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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

Realities of Debt Settlement, Advice & Tips, Debt Validation & Tips on Debt Negotiation

Realities of Debt Settlement

You receive a call from a collection agency one morning claiming you owe $15000 in debt. While you may really owe this amount, a call from collection agencies stresses out many consumers into deep panic. Creditors do have the right to sue you in court, and perhaps order the commissioner and his gang to come into your house and confiscate all your assets. What's the chance of this happening? Very small! This is because it will cost the creditor thousands of dollars to sue you in court and order collection agencies to confiscate your property.

Another reality of debt settlement is that many consumers feel so overwhelmed about their debts that they think bankruptcy is their only option. Many consumers get scared with the thoughts of property confiscation and wage garnishment. What does the collection agency NOT want you to know? The collection agency that calls you does NOT want you to know that in order for them to garnish your wages or confiscate your property, they will have to take you to court and win the judgement. As mention above, this is a long overdue process and will cost them tens of thousands of dollars. Bankruptcy should be your last resort to settle your debts, not your first! In this section, we will give you some debt settlement tips.

Debt Statute of Limitations

Debt collectors have a limited amount of time to collect debts owed. Check the debt collection statute of limitations in your state. If your debt outstanding has passed the # of years of debt collection statute of limitatations in your state, you have nothing to worry about! When the debt collectors call you, tell them the statute of limitations is over and there is no damn thing they can do to you (other than sue you in court, which is highly unlikely).

Note: Most people confuse the Statute of Limitations Period for Debt Collection with the Statute of Limitations period for Credit Reporting. For instance, consider you live in Arizona where the statute of limitations period is 3 years. After 3 years, you can totally refuse to pay that debt and the court will rule in your favour. However, according to the rules defined in the Fair Credit Reporting Act (FCRA), your delinquent debt will be shown for upto 7 years (since your last delinquent or missed annuity payment) on your CREDIT REPORT.

After 7 years, you can challenge the listing of this debt on your credit report and the credit bureau will erase it 100%. This means your credit score will be back on track!

Debt Settlement with a Collection Agency

If the debt collection statute of limitations period is not over, and you are not willing to go through the process of Debt Validation, there is another solution for you. This solution is called Debt Settlement. Before I explain the process of debt settlement, lets define what a collection agency really is:

  • Firm who purchases debt from other companies (also known as junk debt buyers)
  • Firms hired to collect debts owed on behalf of the original debtor in return for a fee or a commission
  • Lawyers sending you debt collection notices

There are certain types of debt that can be settled relatively easy. These debts are known as Unsecured Debts. Types of unsecured debt include:

  • personal loans, student loans
  • dishonored checks
  • credit card debt, medical bills

Why are unsecured debts relatively easy to settle? This is because as opposed to secured debts that have some sort of collateral attached to them (the debt collector can confiscate your house, car, boat or other personal assets), unsecured debts have NOTHING attached to them. This means the debt collector cannot come and take over your boat and your car to recover his debt. He will have to settle the debt with you.

Debt Settlement Tips & Advice

Its natural that you are at an advantage when negotiation a debt settlement with your creditors. This is because they are after YOUR money, not the other way around. At first debt negotiation efforts, the collection agency might just say NO! Do not get angry with this, keep cool. Make sure all your communication with them is in letters format, and not by telephone. This is because with letters, you will have a record of all communication which will help your case.

Debt Collection Statistics

The following data we present is from the Source: Sean McVity, Portfolio Broker (Keefe, Bruyette & Woods). Collection agencies usually receive pennies of debt to each dollar. The # of pennies received to each 1 dollar of debt depends on the age & type of debt:

  • Recently Charged Off Debt: 6-7 cents on the dollar
  • Older accounts: 1.5 - 2 cents on the dollar
  • Debt on which statute of limitations has passed: 1 cent or less

Thus when negotiating a debt settlement, do NOT offer more than 20% of the original debt owed. Say you owe $5000 of debt. With the above data, the collection agency would collect 0.06 x $5000 = $300. With your original offer of 20% x $5000, the agency would collect $1000! This is a profit of $1000 - $300 = $700 for them!

Successful Debt Negotiation Tips

To successfully negotiate all your debts with collection agencies, use the following tips & advice:

  • Talk to the agency via letters & correspondence. Do not communicate with them via the phone!
  • If you settle a certain percentage with them (say 20% in the above case), make sure you get this in writing. Draft an agreement and make them sign it. Never expect your creditors to verbally meet an agreement, you'll probably end up getting screwed at the end.
  • Keep a copy of every letter you send out.
  • Send all your communication letters via registered mail and keep your receipts. This only costs $5 anyways!
  • If you ever make a phone call, write down the name of the person you talked to and the time.
  • If the collection agency calls you, return their communication via a letter and not a phone call.
  • The longer the debt matures, the less likely is the collector to call and harass you. This means you have more chances of reaching a good settlement. The creditor might just write off the debt as "bad debt expense" in order to receive a tax write-off. This does not necessarily mean your debt will be forgiven. The creditor may take you to court, press for a wage garnishment plan against you, etc.
  • Never be desperate to settle your debts. Never ever tell your creditors that you want to settle their debts because you need a mortgage loan for a new house, or a car loan for a nice car! If you do that, forget to ever reach a good debt settlement! The creditor will think, "hey if he has money to buy a house, he has money to pay off my debts too!"


Keith Comments on August 7th, 2007

Bank Of America has a collection agency call me daily. The original CC amount was $ 1,400. With interest it has grown to $ 3,200.00. I can not afford to pay this. I live in california. Can they garnish my pay check? It has been 2 years now. I want to just ignore them. I'd pay the original amount but 3200 is crazy.