Living Paycheck to Paycheck, Debt Collector Wants Too Much to Settle

Question: Like so many others in this economy, I can barely pay my current bills, so I had to stop paying the minimum on some of my credit cards. The phone calls and final notices for payment from the banks stopped about a year ago, but I just received a letter with a settlement offer from a debt collection company, which also says that I can dispute the debt within 30 days of receipt. What do you suggest? At the end of the month, there is still nothing left over, after regular expenses, living as cheap as we can. I cannot pay the settlement, but I am afraid their next move will be to sue me in court, like your website says. My wages are higher than the bankruptcy means test amount, so I need help.

My response:
As you know, you are not alone. Now, 41% of Americans live each week paycheck to paycheck, according to a recent survey by Allstate, covered in the LA Times Business/Money Section. After several months of no credit card payments, the bank charged off your account as a bad debt. A charge off is an accounting term to show that the debt is probably not collectable, so bank auditors will no longer allow this to be considered an asset of the institution.

At that point, the credit card bank reviewed its uncollectable accounts and sold many of them to a debt collection agency, known in the industry as a “debt buyer.” Either this debt collection agency or another debt collector is now contacting you to settle this debt, which now belongs to them. If you do not settle soon, they may refer the debt to a collection lawyer licensed in California, who will probably file a lawsuit in the Superior Court that covers where you live, if settlement arrangements are not made in writing. I explain the reasons in an article on my website, Understanding Why You Were Sued.

It can be less costly for the consumer to settle when no lawsuit has been filed and the lawyer has not been retained, because the debt buyer has not paid for those costs and fees. However, depending on the debt buyer’s policies, it still may be unaffordable or you may feel that they want too much to settle the debt, which did not cost them much to buy. Bear in mind, however, that if they sue you in court and win a money judgment, the amount will probably be the full balance on one of your last statements, plus accrued interest, court costs, and maybe attorney’s fees. The judgment may then appear on your credit reports and be secured as a lien on any real property (such as your home) by recording an abstract of judgment with the County Clerk or Recorder’s Office. There are numerous other ways that the collection agency’s lawyers can enforce this debt, such as by levying the consumer’s bank account and wage garnishment.

As painful as a settlement would be now, a worse alternative is having to pay this entire account plus interest and attorney’s fees on a money judgment that itself yields 10% interest per year and many costs can be added to the balance. By the same token, I would not accept any settlement offer that the consumer cannot ensure will be paid, exactly as promised. This would only put you in a worse position, as the discount that you negotiated in the settlement will be lost and the payments will merely be applied as credits towards the full balance due.

When agreeing to a debt collection settlement, you as the debtor should know that the collection agency will require you to acknowledge in writing the full balance due. If you miss one or more of the settlement payments, then they will have a much easier time enforcing in court the full unpaid amount of the debt. This would not limited by the settlement amount. This lawsuit would also not be limited by the fact that some debt buyers lack adequate documentation of their debts and it can challenging to obtain the full records for the account.

Your question also asked about a written dispute, because the debt collection letter states that you have the right to get it verified in writing or to dispute it. You may want to access the free consumer letters on my other web site, sample letter #1.1, which contains the language that I recommend for this purpose. Be prepared, however, for a simple letter back from the debt collection agency that says we have verified it. There are court cases that make this an adequate verification of the debt, so they can continue their collection efforts. I am not aware of potential harm from sending the dispute letter, but asking them to verify the debt in writing can make them more “aware” of you.

Robert Stempler
www.StopCollectionLawsuits.com
Twitter @RStempler

Facebook: www.facebook.com/SoCalConsumerLawyer

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