How long does it take to settle a debt? There’s no firm answer to this question. Debt settlement is a process that happens in stages: Missing payments and collection calls, the charge-off, negotiating a settlement offer within the creditor’s deadlines, making the settlement payment in full or monthly, and, if negotiations fail, a possible lawsuit. The amount of time any of this may take varies, based partly on the creditor and partly on you.
Charge-off
When a company fails to pay on a debt, the lender contacts the debtor and sends letters. After 120 to 180 days of nonpayment, the debt is classified as noncurrent (not current), and generally accepted accounting principles and federal guidelines instruct lenders to charge off the debt. The creditor is not required to notify the debtor that the account has been charged off. That means the first phase of the timeline, from the last payment to the charge off, lasts four to six months.
”Charge-off” does not mean that a debt is forgiven. The business is still liable for the debt and collection efforts still continue. The creditor simply shifts the debt to a late accounts department or sells the debt to a collection agency that buys the debt at a discount but can still pursue the debtor for the full amount plus interest. The charge-off date has little or no relevance to the statute of limitations or to the removal of the debt from a credit report. Charge-off is sometimes referred to as write-off.
The Deadline Is Part of the Negotiation
When creditors make you settlement offers, they may give you a short window of time in which to take the offer. Creditors negotiate hard, and the deadlines feel random. It’s to the debt collector’s advantage to settle as quickly as possible and for as much as possible, so you might be able to get a better deal at the end of the month than the beginning. A short deadline for a settlement offer does not necessarily mean that negotiation is done.
For example, one business owner had a $50,000 unsecured line of credit with Wells Fargo. The owner made payments until the bank increased the interest rate and assessed over-limit and late fees, then four months ago the owner quit paying the bank. The owner tried to contact the bank to negotiate something, but the bank wouldn’t speak with the owner, they just wanted money. Then one day the owner got a call saying the account had been charged off. Nothing in writing. The bank offered to settle the $58,000 balance, including interest and fees, for $24,500. The owner had three days to make a decision and would have to pay the settlement in full by the end of the month. With the 1099-C on the way and penalties for cashing out a small SEP IRA, the business owner couldn’t come up with that kind of money in less than a month. The recovery rep wouldn’t move and had the account sent to the bank’s legal department and said the owner should contact a third party.
The 40 percent on the dollar offer was a good one, if the owner could afford it. The lesson is that it was the creditor, not the business owner, that dictated the terms: three days to reply, a few weeks to pay. This is how creditors tend to operate. But the deadline is part of the negotiation, and you’re better off in most cases pushing the negotiation as far as you can, rather than folding.
When you settle, the creditor agrees to forgive a portion of the debt, meaning the debtor could save up to 60%. The debtor only pays the negotiated amount. In some cases, the debtor may continue to make monthly payments until the new amount is paid in full. In other cases, the debtor may be required to pay a lump sum amount. Which payment plan you negotiate will affect how long it takes to settle your debts. The forgiven amount will be considered taxable income, and the debt settlement could appear on your credit report. You will receive a 1099-C for the forgiven amount.
You can try to negotiate yourself, or you can hire a debt settlement service. Usually professionals are more successful than individuals: They know how much each creditor will settle for, what terms the creditor will agree to, and what creditors are not willing to settle. Creditors are not obligated to negotiate, so if you’re doing this on your own, prepare to play hardball.
The Creditor May Sue for Breach of Contract
If a settlement is not reached, the creditor may sue for breach of contract. If you don’t put up a viable defense, they’ll get a judgment against you and then can try to garnish your wages (if allowed in your state), put a levy on your bank accounts, or attach a lien to some property, either real or personal. By consulting a bankruptcy lawyer while negotiating, you can put pressure on the creditor: if your negotiation doesn’t work out, the creditor might get little or nothing in a bankruptcy discharge.
How long does a settlement take? The charge-off occurs 120 to 180 days after the last payment, and then the process varies depending on the negotiations, whether you can negotiate beyond deadlines, and whether it is lump-sum or monthly payments. If you’re not comfortable with the idea of negotiating you can always hire a debt negotiation firm to do all the heavy lifting for you. Whichever route you choose, make sure that you keep in touch with the creditor. If your negotiation does not work, then you could be served with a lawsuit.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
