Coping with Credit Card Debt

When you first get into trouble, document the reasons for your hardship and send your creditor a certified letter.  Make sure that you send it to the creditor’s correspondence address!   It may or may not be the same as the payment address.  The only way to know is read your credit card statement – it could be on the front or the back but it will be in mice-size type (get out a magnifying glass) and look for the address.  Make sure you tell them that they are not to call your place of work as your employer does not allow you to take personal calls.  Tell them not to call your relatives, friends or neighbors too.  They want money which you do not have, so just do not talk to them.  Ask them to close your account and tell them also that you will pay when you are able.

Do not commingle exempt funds (Social Security, disability, worker’s compensation, Veterans benefits or unemployment benefits are all examples of exempt funds) with non-exempt funds.  Once you do, you lose the protection.  If you have such funds, make sure you also do not commingle exempt funds with your spouse either unless your spouse also gets exempt funds  Commingling funds with another will also cause you to lose the protection.  This becomes very important if the creditor obtains a judgment against you or your spouse.

After 90-180 days, your debt is “charged off.”  This is an accounting term meaning that the original creditor has moved the debt from the accounts receivable side of its ledger to the bad debt side.   It does not mean that you no longer owe the debt or that you cannot be sued.   The creditor will now send your debt for collection.  Then the debt collector will call you.  Anything between 8:00 am and 9:00 pm (using your time zone) is allowed.  Calls on Sunday are allowed.  Anything outside this time, overly frequent calls or calls to others after you have told them in writing not to call work or your relatives or neighbor is harassment and you can sue them for violating the Fair Debt Collection Practices Act.

After 5 business days, the debt collector will send you a letter with important information about the debt.  In the letter, dispute the debt, ask for proof (called “verification of the debt”) and again remind them not to call you at work and not to call your friends, neighbors, co-workers, etc.  The debt collectors are not allowed by law to do that unless they do not have your location information.  If they know where you are, then they do not need to call others.

When things get better for you, start putting money aside.  Open up an account a credit union, small community bank, online bank or a small bank more than 25 miles from your home.  Don’t worry about interest rates and late fees being added to your debt.  Your debt is going to grow over time.  You can’t help that.  However, you are not going to pay all that.  When you have saved up between 50% and 80% of whatever the balance is on your debt, that is when you call your creditor or the debt collector to settle.  Keep tabs on correspondence that you receive to see who has the debt.  Usually buyers of debts will be willing to offer a deal.  Try to settle towards the end of the month or end of the year as the debt collectors or junk debt buyers often want to clear their books and that is the best time.  If your creditor refuses to accept, then move on to the next account.  Tackle one debt at a time, generally starting with the highest, but if a debt is with a law firm that is licensed to practice law in your state of residence, move that debt up in priority to get it resolved first.  Lawyers who are licensed to practice law in your state can and will sue so you need to get ready when a debt moves on to a law firm that has lawyers who are licensed in your state.

When you settle a debt, get the terms of the settlement in writing.  This is very important.  Ask your creditor to send you a settlement letter which contains the original account number and any new/charge-off account number, the collector or law firm’s internal reference number, the total balance owed, the settlement amount, the due date by which the settlement must be paid, to whom any checks should be made payable (either creditor/collector or law firm) and a physical address where payment will be sent.  The letter should also indicate that once settlement funds clear, the creditor will update your credit report and that there will be no further collection activity on your account.  If a lawsuit is filed or judgment entered, then the law firm should also include a statement that the lawsuit will be dismissed or the judgment marked satisfied once the settlement amount is paid.

Once you receive the settlement letter, I recommend that my clients pay it by cashier’s check or money order because you do not want to give a creditor access to your bank account.  Most creditors and law firms are ethical but an unethical creditor will have all the information they need to raid your bank account if you use a personal check.  Make a copy of the cashier’s check or money order before you send it.  And you should send it to the creditor/debt collector/law firm by UPS, FedEx or hand delivery if they are close by.  It costs more to UPS/Fed Ex but it is totally worth it.  Several of my clients have done so and the US Postal Service either does not get a signature or return the green card so it becomes impossible to track and know if the settlement arrived.  If hand-delivering, get them to acknowledge, in writing, receipt of the funds.

Wait 30 days after the creditor receives the funds and call and get a closure letter stating that the settlement funds were received, that there will be no further collection efforts and that your credit report will be updated.  If a lawsuit is filed or judgment entered, make sure you verify at the court that the lawsuit is dismissed or judgment is marked satisfied.  Get a file-stamped copy of the dismissal or satisfaction.  Make sure that you keep a copy of the settlement letter, a copy of your check or money order, a copy of the closure letter and copy of any dismissal of the lawsuit or satisfaction.  Even though a debt is settled, the debt can be sold to a junk debt buyer who may try to collect again or the debt, like a zombie in the movies, can spring back to life.  For more on “zombie” debt, see my article at http://www.rachelhunterlaw.com/zombie-debts-credit-report/.

If you settle a debt for less than is owed, the creditor may report any forgiven debt that is over $600 on a 1099c and you will have to report the forgiven debt on your taxes.  See my article on cancellation of debts at  http://www.rachelhunterlaw.com/cancellation-debts-1099c-forms/.    However, you may not have to pay tax on this at all.  Use federal form 982.  If you have a CPA, then ask him or her.  If he/she does not know about the form, then find one who does.  The form allows you to exclude the forgiven amount if your debts outweigh your assets by the forgiven amount or more.

 

Copyright (c) 2014 by Rachel Lea Hunter

www.rachelhunterlaw.com

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By Rachel Hunter

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