By Attorney Richard S. Ravosa

For clients who wish to settle their debts, the key is in timely paying the creditor the settlement amount you have agreed to. There are two general types of settlements, payment plans over time, or a lump sum settlement. There is a third type, which is sort of a combination of the two that will also be addressed.   For example, if you have a $10,000 balance on a credit card and you want to set up a payment plan to pay it off, the chances are good that the credit card company will let you make smaller monthly payments over time, so long as you agree to pay off the full $10,000. Whether interest and late fees are still accumulating depend on how well you negotiate an agreement with your credit card company. This type of settlement can be long, drawn out and not really save you very much money in the long run. Also, the longer a settlement agreement is in place, generally the worse it is for you because the credit card companies often have a clause that says if you miss an agreed payment, the deal is off and they can come after you immediately and demand the full past due balance from you. These payment plans usually fall by the wayside for one reason or another, often after people have made many monthly payments that they would not have had to make had they filed bankruptcy earlier. Making monthly payments to a credit card company, if you are going to file for bankruptcy anyway, is like throwing money away that you could have used on other, more important things.   The better type of settlement is a “lump-sum” settlement. With that same $10,000 balance in the previous example, if you offer the credit card company an immediate payment of $8,000 to settle this account in full and final settlement, the chances are good that they will take it. But not so fast. If you are current with your payments, the credit card company is unlikely to agree to this and that is because they are getting your payment every month and they have no incentive to offer you a deal. The longer you are unable to make your monthly payment and the further behind you fall month after month tells the credit card company that you are having financial difficulty. Typically, the more you fall behind, the better your chances are for a lump sum settlement for a lower amount. After you have missed two or three payments, sometimes your credit card company will transfer your account to a collection agency. This collection agency will contact you and try to get you to make payments. This is where you can wheel and deal, but not so fast.  Many creditors believe that the longer an account goes unpaid, the less likely they are to ever get paid from you. Now that a few months or more has gone by, you stand a better chance of settling your $10,000 balance for $5,000. That is a 50% reduction of what you owe. If you are happy with that then good for you, but if you continue to drive a hard bargain, you can get the settlement amount even lower, but you have to be prepared to be patient and put up with the harassing phone calls and letters, unless you have a lawyer representing you, then the credit card company is not allowed to contact you and they have to deal with your lawyer instead. If you or your lawyer really drive a hard bargain, it is possible to pay as little as $2,000 to settle your $10,000 balance. But the key is having the $2,000 now and paying it immediately by a check by phone, or overnight mail. What makes this settlement technique work is the immediacy of your payment to settle the balance now. If you can do it, then you get a great deal, but if you can’t, your stuck paying off the full $10,000 balance, plus added late fees and interest charges.   Before you agree to any type of lump sum settlement, or any other type of settlement, it is best to get the terms of the agreement in writing before entering into the agreement. Also, you should insist that upon receipt of your payment, the credit card company will report to the credit bureaus that your account is “paid off” or “settled in full.”  There are other important considerations to consider before attempting to settle your credit card debt, or other debts. As you fall farther behind on your monthly payments, your credit score will be effected negatively and will drop. You will also be called constantly by your creditors and they may call your place of employment unless you advise them in writing that they are not permitted. However, if you have an attorney, they cannot contact you by law. You also run the risk that they will sue you in court if you do not pay your balance. Generally, several months have to go by before they take this drastic action and if you are represented by an attorney and are trying in good faith to negotiate a settlement, usually, they will not file a lawsuit against you.   You also need to be aware of the tax consequences of entering into a settlement agreement. If the credit card company agrees to accept $2,000 to settle your $10,000 balance, that may sound wonderful, a savings of $8,000! But Uncle Sam says that any amounts of debt forgiven by your creditors are treated as taxable income to you in the year that the debt was forgiven. That is why after settling, the credit card company will issue you a 1099 Form and you are advised to check with your tax preparer for how to handle the situation to see how much tax, if any you will have to pay on forgiven debt. The other problem is for people who either borrow from or liquidate their retirement account to pay credit cards. This is generally a poor decision because you are taking money away that was set aside for your future, and there are also tax consequences of liquidating your retirement account that may be very costly to you as well. If you borrow from your retirement account, you will be stuck having to make payments to pay back what you have borrowed and you may not be in a position to do that.    As you can see, there are benefits and burdens to settling your debt. That is also true if you decide to file for bankruptcy. If you qualify for a Chapter 7 bankruptcy, your debts will all be discharged and you will be debt free in a little under 4 months. This is relatively quick and can cost much less than paying off credit card settlements. If you file bankruptcy, that fact stays on your credit report for 7 to 10 years. But you can begin to improve your credit score immediately after your bankruptcy is over. There is a big difference between a bankruptcy notation on your credit report and your credit score. If you begin to pay your bills on time after your bankruptcy is over, you will begin to improve your credit score immediately. Your credit score is the number lenders and banks use when deciding to loan you money.  Month after month of making timely payments will cause your credit score to increase. This is why people are able to get car loans right after bankruptcy and even buy houses less than 2 years after their bankruptcy is over. However, the longer you wait after your bankruptcy can reduce your interest rate on your loans because more time will have elapsed since your bankruptcy case was closed and you have built up a longer payment history.   For people who may not qualify for a Chapter 7 bankruptcy, they can often obtain a good result by filing a Chapter 13 bankruptcy, and still pay less than they owe their creditors, often without adverse tax consequences. But this type of bankruptcy stays open for at least 3 years and can stay open for as long as 5 years. Regardless of whatever choice you make, do your best to make sure that you have made an informed decision by consulting with an experienced bankruptcy attorney. Where legal matters are concerned, it is usually best to have a lawyer on your side because there are too many pitfalls that could end up costing you more in the long run. The credit card companies have lawyers and so should you.
It’s as easy as 1, 2, 3…
To get started, follow these three steps and you are on your way: Make a list of all your monthly bills. Make a list of all your monthly income. Contact us for a free, strictly confidential consultation. We look forward to helping you overcome debt with dignity.
Attorney Richard S. Ravosa
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(617) 720-1101  (508) 655-3013  (413) 734-4147
Greater Boston       Central Mass.      Western Mass.