A letter shows up from a law firm you’ve never heard of, saying it represents one of your creditors. If your business is already behind, it is easy to assume the time for talking is over. It isn’t. One common type of demand letter is a statement that a law firm represents your creditor, and that the creditor is demanding that you immediately pay a specific amount, or face legal action. While that would sound like an ultimatum, the reality is that the law firm’s letter is really the first step to starting the negotiation process. It is not the end of the discussion. An open dialogue between the parties is often the key to finding a solution. So yes, you can negotiate with a creditor’s attorney, and creditors are almost always willing to settle.
Most owners make one of two mistakes at this stage. Ignoring the calls is obviously not a good idea. It sends the message that you are difficult to work with and are unwilling to cooperate. The last thing you want to do is create enemies. But telling the collector that you feel you can’t pay the bill or that you don’t have the money won’t help the situation, and neither will promising that a check is in the mail. Neither one stops the calls.
There are two ways to make them stop. The first is a cease and desist letter, which essentially tells the creditors to go away. It can ask that the calls end, or state that you refuse to pay the debt. The second is to get an attorney of your own. Once collectors know you’re represented, they will communicate through your attorney. By law, they can no longer contact you directly. However, you must weigh the cost of legal counsel against the possible savings. If the amount due is large enough, it may be worthwhile.
Prove the Debt
Before you talk numbers with anyone, make them prove the debt. Under federal law, within five days of first contacting you, the collector has to send you a written notice listing the amount of the debt, the name of the creditor, your right to dispute the debt within thirty days, and your right to ask in writing for verification of the debt or for the name and address of the original creditor. Read that notice carefully. Make sure the amount and the creditor match what you remember. If you make either request in writing within those thirty days, you get breathing room. The collector must suspend collection efforts until the verification is provided. If it can’t verify the debt, collection may stop there. Usually, the collector will provide the information, and you will learn just who you are talking to. Either way, knowing who you are dealing with is an important first step in the negotiation.
Once you know the debt is real and the amount is right, it is time to do some homework. You need to know what you can offer and what you can’t. If you want to settle, for example, you’ll have to know how much you can afford. The collector isn’t going to help you with that. It is your responsibility to know what you can and can’t do.
So why would a creditor’s lawyer agree to take less than the full balance? Think about what happens if you file for bankruptcy. If you qualify, your unsecured debt is usually discharged, which means the debtor could walk away without paying the creditor anything. A settlement means the creditor is going to take some of what they are owed instead of nothing. When it comes to settlement, remember that this is a business transaction. The key is getting all the parties involved to accept reality. It is reality that a business owner may not be able to pay a debt in full. It is reality that a creditor wants to maximize recovery. Thinking about your leverage will help you be prepared for negotiations.
Settlement Fund
Negotiations take time, often somewhere between six months and three years, depending on how much you owe and to how many creditors. That isn’t necessarily bad news. First, six months to three years is still a relatively short timeframe. Second, it is time to think about and develop a plan to reach a solution. At the start, you set up a savings plan based on what you can actually afford, and the negotiating period gives you time to build up the money for a settlement. Know your goal, and treat the savings account like another bill. Sit down with a budget, and figure out what you can do without. You will need to make some sacrifices, but whatever the final number turns out to be, you have to be ready to commit to and follow through on the funds needed for the settlement. Every payment must go into your settlement fund.
This is where settlement differs from a debt management plan. A debt management plan runs your monthly payment through a third party. The third party then collects money from you and sends that money to the creditors. With debt settlement, you save money in a separate account while you work to get your creditors to lower your debts. The savings deposit goes into an account and when you have enough money there you use that to pay the creditors. The creditor gets a single lump sum once the negotiated amount is reached.
Once the two sides agree on a number, get it in writing. Many people, lawyers included, find it impossible to resist the temptation to skip the important and necessary documentation of the agreement. That decision, however, may prove costly. It’s wise to have a lawyer review the agreement, either before signing or after the other side hands it to you, just to make sure you are fully protected and the creditor can’t come after you later.
Filing Suit
And sometimes, despite all of this, the creditor’s attorney files a lawsuit. Don’t panic. The suit is really a form of pressure. The attorney is trying to force the debtor into negotiations. It is a legitimate way for a creditor’s lawyer to get your attention and move the conversation forward. That said, filing suit is a real threat and you don’t want it. It costs you money. It costs you time. It costs you stress. If that happens, call your own lawyer and tell him or her the creditor has filed suit. Then follow his or her instructions. Let the attorney start negotiations with the creditor’s counsel. A lawyer with debt negotiation and credit defense experience can act right away to defend you and puts you in a stronger position. Negotiating for you and with you, your lawyer will push the other side to find a solution. In all instances, negotiate.
A law firm’s demand letter is not an ultimatum. It is an opportunity. The attorney’s letter often is your first opportunity to respond. It is a chance to initiate a constructive conversation. When you’re in financial trouble, dealing with creditors isn’t fun. But sticking your head in the sand and hoping the problem goes away is a self-defeating tactic. Instead, call the creditor or their attorney and get on the phone. Confront the problem head-on and try to work out a resolution.
