Should I Negotiate or Settle My Credit Card Claim?
When a new potential client calls me, one of the first things they say is that they want to settle the claim (whether its a lawsuit or simply a collection letter). Sometimes this is the right move, but often it is not. We need to take a look at your specific circumstances and see if its better to settle or better to wait.
The rule of thumb is that if the debt has been sold to a junk debt buyer like Midland Funding, Portfolio Recovery, CACH, Calvary, LVNV, then you don’t settle. As discussed elsewhere on this site, debt buyer claims are very winnable in court. Once I explain that to people, about half of them come back to me and say, “Well, maybe it was sold, but it is my debt, and I should pay it”. I wholeheartedly disagree with this sentiment and I’ll explain why below
Let’s create a fictional person, Mike, who has a credit card account with Chase Bank. Mike has a job, everything is great, he uses his credit card and makes payments on it. Then, Mike’s boss tells him that his salary is going to be cut by 50%. Then Mike’s wife tells him that she wants a divorce. Then Mike has a medical issue that forces him to miss work for 6 months (poor Mike, right?). Obviously, the last thing on Mike’s mind is paying a credit card bill, so he defaults. Chase sends him a collection letter, but, while fighting his other very serious issues, he ignores it. At that point, Chase has a decision to make, and its a big one. Do they sue him? or do they sell the debt to a junk debt buyer? If they choose to sue him, and then Mike calls my office, we discuss possibly settling because that always needs to be a strong consideration when an original creditor is involved. (We do not settle all original creditor claims). On the other hand, if Chase decides to sell the account to a debt buyer, then we tell Mike to wait and see what happens. When the debt buyer sues him, we defend. Mike tells me that he wants to pay the debt, and I explain to him why this is a bad idea.
When debt is sold, the debt buyer pays Chase (or whomever the original creditor is) a sum of money. Often this sum is in the range of 1-3 cents per dollar…quite a low amount. Per the terms of the sale, Chase is relinquishing ALL rights to the account in question. It is SOLD, period. The debt buyer is NOT collecting for Chase at that point, it is collecting for itself. They pay 2 cents per dollar for some accounts and then try to collect 100% for themselves. Quite a profit, don’t you agree? You can see how this makes the debt buyer look kind of like a scavenger, right? A bottom feeder….
If you make a payment or a settlement on this account at this time, the original creditor gets nothing out of the transaction. They get ZERO additional funds when you pay a debt buyer. Looking at it that way, how are you actually paying your debt? It’s already been paid by the debt buyer, as far as I can see it. Add to the fact that the debt buyer buys these accounts AS IS (this means that there are no warranties whatsoever as to the accuracy or authenticity of the information) and you really don’t know how much you owe, and to whom it is owed. You cannot pay the original creditor, because they sold your account. They literally will not take your check.
So Do I Ever Settle a Credit Card Account?
Absolutely. There are several circumstances where you should settle your credit card account. If the original creditor (Bank of America, Capital One, Chase, Citibank, Discover, whomever) files a claim against you, then settlement is definitely an option. We look at the age of the claim, the amount of the claim, the county in which the claim is filed, and the attorney who is representing the creditor. All of these factors go in to whether or not you should settle with the creditor. Creditors send better files to better attorneys, and send weaker files to weaker attorneys. The collection industry is pretty small, so we know what to do with your case after a pretty brief consultation.
How Do I Settle?
If the case circumstances indicate that a settlement is a good move, the best way to settle a case is with a lump sum payment. This is the surest way to obtain a nice discount (through negotiation) on the amount that is due and owing. The problem is that most of my clients do not have a lump sum available to them. The second way to obtain a reduction in the amount owed is to make large monthly payments. A creditor will be very happy to receive a monthly payment of $400 – $500, even larger if you can, and you can get a substantial reduction in the balance by settling this way. Again, though, the problem is that not many of my clients can afford this avenue either. That leaves us with making a small monthly payment of $100 or so. Under this scenario, it is nearly impossible to get the creditor to negotiate a reduction in the amount due and owing.
The Most Important Aspect of Settling
By far, the most important consideration when settling a credit card lawsuit is to have a firm written settlement agreement that lays out all of the terms of the settlement. I hear horror stories every day about people “settling” a case with a creditor but failing to have the settlement memorialized in a writing. There are a few collectors out there, who shall remain nameless on this website, who tell the debtor (the person who owes the money) “How about making a few good faith payments and we can re-evaluate your claim in 6 months. NEVER NEVER do this, NEVER. This is a trick to get you to acknowledge the debt and to extend the statute of limitations. Never make a payment to a creditor on a disputed account without having a firm written settlement agreement.
Other Settlement Scenarios
There are a few other occasions where settlement may be a good idea, even if a junk debt buyer is involved. The first is where the amount is tiny. I mean very small… let’s say under $750. The second scenario where I would consider settling is where there is already a judgment in place. It’s very, very difficult to attack a claim when a judgment has already been issued. Settling may be the way to go. The third scenario that makes sense for a settlement is where you are in a hurry to clear your credit report. Once a week or so, I have a client who wants to buy a house, refinance a mortgage, or buy a car, and they are in a hurry, but there is a negative mark on their credit. This is a scenario where settling is definitely an option. It’s a quick way to improve the credit score, but there is the down side of paying on a claim that the creditor cannot prevail against you in a court of law.