Credit Card Debt Management

Recently, a friend of a friend experienced first-hand the potential nastiness of debt collectors. In an effort to help her husband of two years pay off years of massive debt (which had undoubtedly been written off and sold off in the meantime to third-party collectors), the woman contacted the collections companies and began making payments regularly. Apparently, whittling away the debt little by little was not enough to satisfy the collectors, who secured a default judgment and raided the couple’s checking account and savings account. The woman’s heretofore pristine credit will be completely ruined, because they are now facing bankruptcy. The whole situation is just depressing and ugly. Why, you ask, would collectors do this if the consumer is making a good-faith effort to repay the debt little by little?

-Because they can.

-Because it makes them more money.

Old debt is often “written off” by the original agency, then sold for pennies on the dollar to a third-party collector who stands to gain substantially if collections efforts are successful. It is easy for consumers to settle these debts for less than face value because any profit is a good profit for third-party collectors. But any well-intentioned person trying to repay old debts should wise up. Get the settlement agreement in writing before handing over any money. Negotiate the amount to be paid and how it will be reported on the credit report (go for “paid as agreed”). Consumers should also make the payment in one lump sum - not installment payments. Get it over and done with in one transaction, because so-called “zombie debt” dies hard.

So the above-described case is the ultimate form of collector abuse, in my opinion. The asset seizure may have been justified if the couple weren’t already trying to repay the debt on prenegotiated terms. What are some other forms of collector abuse?

-Harassing consumers over debt they do not owe because of prior payment as agreed, bankruptcy, or perhaps falling victim to identity theft.

-Filing or threatening a lawsuit when a debt is beyond the statute of limitations in the consumer’s current state of residence. This is illegal.

-Manipulating the age of debts to illegally extend the statute of limitations, be able to pressure the consume more and increase the likelihood of getting paid.

-Verbal abuse, mental and emotional manipulation. Anything from threats of unemployment and imprisonment to pitting mother against child or spouse against spouse through emotional manipulation.

According to MSN Money, there is another interesting scenario not included in the above list. A collector might promise to delete a negative mark from the consumer’s credit report if the consumer will make a payment. This payment (or even the promise of a payment) can revive the statute of limitations on that particular debt and in no way guarantees that the collector will hold up their end of the bargain. Such an agreement also provides no protection against future harrassment from other third-party collectors.

For an interesting activity to pass the time, visit the ABC News web site to read transcripts and hear recordings of collectors calls gathered by weary consumers. Remember, education is your best strategy. Know the statute of limitations on your debts, according to the law in the state where you currently reside. Know what is legal and illegal behavior. Know your FICO score and your credit report well. Collectors are preying on ignorance because, as former debt collector Mike Flannagan told ABC News, “Mean works better than nice.” Failing all else, Caller ID systems and hanging up the phone also work really well.

There is an art to credit card debt negotiation, and it’s not for the faint of heart. The first thing to remember is that the collector cannot get payment if the debt has passed the statute of limitations. Also, you should not have to pay for charged-off debt that you’ve already paid taxes on as if it were income.

If it is not past the statute of limitations, there is an outside chance that you could be sued, depending largely on the amount of money involved. It is always better to settle your debt, if possible, not only because you owe it but so as to prevent it from reappearing years later and haunting you. Because it may be with a third-party collector by the time you get around to paying it, you could settle your debt for a fraction of its true value. This is because that third-party collector bought that debt from your lender for pennies on the dollar and virtually any money they can collect from you is their profit. However, don’t forget that the difference between what you pay and what your debt actually amounts to is considered taxable income.

One major point: Something many consumers - and most debt credit counseling services - forget to negotiate is how the debt settlement will be reported. Your final payment amount is not the only thing on the negotiating table. You want that account to read, “Paid as Agreed” on your credit report. According to DebtSteps.com:

Although [Consumer Credit Counseling Services’] primary goal is a valuable one, they usually forget to negotiate on how the account will be reported, which means that although your debt is settled, your credit report will be ruined. And besides settling your debt, your goal should be to negotiate how this debt will be reported to the major credit bureaus.

If you are going to reinitiate contact with the collectors, you should ideally be prepared to pay in a lump sum, not in payment plans. This is to prevent any messiness like garnished wages, bank accounts or seized assets - again, an outside chance (depending on the monetary amount involved), but always a possibility nonetheless. Furthermore, before any money changes hands, get in writing from the collections agency the amount of the final debt payment and the fact that it will be marked “Paid as Agreed” on your credit report. Try to get a receipt of payment or at least save bank records showing that payment was made.

So you may think that if your credit report shows accounts that are “charged off” or “written off,” you got off scot-free. That is not true. It does not go away. It becomes “Zombie Debt” and it will haunt you, very likely until the day you die.

Zombie debt has been purchased by collections agencies from lenders for pennies on the dollar. These third-party collectors have real incentive to collect on the old debt because anything they collect is their own profit to keep, not to be shared in the least with the lender. So they pay up to 12 cents per dollar for delinquent debt that is not yet charged off, 7 to 9 cents per dollar for recent charge-offs and so on. They will even buy debt that other third-party collections agencies have already worked on (unsuccessfully).

Unbelievably, for a penny or less per dollar, these companies will even buy debt that is written off and outside of the statute of limitations for any kind of lawsuit. That’s why it pays to know the statute of limitations in your state because a creditor may threaten to sue you for an old debt and you’ll know whether that’s even possible. If it is out-of-state debt, consult the statute of limitations for the state where you are currently living.

So to avoid harassing phone calls and, for a time, the potential of a lawsuit, settle the debt. The bonus is that you will have more negotiating power with third-party collectors because any payment is a profit for them. Just keep the offer decent and fair, keeping in mind the basic fact that you do owe the money.