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Time-Line to settle a Debt (in Texas)
As Bankruptcy Lawyers in Houston we have ample experience providing our clients with effective debt relief strategies that work. This is the second in a series of articles we are providing to help people remove their debt burdens; see our first article How To Get ut of Debt: A Texas Debt Settlement Primer
You should set aside a total of 4-6 hours for each account you hope to settle. You will rarely ever spend more than half an hour at any one time, but it’s essential that every step you take is documented (every phone call, letter, email, etc.). Each little bit of time expenditure adds up and this does not include the amount of time you spend thinking or worrying about each account.
Depending on how long it’s been since you defaulted on the debt, it’s not worth trying to settle until you have at least 15% of the principal to offer as a lump sum while also being prepared to make some monthly payments. This really varies by creditor, but the point is that you should not start the process until you at least have some reasonable percentage to offer. If you don’t, review your basic rights under the Texas debt collection laws. Proper use of the collection laws can almost certainly buy you a few months.
Step 1: Contact the creditor or the creditor’s representative
First get the person’s name and direct phone number or extension. You will likely not be given a direct phone number or extension but insist on getting the person’s name. Explain that you do not want to get lawyers involved and that you are calling to learn about their settlement parameters. They will probably ask for personal information, and it’s ok to confirm your name, address and phone number. If it’s a collection agency (as opposed to the original creditor), do not give out your social security number. Find out all you can about the debt: what is the balance as of today, when was your last payment, how did the company acquire the debt if it’s a debt buyer, etc. See if they will mail you a detailed statement as this will buy you time.
Keep in mind that you may not get all, or any, of this information on the first phone call. It could take 3 calls, or 20, but the goal is to ensure that you know how much you owe and why you owe it. Take copious notes--remember that the person you are speaking to now may not be taking accurate notes. You also may not get to speak with this person the next time you call.
Remember that you are not required to stay on the phone, no matter how hard they try to keep you on the phone. If they are rude, hang up and take detailed notes of exactly what was said to you that caused you to hang up. These notes may be critical if you ever seek to use an attorney.
Step 2: Determine an offer that you know you can handle
Once you have learned what the creditor is willing to do, you can come up with an offer. Be reasonable. No matter how many friends have told you they have settled their debts for 10 cents on the dollar, it’s likely not true. These offers do appear from time to time, but the time and effort you spend waiting for them will further harm your credit and cause you undue stress. Based on your conversations with the creditor, figure out an amount you can afford to offer, be it a lump sum or a monthly payment. Discount that amount by 20% and make the offer.
Step 3: Repeat steps one and two above until you’ve reached a settlement
You may be thinking “seriously?!?!? That’s IT? Why do lawyers and all these companies ask to get paid to do this type of work?” That’s really all there is to debt settlement. I can’t speak for others but we ask to get paid because it’s arduous and laborious work. Also, because we do this type of work every day, we are more likely to discover debt collection law violations as well as other opportunities that our clients can exploit to their benefit for better settlements.
Step 4: Once you have reached a settlement, insist on the offer in writing
Unfortunately, it’s not completely uncommon for creditors to mess up their records on settled debts. More than once in my career I have seen creditors and debt buyers file suit over debts that had been settled. In each case, our firm handled the settlement, so our client had a bullet-proof defense. In fact, filing suit on a debt that’s settled violates the debt collection laws. When our clients experienced this, not only did we get the lawsuits thrown out, our clients were paid a little bit of money for the annoyance of the process. Unless you have something in writing reflecting the agreement, as well as proof of payment, you will struggle to defend that lawsuit.
Step 5: Pay the settlement by check or other form of payment that can be tracked
Do not pay by money order or cash. Absolutely do not give the creditor access to your bank account. You may need to be able to prove sometime in the future that the payment was received and cashed by the creditor. This is very easy to do with a check, very hard to do with a money order. You also might consider incurring the expense of mailing your payments via certified mail, return receipt requested as you will get written proof that the creditor received your payment.
Step 6: 3 months after settlement, pull your credit report to ensure that it reflects accurately
Yet another unfortunate aspect of being a financially strapped individual is that the burden is on you to make sure your credit report is accurate. If you are not already doing so, you should take advantage of the government resource to get a copy of your credit report for free once per year. The government’s website is annualcreditreport.com. It is truly free. Do not be put off by requests to pay for your credit score--simply follow the smaller links and you will, in fact, receive your credit reports for free. If there are errors, dispute them. If you ultimately need help with this process, check out myfaircredit.com or this page from the FTC on consumer credit rights
If you get a 1099, don’t fret!: It is fairly common for creditors to file a 1099 for any amount of debt forgiven. Without help, you would be forced to pay tax on the forgiven amount. If you are struggling financially, it’s highly likely that you qualify for an exemption to pay this tax and it is essentially that you seek the help of a competent CPA or other tax professional. A couple hundred dollars spent on an expert could save you multiples of that expense in taxes.
Read the other articles from our Debt Settlement Primer
1. Debt Settlement Primer
2. Step-by-step timeline
3. Beware of the charlatans
5. Interchangeability of terms
6. Do’s and Don'ts
Click this link to download the Texas Debt Settlement Primer (PDF)