December 5, 2023

If you are thinking of negotiating a settlement of your credit card or other unsecured debt you need to know the most important point: As any expert negotiator will tell you, all negotiations are about leverage — who has it and who doesn’t.

What The Creditor Wants: When you have defaulted in paying a consumer debt on time, the creditor doesn’t want to give up any portion of their claim. They want you to pay in full; with interest and penalties.

What you want: If you cannot pay the full amount of your debt and the high interest rates that come with default, you want to make a deal whereby you can pay off your debts at a reduced amount you can afford, and get a fresh start; or, you want to discharge your debts entirely in bankruptcy and start with a clean slate.

But who has the leverage? If you try to lift a stone without a lever, you will only strain your back.

THE RULE: Generally, unless you can realistically threaten the creditor with losing more money by refusing to cut a deal with you than they will lose by settling with you for a reduced amount, they won’t do it.

Why should they? Credit card companies are not charities! Don’t expect them to show mercy or cut you a deal just because you lost your job or suffered a catastrophic illness. They don’t care. They still want their money. All of it.

Thus, part of their leverage in trying to get you to pay everything is:

a. Harm to your credit rating. They report your account as in default to the credit reporting agencies. Until paid in full or settled this information will stay on your record for years, lowering your credit score and making it more difficult for you to get consumer loans or a mortgage.

b. Harassment. They call you all the time, send nasty letters and e-mails. They may contact relatives, friends or employers. Some (but not all) of these practices are in violation of the Fair Debt Practices Collection Act, but often they do it anyway because few consumers are aware of their rights and fewer effectively enforce them. An attorney can stop the harassment however.

c. Threatening to Sue. They may threaten to file a lawsuit against you unless you pay them.

d. Filing a Lawsuit. The creditor sues you and tries to collect a judgment by garnishing your wages, foreclosing on your residence and/or seizing your bank accounts and any other assets you may possess.

e. Sit and Wait. They can simply sit on the debt for the statute of limitations period (years) without filing a lawsuit try to wait you out. They hope that either you will eventually acquire some assets they can seize or get a job where they can garnish your wages, or else you will get tired of the black mark on your credit and agree to pay them.

What’s Your Leverage?

♦ Your leverage has to be that you are unable to pay and they will be unable to collect the full amount in any reasonable time by the above means, so they should cut a deal with you, take their losses and get what they can.

♦ Additionally, if you can realistically threaten them that you are going to proceed with a bankruptcy, they may be forced to accept less they would like to avoid becoming an unsecured creditor in a chapter 7 bankruptcy case. (More on this below).

However, for YOUR leverage to work, you first need to be able to protect yourself from THEIR leverage in order to force them to deal with you, rather than, say, suing you to collect the debt.

They will generally do whatever looks easiest, and most cost effective to them. Normally, that’s damage your credit rating, threaten and harass you and ultimately sue you to collect the full debt or sell your debt to some debt collector that will do the same.

There are only three ways to successfully fend off creditors:

1. Remain judgment proof. If you have little or no assets, rent instead of own your own home, and you are self-employed, then creditors cannot garnish your wages or seize your house or assets.

Needless to say this does not apply to everybody. Also the amount of exempt assets you can keep from creditors varies according to state law in the state where you live. For interest, cars worth more than a certain amount may be non-exempt (the creditor may be able to seize and sell your vehicle).

It also won’t protect you from harassment, court orders to fill out interrogatories about your assets and other creditor demands. Creditors can also file to renew their judgment for many years.

2. Negotiate a Settlement. Obviously if you get them to agree to take a reduced amount in full satisfaction of their claim, then that solves the problem. The debt is reported as “settled” to the credit reporting agencies — which is better than a bankruptcy.

3. Bankruptcy. If you are able to discharge your debts in bankruptcy under Chapter 7 then you won’t have to pay them. If you file for a chapter 13 repayment plan you will be able to pay a portion of your debt depending on your assets and income, over a period of years.

(This whole area is extremely complicated and you need an attorney to analyze your situation properly if you are considering bankruptcy. Under no circumstances should you try to do it yourself. I cannot tell you how many times I’ve sat in bankruptcy creditor meetings and seen other bankrupt debtors come before the Bankruptcy Trustee and have their cases dismissed because they didn’t have a lawyer and didn’t know how to follow the rules. Bankruptcy law is tricky by Congressional design.)