A debt collector has the right to collect for unpaid bills.  That makes sense, but misunderstanding about what a collector can and cannot do causes stress and fear. 

If you find yourself unable to keep up with at least the minimum payments due on your credit accounts, before long, those accounts may be turned over to a DEBT COLLECTOR!

This may cause FEAR or STRESS, which is natural, but often unfounded!

Someone has called F.E.A.R. :

•         False
•         Evidence, that
•         Appears
•         Real

You may be in this situation as a result of...

• Unemployment
• Divorce
• Serious illness or Disability
• Trying to make ends meet on a limited, FIXED INCOME of retirement
• or other reasons beyond your control

What happens when you start missing the minimum payments due?

The original creditor will start trying to get you to start making payments again.

Each creditor (Visa, Master Card, Discover, Capital One, etc.) has slightly different processes for recovering past due debts, but all take pretty much the same approach:

They send out letters encouraging you or kind of demanding you to start making payments or even warning you that unless you do "such-n-such", they will escalate their collection efforts to the next level.

And then the calls start.  Lots of calls!

If you somehow have the funds available to catch up, then you may want to contact them and see what can be done, but.......

DO NOT GO INTO MORE DEBT TO PAY OFF THESE DEBTS!

"Robbing Peter to Pay Paul" just results in more and more problems!

However, if you don't have the money to pay your debts (and you probably are in this situation because you just can't keep up), then it is usually best not to bother contacting them and trying to explain your situation.

NEVER FORGET...

Credit card companies are in business for one reason and one reason only, and that is to make HUGE PROFITS!

These profits come from:

• INTEREST
• ENROLLMENT FEES
• ANNUAL FEES
• OVER-THE-LIMIT FEES
• LATE FEES

...and about anything else they can tack on to get more money from us!

OK, then what happens next?

After about 3-4 months, if the calls and letters don't work to get you to start sending them money, they will usually:

• Charge the account off as a loss
  
• Assign it to a collection agency
  
• Sell the account to a DEBT BUYER   (Yes there are hundreds of companies that BUY Millions if not Billions of dollars of debt!), or...
  
• Retain a LAW FIRM that specializes in debt collection

Now these other agencies begin to contact you by mail and phone.

While your account is still with the original creditor, they have the right (in the fine print of the application) to call you.

But once these accounts are transferred or sold to another party,  you have the legal right to stop them from calling 

But, whether these companies are working on a commission basis or have purchased the account, their goal is the same...

GET YOU TO PAY THEM $$$$ !

Depending on your particular situation, you may be able to accept or negotiate a SETTLEMENT.

In fact, they may mail you an offer or you can call and try to negotiate.

A SETTLEMENT is an agreement to accept an amount less than the full balance.

Once this settlement is completed (lump sum or in payments), the account is deemed "settled-as-agreed" or "settled for less than the full balance" and it will be reflected as a ZERO or $0 Balance on your CREDIT REPORT.

If you'd like to know more on how DEBT SETTLEMENT affects your CREDIT SCORE, CLICK HERE:

What Can You Do to Improve Your Credit Score?

But what if you don't have the funds necessary to accept to negotiate a settlement offer?

The collection agency may be patient and keep the account on file for several months.

Or...

The original creditor may RECALL the account and RE-ASSIGN it to another collection agency.

If this happens, then the LETTERS and CALLS will start again.  You'll have to follow the same procedure to STOP THE CALLS.

But...

Sometimes your account lands with a Law Firm that specializes in DEBT COLLECTION.

This firm will send the letters and make the calls, but if no agreement can be reached, they may start the LEGAL PROCESS to collect.

A CLAIM will be filed with the COURT in the county where you reside.

A SUMMONS will be delivered to you.  It will state that you have 20 or 30 days (varies by state) to APPEAR and give an ANSWER to the court.

Sounds like you have to go to court within that time-frame or else!!!!

Good time to give disclaimer:

I am not an attorney and am not nor cannot give legal advice. My comments are just my opinion gained over many years of helping people deal with debt.  If you have concerns, please consult an attorney.

"Appear and give and Answer":

If you have clear proof (payment stubs, bank records, etc.) that prove that you DO NOT owe the debt that the PLAINTIFF (creditor or owner of the debt) CLAIMS you owe, then you have the 30 days or so to file your ANSWER with the court.

This ANSWER must be in the proper, legal form your county court demands and usually it is best to have an attorney prepare it and file with the court.

Of course, this takes more money, so don't even start if you cannot prove (no question) that you DO NOT OWE THE DEBT!

But what if you owe the debt the SUMMONS says you owe?

Then you need to contact the attorney's office and try to negotiate either a SETTLEMENT or a REPAYMENT agreement! 

DO NOT IGNORE THE SUMMONS ! ! !

If an agreement cannot be arranged in about 2-3 months, then the attorney will probably apply for a JUDGMENT by DEFAULT. (No one filed an ANSWER), so they win by default.

Many people think that if you get behind on your bills that a creditor can just TAKE MONEY OUR OF YOUR BANK ACCOUNT, GARNISH YOUR WAGES or put a LIEN on your home or other property.

NO,         NO,        NO ! ! !

A creditor, debt collector or attorney cannot just take your money or property!

I hope you are starting to understand that there is a whole lengthy, legal process that has to take place before that could possibly happen! 

 HOWEVER, VERY IMPORTANT...

If you owe taxes, child support, alimony or some other debts, then your bank account, wages and liens can be done without all the above process! 

If your creditor (plaintiff) has been awarded a judgment, now they can apply for a wage garnishment, bank levy or place a lien on your home or other property.

WAGE GARNISHMENT

If you have EARNED INCOME (not Social Security or other Retirement income) then it can be subject to garnishment per the judgment.

In most states, this is usually about 25% of your net (after tax) income. 

BANK GARNISHMENT

Once the plaintiff is awarded a Judgment, they can search for you bank accounts. 

This is usually done by using your social security number.

In 2011,  a law was passed to protect consumers from incorrect bank levies.

If you bank receives a court order to "freeze" you bank account due to a judgment, the bank is required to follow laws on what they can and cannot do.

However, not all banks do so and this can result in a very frustrating situation.  To learn more, click here:

Bank Laws Concerning Levies and Garnishments

PROPERTY LIEN

One of the most misunderstood options a creditor has for collecting a debt (REMEMBER: ONLY AFTER A JUDGMENT IS AWARDED!) is a LIEN.

If a lien is placed on your home, is DOES NOT MEAN that you have to sell your home to pay the debt!

A LIEN is basically a plaintiff taking a position (usually behind a first or second mortgage) on your home.

If you home is paid for, then they would have first position.

What does this mean?

It means that when you go to sell or transfer ownership (give to your children after your death as an example), the amount of the judgment must be paid.

Example:

If you sell the house for say $250,000 and the judgment balance is $20,000, the title company will have to send $20,000 to the plaintiff at closing.

That's why they do a "Title search" when you are buying/selling/refinancing a house in order to see if there are any LIENS.

In this example, you would net $225,00 and the Lien is removed from court records.

OK, let's review:

Can a creditor take anything you own without being awarded a judgment?   

  NO!

If you receive a SUMMONS, do you have to go to court?                                 

NO!

If you receive a SUMMONS, can you still negotiate a settlement or a repayment agreement to stop any other legal options a creditor may have?   

YES!

Can a creditor take money out of your bank account without being  awarded a judgment?                                                                                                           

NO!

Even after being awarded a judgment, can a creditor take money from your bank account that comes from:

• social security
• disability
• retirement
• child support, or
• alimony.                                                                                       
  
  

No ! 

Hope this helps.

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When we enroll a new client for the Debt Settlement Program, most of the time they are confused about what a debt collector can and cannot do.

Although the whole experience of facing severe financial circumstances is stressful, let me help alleviate your fears.

OK...

For all kinds of reasons or circumstances, you just cannot keep up with the minimum payments required on your credit card accounts.

The annoying calls and letters come many, many times a day!

The last call left a message and the guy said that unless you contact them right away, they may decide to start legal processes to collect the money you owe.

Your mind starts fearfully asking:

• Can they take money out of my bank accounts?
• What about my paycheck?  Is it safe?
• Will I have to sell my house or car?
• What about my jewelry, tools, or other things I value?

Let me walk you through the debt collection process so you can start to understand what a collector can and cannot do:

Once you miss a couple of months of the required payments due, you'll start getting letters saying something like...

"Mr. Jones, your XYZ Account is seriously past due and unless you call us immediately, your account may be turned over to an attorney for collection."

If you've just had a temporary financial setback and have enough money to catch up or start making payments again, you may want to call and see what they will do to help get you back on track.

They should be willing to work out some kind of plan to start taking your monthly payments again.

But if you find yourself with just too much debt and not enough money coming in to keep up, then what should you do?

• How delinquent is the account?
• How much do you owe?
• What kind of account it is?
• Who the creditor is (some will work with you and some will not).

If it comes down to paying the rent or mortgage, utilities, groceries, etc. (the really important bills) and making credit card (unsecured) payments,

PAY THE IMPORTANT BILLS FIRST!!!!!!

Usually a creditor will try to get you back to paying monthly payments (they need that interest!) for a couple of months.

If unsuccessful, they will either send to their internal recovery department or to a debt collector or even sold to a debt buyer.

An account is deemed "CHARGED OFF" when the creditor decides that they are not going to spend any more time trying to collect and are going to write the account off as a loss.

Yes, there are companies that buy millions of dollars of debt for pennies on the dollar in order to try and collect.

Either way, now you can do a couple of things:

1) PUT A STOP TO THE CALLS!

2)  You may be able to negotiate a SETTLEMENT for less than the balance.

Your account may now be with the original creditor's internal recovery department, a debt collection agency or a Law Firm that specializes in debt collection.

HERE'S WHAT YOU NEED TO KNOW...

At this point, creditor, debt collector, debt buyer or law firm CANNOT:

• Garnish your wages, retirement income, disability income (an several other exempt income sources).
• Levy your bank account
• Repossess your TV, stereo, furniture, jewelry, tools, etc. (unless they were used as collateral)
• Arrest you or most any other thing you may think!!!!

BUT... (very important you understand the following!):

If no agreement can be reached, the creditor or collector may decide to file a CLAIM.

A CLAIM is a legal document filed with the court of the county of your residence. 

You will be delivered a SUMMONS.

Basically is says that XYZ is claiming that you owe $$$$ and that if you want to dispute the CLAIM you have (avg.) of 30 days to file an ANSWER with the court.

A ANSWER is a legal document (usually prepared by an attorney) that PROVES that you have paid or why you do not owe the debt.  There is a fee for filing the ANSWER and fees for the attorney who prepares it.

Most people know they owe the debt so they don't file the ANSWER.

NOW WHAT???

At this point, an agreement can still be negotiated to stop the legal process, but is it VERY IMPORTANT that you DO NOT IGNORE the SUMMONS!!!

If an agreement cannot be negotiated, the the PLAINTIFF (the creditor or one filing the claim) may move forward for a DEFAULT JUDGMENT.

You don't want this to happen!

If a JUDGMENT is awarded to the PLAINTIFF, then now the PLAINTIFF has the right to apply for a WRIT OF GARNISHMENT OF WAGES OR BANK LEVY.

To prevent this, a SETTLEMENT or STIPULATED AGREEMENT may be negotiated.

A SETTLEMENT is an agreement whereby the PLAINTIFF agrees to accept an amount less than the balance due.  It may have to be paid in a LUMP SUM or in many cases, a LONG-TERM PAYMENT agreement.

Either of these is usually much better than a WAGE GARNISHMENT!

A WAGE GARNISHMENT is usually (in most states) 25% of you net (after tax) paycheck!

Let's say you earn $5,000/month.  If State (if you have) and Federal tax withholding equals 35%, you net take home would be about $3250.

25% of $3250 equals $812.50 ! ! !

If you're facing a financial crisis now, how could you survive if your income was cut by over $800 more!

Again... DO NOT IGNORE A SUMMONS!

SUMMARY:

A creditor or debt collector cannot just "take your stuff" when you don't pay your required payments due.

There's a whole process that must be completed first.

However, YOU HAVE TO TAKE ACTION!

It is not easy dealing with collectors and attorneys. 

Time consuming and frustrating, but absolutely necessary to prevent GARNISHMENTS!

This may help:

Photo Credit

When you have too many credit accounts and cannot meet the minimum payments required, then it may be time for you to consider a DEBT SETTLEMENT PROGRAM.

There are many reasons a financially stressful situation like this can happen, but some of the most common are:

• Loss of employment or layoff
• Too little income in retirement
• Unexpected medical bills
• Increasing cost of medications
• Divorce
• Disability
• Loss of spouse or partner

These are just some of life experiences that can financial hardship.

If one or more of these sounds like what you are going through, you may have several options:

If you have enough equity in your home, a refinance or equity line of credit may be a solution.  

If you qualify for a consolidation loan or balance transfer and the interest rate is not too outrageous, then that may work.

You may qualify for a Credit Counseling or Debt Management Program.  But if you are having a hard time keeping up with the total due for all of the minimum payments now, most likely this type of program will not help.

What about BANKRUPTCY?

I believe bankruptcy can be a viable option if you have tried all other options.  Bankruptcy laws have changed over the last few years to prevent someone from trying to use bankruptcy to discharge debt when they possibly could meet their promised to repay!

So how does a DEBT SETTLEMENT PROGRAM work?

If you have missed a couple of months of making the minimum required payment due on all of your accounts or cards, they are probably getting close to being "charged off".  

When this happens, the account will most likely be transferred or sold to a third party debt collector or debt purchasing company.

Most people are not aware that there is a multi-million (or most likely) billion dollar industry that purchases old, delinquent debt for pennies on-the-dollar for collection!

Let's say you have a credit card and due to circumstances beyond your control you just cannot make the payments.

The original creditor will call and send letters trying to get you to start making payments again.  But after 3-4 months, the account lands with a Debt Collector.

Now the Debt Collector starts calling, and calling, and calling.....

The good news is that now you can put a stop to those annoying calls!

But the letters keep coming!

These letters will try to get you to pay or in some cases, they may offer to SETTLE THE ACCOUNT for less than the balance due!

This offer may be anywhere from a small reduction or possibly a very good reduction.  

You may also be able to contact the debt collector to NEGOTIATE a better settlement or perhaps to let you take advantage of the settlement offer by making a series of monthly payments that you can afford.

Negotiating with debt collectors can be very time consuming and stressful.

I've been helping people deal with the stress of too much debt and negotiating with debt collectors (many time attorneys) for many years, so I know from personal experience!

The agent for the debt collector's job is to get as much money out of you as possible!  In many cases, their income, commission or bonus depends on being very inflexible.

The agent will try to intimidate you and in many cases try to shame you into getting you to pay back all of the balance!

There are laws that protect consumers from illegal collection tactics, but most people are not aware of them.

I've written several articles about dealing with debt collectors.  Here's one that may be especially helpful:

Debt Collectors, the FDCPA and Your Rights

For the sake of this blog, let's say that you negotiate a settlement for less than the balance due...NOW WHAT?

DO NOT, I repeat, DO NOT make any payment (by phone or mail) without a WRITTEN SETTLEMENT AGREEMENT!

A settlement agreement is basically a modified contract from the original contract (application) you signed when you took out the card or loan.

If the agent will not email, fax or mail the written agreement, then no settlement/no payment....PERIOD!  It is your only proof of payment once the agreement is completed.

Here is link to what a settlement agreement looks like:

Once the settlement agreement is completed, you can request a letter or statement showing a $0 balance, but if they will not comply, then your cancelled check or bank statement showing payment along with the settlement agreement will suffice.

Over time, you can get yourself back to being DEBT FREE! 

If all of this sounds like a little too much for you to handle, let us know:

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Debt Settlement is a great way to pay off old, delinquent debts.  But, will it hurt or help your credit score?

If you find yourself with too much debt and not enough money to keep up with at least the minimum payments, a debt settlement program may just be what you need to get a fresh start!

But, I'm always asked, "Will debt settlement lower or raise my credit score?

Let's be honest....

The reason you are considering debt settlement is most likely due to the fact that you have accumulated so too much debt and your credit score had gone down already!

Maybe you...

• Lost your job.
• Are retired and living on tight, fixed income from Social Security and/or other retirement income.
• Had a serious illness or possibly a career ending disability.
• Went through a divorce.
• The death of a spouse or partner.

How are Credit Scores determined?

There are basically 5 things that go into making up your credit score:

Payment history ...

• This makes up about 35% of your credit score!
• How have you been handling credit? 
• Do you make payments on time?
• Have you been late too often?
• How long have you been using credit?

Balance-to-limit ratio...

This accounts for 30% of your credit score and in my opinion, actually carries more weight!

Add up all of your balances and the total credit limits you have.

Divide the total balance by the total limit.

Example:

You have about $25,000 of total credit card balances on 5 different cards.

Your total credit limit (each card is different) adds up to $35,000.

$25,000 divided by $35,000 = 71% !!!

When your ratio is above 30%, lenders think that you are over-extended and are not a very good risk to pay back a loan, etc.

This balance/limit ration is very, very important!

*Hint:

Many people make a serious mistake in trying to improve their credit scores by closing credit accounts or cards after paying them off.

Let's continue the example above and see what really happens:

Before:         $25,000 of $35,000 of available credit (credit limits) or 71% (too high!)

After paying off a couple of cards, the ration looks like this:

Total account balance         $ 10,000

Total credit limit                   $  35,000

Ratio:    $10,000 divided by $35,000 = 28% !!! (Looking good!)

Thinking that getting rid of a couple of cards will help his credit score, he calls and closes 2 accounts and his credit score goes back down!

Ratio:    $10,000 divided by only $25,000 (closed 2 accounts with $10,000 limit)

Now his ration is back up to 40%.  Yes, better than 71% before, but still over the 30% goal!

Length of Credit History...

This accounts for about 15% of your credit score.

Younger borrowers have not established a "credit use history" and fair or not, are punished in their credit score.

Lenders are looking for seasoned credit users who have proven they can handle credit.

It will take some time for this factor (only 15% weight) to improve.

In the meantime, don't run out and start opening up several credit cards thinking this will help!

This takes us to the next factor:

New Credit...

If you try opening several credit or store cards, it suggests to the lenders and the credit bureaus that you may be in financial trouble and are trying to "borrow your way out"!

Even though new credit accounts for only 10% of your credit score, it is still very important!

There are no "short cuts".  It takes time and a good payment history to improve your credit score.

Credit mix...

A good mix of revolving credit (credit cards) and installment loans (auto loan) looks better and is viewed as a good risk to lenders and the credit bureaus!

Although accounting for 10% of your score, this is still important!

OK, now you see there are several factors that go into making up your credit score.  So will a debt settlement program help or hurt your credit score?

There are no "quick fixes" so beware of ads that say they can remove negative items from your credit report, etc.) is to pay down and or settle balances.

If the only way to start improving your credit score is by paying down the balances, what if you just don't have that much income?

If your total minimum payments requires $500/month and you only have about $200 (if there are no emergencies, etc.), what are your options?

Debt Management (used to be called "credit counseling")

In this program, each of your creditors agrees to lower your interest and possibly waive some late or over-the-limit fees.

Your total monthly payment is usually about 2.4% of the total balances, which may be the same or even higher than the total of all of your payments now!

Let's say you have $25,000 of total credit.

At 2.4%, that's a payment of abut $600 a month!

If you are having trouble making the required total monthly minimum payments now, most likely a Debt Management Program will not help.

Debt Settlement

Once your accounts start going to collections and you start getting letters and calls (lots of calls!), it's time to face the hard facts!

You're in real trouble and if you don't do something quickly, creditors may start to file claims which leads to a summons, which can lead to judgments.

After a judgment is awarded, a creditor can apply for wage garnishment and/or a bank levy!

Serious stuff!

When a borrower is in serious trouble, they may be thinking about looking into BANKRUPTCY as their only solution.

Creditors will usually be willing to accept a settlement or reduced amount to avoid this.

Settlements can run from 40% to 70%, depending on several factors.

The bottom line is that once a settlement is completed, even though your credit history shows late or no payments for awhile, now you have repaid or "settled-as-agree" the account and you have a $0 balance!

To potential lenders and the credit bureaus, this looks good and your credit scores will start to improve!

Bottom line...

Debt Settlement will help improve your credit score over time!

If it's not bad enough having too many debts and bills, receiving a SUMMONS is especially stressful!

One of our clients sent me an email this morning and said...

"I received this subpoena last night.  Kind of freaking out.  What do I do!"

We've been helping people deal with the stress of having to much debt and just not enough money to keep up for many years.

I've written many blogs about what to do with or how to prevent a summons, but wanted to give some insight that may help.

WHY DID YOU RECEIVE THE SUMMONS?

When you miss payments due on your accounts (I'm only talking about unsecured accounts like credit cards, medical bills, etc.) the original creditor will start calling and sending letters.

They may offer a few options for getting you "back on track", but for most people, these don't help or are possible due to your circumstances.

Trying to explain to the agent is usually a waste of time, so I don't advise trying.

If you do, just say something like...

"I've had some things happen and can't make payments right now.  I intend to get caught up soon and would appreciate it if you'd stop calling."

After a few months, most likely your account will be transferred, assigned or even sold to a collection agency.

Now you can at least put a stop to the calls:

DEALING WITH DEBT COLLECTORS

There are thousands of companies that make a lot of money collecting bad or old debts!  These companies may take accounts on consignment, in order to earn a portion of the money they recover.

Or, they may have just purchased the account for pennies-on-the-dollar from creditors who have given up on trying to collect and have just written off the debt as a loss.

The debt collector most likely will be open to a SETTLEMENT.  The amount of settlement is determined by many factors, but on the average, a settlement of 50% to 70% (more or less) may be available.

 DON'T IGNORE A SUMMONS !

To many people take the "hide your head in the sand" approach to their financial crisis.  Although I certainly understand and appreciate how they feel, the debt is not going to go away!

If the calls and letters from a debt collector go unanswered or returned, after a few months, the debt may be:

1. Recalled back to the original creditor
2. Transferred to another debt collection agency
3. Sold or transferred to a Law Firm that specializes in Debt Collection

If your account lands with #3, and if they cannot reach you or an agreement or settlement cannot me negotiated, they may decide to FILE A CLAIM.

Once a CLAIM is filed with your local county court, a SUMMONS is prepared and sent out for delivery.

The delivery may be by a COUNTY SHERIFF or COMPANY PAID TO DELIVER the summons.

Either way, receiving a summons is (like my client said), kinda "FREAKS YOU OUT!"

Although a summons (or small claims order) may differ, most of them state something like the one my client received:

     "YOU ARE HEREBY REQUIRED to appear and defend the Complaint filed against you in the above-entitled cause within 30 days from the date of service of this summons on you, and in case of your failure to do so, Plaintiff (creditor or debt collector you owe) will apply to the court for the relief demanded in the Complaint."

Well, it sure sounds like you have to go to court within 30 days, doesn't it!

But, if you kept reading, it would explain.  (I'll paraphrase and explain to save time:)

It says you must "APPEAR".  Notice the word "appear" is in italics.

It then goes on to explain what "appear" means:

It basically says that if you wish to give proof of why you do not owe the CLAIM being made, you have 30 days to provide the court with a legal document called a "motion" or "answer".  You also have to pay the required filing fee ($165 in this particular county court).

The summons goes on to say that if you have questions you should see an attorney immediately and usually gives a phone number for your state's Bar Lawyer Referral Service.

NOW WHAT?

OK, so you have the summons and understand that you don't have to go to court.  What should you do?

The worst thing you can do is ignore the summons!!!!!!!

If you ignore the summons, a JUDGMENT will most likely be awarded to the PLAINTIFF.

If this happens, the attorney for the plaintiff will seek the legal options available to get funds awarded in the judgment.  These include:

• Wage Garnishment
• Bank Levy of your bank accounts
• Placing a lien against your home or other property

I don't have the space here to address each of these, and there are things you may be able to do if you are facing one or more of these due to a judgment.

The important point is....

DON'T LET IT GET TO THIS POINT!!!

In most cases, some kind of agreement or solution can be negotiated before or even after a JUDGMENT has been awarded.

You may have to repay the entire balance due to avoid a garnishment, levy or lien.

This will most likely be a STIPULATED AGREEMENT that will be filed with the court.

This basically will say that as long as you make the required payments specified int he Stipulated Agreement, the Plaintiff will not continue to seek the legal options described above.

Once the Stipulated Agreement is completed, a LETTER OF SATISFACTION will be mailed to the court and the judgment is removed.

Now, I've explain a lot. What's the main points?

You have several options to prevent your account from ever getting to becoming a judgment.

• You can't ignore the debt.
• It will not go away!
• If you receive a summons, don't panic!

If you are overwhelmed, we may be able to help:

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If you have received a summons for an unpaid, unsecured credit debt, you know how intimidating it is!

In order to help you understand why this has happened and what your options are now, I'm going to walk you through the basic process and give you ideas on how to prevent in the future.

Dealing with the stress of having too much debt and not able to make the minimum payments due is a terrible experience.

Then, you get a knock at the door and are handed a SUMMONS!

Now what?

Do you have to go to court?

Are they going to garnish your paycheck or levy your bank account?

Most likely, the answer is NO!

Let me walk you through the basic litigation process and I think you'll understand more and hopefully feel better!

When you applied for the credit card or unsecured loan, you were making a promise to repay the debt per the payment and interest of that account.

But, things happen in life and you most likely have had one or more of the following events cause this:

• Unemployment
• Illness or disability (medical bills!)
• Death of a spouse or partner
• Divorce
• Retired on a very limited fixed income!

 Letters and calls

When you don't make the minimum payments required by your credit account agreement, you'll start getting letters and calls.

The letters will warn you that you missed a payment and now you must make up the missed one, pay the late fee and add the next payment due!!!!

The calls usually come after a couple of months of missed payments.  Unfortunately, the original creditor has the contractual right to call you.

Once these accounts are charged off and/or sold to a collection agency, you can put a stop to the calls.

(I'll show you how to stop calls from collectors in just a minute.)

I've been helping people deal with credit issues for over 15 years and have not found it very helpful or productive to try to explain yourself to the agent making the call.

If you feel like you just have to...try saying something like:

"I've had some things happen and can't make the payments now.  I intend to get caught up soon, but would appreciate it if you would stop calling."

This may work, but don't be surprised if it doesn't.

Collection Letters and Calls

After 2-3 months of non-payment, your credit card or unsecured account will most likely be transferred to a DEBT COLLECTION AGENCY.

If the calls had stopped, they will begin again.

But, now you can stop the calls.  Here's how:

The calls will stop, but the letters will continue.

You may get a letter with a SETTLEMENT OFFER. 

It will say something like...

The current balance is $$$$$$$, but we are making a one-time settlement offer of $$$$$.  This must be received in our office by (date).

 Sometimes, these are not bad offers!  I've seen some at 40% or so of the balance (yes with all of the added interest and late fees), but for example, a $4,000 settlement on a balance of $10,000 is a pretty good deal!

However, I'm guessing that if you had that kind of money, you wouldn't have gotten behind in the first place!

Debt Collection Agencies (sometime attorneys who specialize in debt collection) have either purchased the debt or have taken it on a kind of consignment.  The debt collector will get a percentage of what they collect.

So, they are going to play "HARD-BALL" and try to get as much as possible out of the debtor (you).

You can negotiate a settlement, but the final settlement will be determined by several factors:

How much the collector paid or stand to earn on this particular debt.  Different creditors (Capital One, CitiBank, etc.) each have their own parameters of what they will or will not take as a settlement.

Your particular financial circumstances also play a very important part of the negotiating process!

If you are employed and are paying a mortgage, the collector may not be willing to come down much as they may decide to file a claim hoping to get a judgment in the future.  I'll explain more about this later.

But, if you are unemployed, disabled, retired, renting and just barely getting by, they will be more willing to accept a good settlement (40%-50%).

Before you make the call, it is a good idea to have "all your ducks in a row" so to speak!

You need to have completed a budget (what's coming in and going out each month).  The collector will need to provide this in order to present you offer to the original creditor or their manager.

Here's a FREE BUDGET WORKSHEET to help:

Now that you know where you stand financially, you can make the call.

Most debt collectors are surprisingly professional and even polite, so you do the same!

Being aggressive or having a "take it or leave" attitude will not help!

But on the other hand, don't beg or show weakness either.

Just explain your situation and that you are trying your best to work out settlements rather than being forced to seek BANKRUPTCY PROTECTION.

Although bankruptcy is an option, you should do everything you can to avoid it as it stays on your credit report a long time and makes it difficult when applying or credit in the future.

OK... Let's say you negotiate a good settlement....Now what?

Before you set up or make any payments, you MUST....ABSOLUTELY MUST have the agreement emailed, faxed or mailed IN WRITING!

Once you have the written agreement, you can either call to set up automatic payments or mail them per the agreement.

To give you an idea of what a real settlement agreement looks like, click below:

If you are mailing the settlement, make sure it arrives on or before the due date!  They can and will void the agreement if you are late!

If you cannot reach a settlement agreement, the collector may opt to go for a judgment.

I've written several articles about this process.  Rather than go into it in this blog, check out:

What To Do If You Receive a Summons

I hope this has helped. Let us know if we can help...

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Around tax time, many people receive a 1099-C form and usually do not know what to do about it.

Here is some very important information on not only why you received it, but what to do about it:

You need to understand:

• Why you received the 1099-C.
• Why you cannot ignore.
• If you will have have to pay more tax
• How to file with your tax return.

Anytime a creditor accepts less than the full balance due and the "forgiven" amount (the difference between the actual balance and the amount you paid) is greater than $600, the creditor most likely will report it to the IRS.

I said "most likely" because not all creditors will report a settlement/forgiveness.

If they do, then you will receive an IRS Form 1099-C that shows the creditor, the amount given and some general instructions on what to do.

Of course, typically with the IRS, the form is somewhat vague and not very clear as to what you need to do.

So, let's walk through this....

WHY DID YOU RECEIVE A 1099-C?

If you cannot make the required minimum payments on your credit cards or other unsecured debts, after a certain amount of time (usually 3-4 months) the creditor may sell or transfer the debt to a debt collection agency.

The original creditor will most likely write the balance off as a loss (to offset their tax reporting) and usually sell the debt at "pennies on the dollar".

Let's say that the debt collector/debt buyer bought your Visa Card debt of $5,000 for $500...(yep, the get these very, very cheaply!)

Now, you start getting calls and letters from the debt collector saying you owe the $5,000 to them (even thought they only paid $500).  Starting to get the point?

Oh, by-the-way, once the account has been sold or transferred from the original creditor, you can put a stop to the phone calls:

But, even though you stop the calls, the amount you owe still remains!

Depending on your specific circumstances you may have gone through or are going through, the debt collector/buyer may be willing to accept a SETTLEMENT.

A settlement is an agreement to accept less than the full amount to satisfy the debt, usually saving you 40%-60%.

The difference between the balance owed and the amount accepted as a settlement is called a "FORGIVEN" amount by the IRS, and as I said before, you most likely will received a 1099-C form because of it.

YOU CANNOT IGNORE THE 1099-C!

We get calls from clients all the time who received the 1099-C, ignored it, filed their income taxes as usual, and then, a few months later, start getting letters from the IRS saying they own more money plus penalties and interest!

And, even though you can file an amended return in hopes of getting this taken care of, it is a lengthy, time consuming process now.

The time to deal with the 1099-C is now....not later!

Just because you receive a 1099-C doesn't necessarily mean that you will have to pay more tax.

Let's say that the Visa Card that had a balance of $5,000 and was sold to XYZ Collectors, was ultimately settled for $2,000.

Good deal!, you just saved $3,000!

Well, that's true, but, the IRS looks at it as if you had received $5,000 of goods and services, but only paid $2,000, so you had an additional $3,000 added back to your gross income for that year.

Now your total adjusted net income (the amount you will have to pay tax on after all deductions and credits are deducted from your gross income) is increased by $3,000.

If the TAX RATE (the percentage of the adjusted net income) was 20%, then you would owe an additional $3,000 x 20% or $600 more tax! (not including penalties and interest!).

But, if you had read the fine print of the 1099-C you received, it said that (paraphrasing here) that...

 you may be EXEMPT if you were INSOLVENT at the time of the FORGIVENESS.

What does "INSOLVENT" mean and how do you show or prove to the IRS that you were? 

How do you file with the IRS?

You must provide the IRS with a little information and the proper forms (specifically IRS Form 982).

Basically, you are going to show that at the time of forgiveness (the settlement) you had more LIABILITIES (debt owed) than your ASSETS (all equity, bank accounts, etc.)

If this is the case, then you DO NOT have to include the FORGIVEN amount as additional income and therefore, and will not have to pay any additional tax!

But, you have to provide/include the proper documentation and form with your tax return.

Don't be surprised if your tax-preparer doesn't know what to do with the 1099-C and don't "just pay the extra tax" as a result!!!

Just click below, follow the instructions:

It's bad enough to be under the stress and pressure of having too much debt and not being in a position to make adequate payments, but now, you get a SUMMONS!

I'm going to explain not only why it happened, but also what you can do to take care of it.

I think it was Tony Robbins who either used an acronym about FEAR:

WHAT IS FEAR?

• False
• Evidence that
• Appears
• Real

When you get a knock on the door and someone (sometimes a sheriff or police officer) hands you a summons and says, "You've been served", it can be a very fearful experience!

FIRST, DON'T PANIC!

Take a deep breath, sit down and slowly....I said slowly (I know how you feel) the summons.

Most of the time, a summons will read something like this:

"You are hereby required to appear and defend the complaint filed against you in the above-entitled cause within thirty (30) days from the date of service of this summons on you.  If you fail to appear and defend, the plaintiff will apply to the court for the relief demanded in the complaint."

It usually goes on to read:

"You must "appear" in this case or the other side will win automatically.  To "appear" your must file with the court a legal paper called a "motion" or "answer".  The "motion" or "answer" must be given to the court clerk or administrator within 30 days along with the required filing fee.  It must be in proper form and have proof of service on the plaintiff's lawyer or, if the plaintiff does not have a lawyer, proof of service on the plaintiff."

OK...now they have your attention! But, before you "get carried away", let's examine the SUMMONS carefully:

"You are hereby required to APPEAR and DEFEND the COMPLAINT FILED AGAINST YOU...

"APPEAR AND DEFEND"

I know it sounds like you must appear in court, but that's not what it means.  The phrase, "appear and defend" is further explained in the second paragraph. 

The second paragraph (above) also says that you must file an LEGAL PAPER called a MOTION or ANSWER.

This MOTION or ANSWER is, in fact a LEGAL PAPER that you would file with the court if you don't believe you owe or are responsible for the debt they are claiming you owe. 

Yes, it will cost you a fee  just to file your ANSWER, and it must be filed in the appropriate legal fashion.  This usually requires an ATTORNEY to be retained, which also costs you more money!

But, in most cases, the client or DEFENDANT in the claim actually owes the debt, it is not necessary to file an ANSWER.

So, the 30 days to appear and defend doesn't mean you have to go to court!

OK, so what should you do?

Here's what has happened so far:

When you have debts that you are unable to pay, the creditor will send nasty sounding letters and call and call and call (you probably have experience this already). 

If you cannot or do not respond by making some form of repayment, then the original creditor may decide to hand over to a COLLECTION AGENCCY or hire an ATTORNEY to file a CLAIM or  "COMPLAINT". 

Most of the time, the original creditor will use a DEBT COLLECTOR or DEBT COLLECTION AGENCY to attempt to get you to repay the debt. They will start by sending you letters that may sound threatening in an attempt to scare you into paying the debt.

And as you probably know, they will call constantly.  Even though we have laws that protect us from harassing phone calls from debt collectors, most people are not aware or do not know how to put a stop to these calls. 

The FAIR DEBT COLLECTION PRACTICES ACT clearly spells out what a debt collector CAN and CANNOT DO!

The good news is now, you can put a stop to those calls! 

As long as the account is still with the original creditor, they have the right to call you.  Now, they must do it according to the FDCPA (above), but you can't put a stop to the calls until the account is turned over to third party collection agency.

You must send a letter and they must stop calling (even though they can continue to send letters).

This will help:

But, even though you can and have put a stop to the calls, in most cases, they are not going to give up trying to collect on the debt.

See my blog on HOW TO DEAL WITH DEBT COLLECTORS for some good tips.

• OK, you've receive the summons.
• You understand that you don't have to appear in court in 30 days

Now what?

You should contact the attorney who filed the claim and attempt to SETTLE THE DEBT by making a lump sum payment for less than the balance due. 

This is not always an easy thing to do at this point because the PLAINTIFF (the creditor or debt collector) has had to pay a pretty hefty FEE TO THE ATTORNEY to file the claim, prepare the summons and have it delivered to you.

Yes, many times you can still negotiate a settlement or other reduced repayment plan even though a judgment has been awarded!

Here's an actual example of a settlement we were able to negotiate even though a judgment had been awarded.  Click on the link below:

Actual example of a judgment that was settled.

But, if you are unsuccessful in negotiating a settlement, then you might have to attempt to negotiate what is called a STIPULATED AGREEMENT.

In a Stipulated Agreement, you and the plaintiff/attorney for the plaintiff have a legal document  written up ( the collector's attorney does this and you will not pay a fee). 

The agreement will basically state that if you make a certain dollar amount payment each month until the balance is paid in full, then they will not go forward with any more LEGAL OPTIONS.

WHAT...LEGAL OPTIONS?

When a Plaintiff (the creditor) is awarded a judgment (and they will be in most cases), then they now can choose to do several things...legally, to collect on the debt:

They can get a WRIT OF GARNISHMENT, giving them the ability to take 25% of your take-home pay until the debt is paid in full!

They can get a WRIT OF LEVY, giving them the right to levy one or more of your BANK ACCOUNTS! 

Again, before you go into PANIC MODE!!!!

The following sources of income are 100% exempt from any bank or account levy:

• Social Security
• Disability Income
• Unemployment Income
• Retirement Income
• And several other sources

However, if you receive normal income (called W-2 Income) from your employer, and you deposit those funds into your checking or savings account, they can be garnished/levied.

The bank has now option but to obey the Writ of Garnishment delivered!

There is nothing more devastating to someone to deposit their check (from W-2 or other "earned income") and have their check or debit card declined at the grocery store because their account was liquidated over the weekend!

To make sure this doesn't happen, DON'T IGNORE THE SUMMONS!

Hopefully, I have made my point...

Let me summarize (if your still not clear, please re-read this article!):

DO NOT, DO NOT, DO NOT, Ignore a SUMMONS!

If you take the appropriate action (as I've spelled out), you should be able to work out a mutually agreeable option.

If all of this sounds a little intimidating, I understand. If you need more guidance:

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