-workers about your debt.

Here is what you do: Write the creditor a “cease and desist” letter. This letter tells the creditor that he is to stop all further communication with you regarding this debt. Once received, the creditor must leave you alone. While a creditor retains the right to sue you, what he cannot do is write or call anymore.

Here is what your letter should look like:

ABC Collections
1800 Mariposa Ln.
Fullerton, CA

Re: Acct. 2727

Dear ABC Collections:

Pursuant to the Fair Debt Collections Practices Act, 15 U.S.C. 1592 et. seq., (this is the specific law you are using; make sure it is in your letter just like it is written here) you are hereby notified to cease and desist all further communication with me, and anyone associated with me, regarding the above-referenced debt. Failure to abide by this law will result in a complaint being filed against you with the Federal Trade Commission and the Attorney General of my state. I also reserve the right to file suit against you for any future violations of the law.

Very truly yours,

Between knowing what your rights are and forcing a collection agency to stop harassing you with one of these letters, your life can be much easier and less stressful.

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