San Francisco Debt Settlement Attorney – General Information
With debt settlement, borrowers can negotiate a settlement for less than the full balance and avoid bankruptcy. Debt settlement may be appropriate for clients that have the means to pay a settlement, and better for those that have one or two large accounts that are particularly problematic.
Debt settlement requires four basic steps:
1. Default on debt
2. Offer to settle – lump sum or installmentr payments
3. Settlement agreement
Default on Debt
While technically not a requirement, in general, lenders will not enter into negotiation unless the borrower is in default. Afterall, why would they settle with you when you’re voluntarily making all of your payments? Of course, once you stop making your payments, your credit score will take a hit. For this reason, you can expect debt settlement to hurt your credit score.
Once you start missing your payments, the lender will start its collection calls. The calls typically start within 7 days of the payment due date, but this varies by the creditor. You can indicate your desire to settle at any point after the default. However, offers will typically get better with time.
From the moment you go into default, you also run the risk of a lawsuit. Defending a lawsuit can be very costly. However, even if you are sued, it’s important to note that you can still settle your debt. In fact, most credit card lawsuits end up in settlement.
Typically, around 6 months after default, the lender will sell or transfer the account to a third party debt collection agency. Often, you can get a better deal from the third party debt collector agency than from the original lender, such as Chase.
One other consideration of default is that your balance will grow exponentially once you’re in default. Each month, you’ll be assessed with late charges and compounding interest. Most credit cards have a default rate of about 30%. This means that if you stop making payments on $30,000 of credit card debt for 6 months, the balance will easily balloon to more than $35,000. The rapid growth in balance can also make settlement challenging.
Offer to Settle
One of the biggest hurdles in debt settlement is having sufficient funds to pay the settlement amount. Practically speaking, most clients who want to do debt settlement can’t because he or she doesn’t have any money to settle with. Remember, you need money to settle your debt. So, if you are going to attempt debt settlement, you should immediately start saving as much money as possible.
In general, you’ll get a much better deal with a lump sum settlement offer than an installment payment. With an installment agreement, the lender has no way to ensure you’ll make all of the promised payments.
How much can I settle my debt for?
Frequently, I’ll get a call from a client with a question like “I have $30,000 in debt. How much can I settle it for?” This is a tough question to answer. The short answer is “it depends.”
There are many factors and considerations in determining how much you can settle an account for.
- Number of accounts. Most clients have multiple credit cards. This means that we’ll have negotiate and enter into a settlement agreement with each and every credit card. Lining up all the creditors at once to settle can be very challenging. The situation we want to avoid is where you settle with one or two accounts only to have the other accounts bring a lawsuit against you forcing you into litigation or bankruptcy after having expended your limited resources on settling with some creditors.
- Length of default. In general, the older the debt, the better the offer will be.
- Original vs. third party collector. As mentioned above, you’ll generally get a better deal from the third party debt collector.
- Lawsuit vs. collection agency. Once a lawsuit has been filed, it becomes difficult to settle the debt without having your own attorney. Frequently, you’ll have to pay some of the lender’s attorney fees and costs as part of the settlement agreement.
- Lump sum or installment payments. A one time payment of $10,000 is likely to be more successful than a 10 month repayment of $1,000.
- Personality. Unlike bankruptcy where we know the players – the trustee and the judges, we often do not know who we’ll be dealing with when we are attempting to settle your credit card accounts. We might get someone on the other side who’s willing to play ball and settle. Other times, we get the not so agreeable person and the settlement can take months.
Once you’ve made an offer an offer and it’s been accepted, it’s important to have the agreement reduced to writing. If you’re settling with a third party debt collection company, be sure to get a release from the original lender as well.
This is the simplest step. Once you have an executed settlement agreement, you’ll need to pay the negotiated amount. You should pay this amount in money order or cashier’s check. Never from your personal checking account since you don’t want the lender to have your bank information.
Debt Settlement and Taxes
One downside of debt settlement lenders frequently don’t tell you about is that you’ll receive a 1099 for any amount forgiven. For example, if you settle $20,000 for $7,000, you’ll be taxed on $13,000. Assuming you’re in the 25% tax bracket, this means you’ll end up owing $3,250 in taxes.