I got a question from a reader this week, regarding how she can settle with her credit card collectors. She’s read the tips on my other articles, and is in a position where she has found herself struggling as a single mom of 4, a job that barely covers the bills, and a mound of credit from her dissolving marriage. Since she is getting a fresh start for herself and her kids, she wants to get her financial affairs in order as well. She’s considered that she may have to consult a bankruptcy attorney if she can’t negotiate an affordable arrangement with her creditors, and needs some tips to use while she tries to make these arrangements. I did some research, and these are the tips I came up with:
- Make a spreadsheet listing ALL of your creditors. List their name, contact info, balance, interest rate, minimum payment, due date.
- Create a budget. You need to know what YOU can afford to pay, realistically, before you call with promises to pay certain amounts.
- Understand that you will need to CLOSE each account and not use these cards anymore.
- Study the budget and spreadsheet. Come up with your ideal plan to pitch to each company and make notes on your spreadsheet that you can reference during your call. The better prepared you are with a full working knowledge of your situation, the better result you are likely to get during the call.
- Start with the smallest balance, and begin calling EACH creditor. Start calling early in the month, if you don’t reach an acceptable agreement right away, call back every 5 days. Make notes on your spreadsheet of EACH person you speak with, what time you are calling, and what they tell you. Persistence usually pays off. Sometimes you just need to catch the right person on the right day. As time goes on during the month, if you aren’t making progress, start asking to speak to supervisors, managers, or the Vice President of Collections. Work your way up, every employee has a boss.
- Write a letter. If it’s the middle of the month, and you aren’t getting anywhere, consider sending in a letter explaining your situation. Tell them that you must to work out a mutually beneficial REDUCED balance/payment plan. List every person, date, time, conversation you’ve had that has lead up to the writing of the letter. Ask for a manager to contact you to work out an arrangement. Send it certified or registered, so you create a paper trail.
- Know your rights.
- Know the law. If you are behind on payments, and facing judgments, you need to know what the statutes are in your state.
- Learn how collection agencies work. If you are getting letters or calls from agencies, research them. Know the length of time they keep accounts, the “type” of agency they are: (i.e. primary, secondary, tertiary) for the company they represent. Usually, collection agencies sell their debt after a given length of time. Each will have limits they must stay within. Based on many articles I read, it seems as though the average Primary Agencies buy debt for about 25% of the balance. Secondary for about 10%, and tertiary for about 5%. They must cover the cost of their purchase, and then make their profit.
- Understand they won’t ALL agree. There is a risk of them filing for a judgment or garnishment. The goal is to reach a mutually acceptable arrangement without that happening, but it doesn’t always work. Knowing that ahead of time will save you some frustration.
- If you get served papers for a judgment, go to court. If you don’t, you lose and they can garnish you. If you go, you’ll have the opportunity to plead your case to their attorney and possibly work out an agreement before seeing the judge, or at least have a chance to plead your case and arrangement you can afford to the judge before the ruling.
- If you get a rude person on the phone, hang up and call back. Should you get the same person, demand a supervisor. Remain CALM, don’t yell or call anyone names. The person on the phone isn’t responsible for your situation, they are just doing their job, though admittedly, some do it better than others 🙂
- Sometimes end of quarter is a better time to reach an agreement with agencies. If you can settle in March, June, September, or December, sometimes you’ll have more luck. If you file taxes early in the year and are getting a refund, perhaps consider a lump sum payment to one or more agencies using your refund. Then, you can mark one creditor off your list as account settled, and move on.
- The bigger your balance, the more leverage you have. Know what your debt percentage is. If you offer to settle a $1000 balance for $100 (10%), it’s going to be harder than settling a $10000 for $1000 (10%). Start low so you have room to negotiate up. You won’t get 10%, asking for 25% first. Start low, and work your way up. Sometimes they will take payments on the agreed upon balance.
GET EVERYTHING IN WRITING. I really cannot stress that enough. BEFORE you make your first payment, you need a letter IN WRITING spelling out the agreement. THEN, send a money order (you will have a receipt) and mail the payment certified. You WANT a paper trail. Make copies of everything, and keep it all in a file. Once it’s paid as agreed, ask for a letter stating as such, and KEEP IT IN YOUR FILE. Keep ALL records in a fireproof container. Sometimes irreputable agencies will buy old, settled, debt and start contacting you. Send them copies of your paid as agreed paperwork to stop them.
- Know that they will pull your credit report before agreeing to anything. It’s important that you are checking your own score regularly (I get my free copy from each agency annually. I request one each 4 months, so I always have one that is fairly current.)
- Continue making minimum payments each month if you can. It will show them that you are trying, and willing to work with them.
- The biggest ding to your credit, will come within the first 2 years. If you can survive that, things should turn around. YES, things can stay on your report 7-10 years, but as time goes on, the affect on your score diminishes.
- Contact a financial attorney to guide you legally when navigating this minefield. They will know the laws and your rights in your area better than anyone. They don’t ALWAYS suggest bankruptcy.
- When settling, have a certified tax professional prepare your taxes. Sometimes there are tax implications and/or benefits. They can make sure you are filing correctly.
**Various people usually comment that settling with collectors will damage your credit score. This is true. However, the fact of the matter is that typically when people find themselves IN this situation, the score is already damaged and falling. Tips like these are meant to help bandage the wounds and help people begin to heal financially.
***If YOU have a question or situation you need tips for, just use the contact form and let me know. I am also willing to help you create spresdsheets, if needed, for VERY reasonable rates. If I’m able, I’ll research the topic and write up an article for you. Also, I am NOT an expert, just a mom who likes to research things online and help others where I can.***