It’s very common for us to talk to owners who have some bills in collections and others still with their original creditor. They’re not sure what to do, or even what the status of the account in collections really is. To use an example, say you have a line of credit account that was charged off and sent to a debt collector. What’s wrong with saying, “I guess my account with them is forgiven now?” You’re not out of the woods yet. The account in collections is not forgiven. Nor is it a lost cause. And the status of the other loans/advances you have with the original lender(s) still matter. In other words, when we talk to owners about their debts, we look to the whole picture to figure out how to negotiate the most effective way. And if your current accounts are still in good standing, don’t dismiss them either. It’s not a choose one, all or nothing approach.
”Charge Off” Doesn’t Mean “Forgiven”
What does “charge off” mean, anyway? There’s a whole string of events that happen before you even get there. The lender first calls and then mails. Once 120 days to 180 days have passed since your last payment, accounting principles and federal guidelines force the lender to charge off your account. ”Charge off” doesn’t mean “forgiven,” you still owe it, collection efforts don’t stop and the bank doesn’t even have to notify you it’s doing it. It’s also known as a “write off.” Here’s a common misconception. The charge-off date has almost nothing to do with the statute of limitations on the debt or even with when it must come off your credit report. Don’t build your plan around that date.
After a charge-off, the bank might transfer the account to its internal late-accounts or recovery department, or sell it to a collection agency. The collector will probably have purchased the debt at a discount, but he can still collect the entire balance plus interest. Don’t assume that the collector will be eager to accept pennies on the dollar. You are now dealing with a new party on that debt.
Accounts That Have Not Gone to Collections
Then there are the accounts that have not gone to collections. The business line of credit is generally unsecured, which means it’s not tied to any physical asset. However, some lines are secured, meaning they are tied to a physical fixture, piece of equipment, or inventory. Check your paperwork and determine which accounts are secured and which aren’t. That way you’ll know what to protect.
So what do you do with the mix? Don’t ignore the collections account just because the bank wrote it off. The collector still wants the full balance and can sue. And don’t ignore the current accounts either. Best course usually is to keep negotiating with each creditor rather than going silent. Every account is its own negotiation.
If you don’t settle, your creditor may sue you for breach of contract. If you have no viable legal defense, you lose, the court will issue a judgment, and then the judgment creditor can take steps to collect. Depending on state law, the judgment may be satisfied by garnishing your wages, levying your accounts, or putting a lien on your real or personal property. You can’t just ignore the account in collections while you pay the others.
Debt Negotiation
Settlement, also called debt negotiation, is the tool for both kinds of account. A creditor agrees to accept a reduced payment to consider a balance settled. The settlement may save you up to 60% of what you owe. For some accounts, payments will be made monthly until the balance is satisfied. In other cases, a lump sum will be required. The amount forgiven by the creditor is considered taxable income by the IRS, and will be reported to you on a 1099-C tax form. Settlement may be reflected on your credit report.
Expect a fight over terms, whichever kind of account it is. Bank or collector negotiators have all sorts of incentives to get their dollars as quickly and favorably as they can, so they set arbitrary deadlines for you - “I’ll need an answer from you in 3 days,” “Payment must be made by end of month.” The better deal might be at the end of the month, not the beginning. Bear in mind that creditors are not required to negotiate.
Say the bank or a collector offers to settle the charged-off account for a fraction of the balance. Is that a good deal? Well, only if you can afford it. Can you come up with a lump sum by their deadline? And don’t forget that the forgiven amount will appear as income on your tax return, so you’ll need to budget for that too. If you can’t pay what’s owed, say so and keep talking rather than just throwing your hands up and walking away.
You can negotiate with creditors yourself, or you can hire a debt settlement firm. In most cases, the pros are going to do a better job than you would. They know how much each creditor will settle for and on what terms. They know which creditors won’t settle at all. If you’re not a born negotiator, let someone do the heavy lifting. That is the work we do at Delancey Street.
Here’s an idea for when you’re negotiating with a creditor: consult an attorney in your state with experience in bankruptcy. Then use the knowledge as leverage. Tell the creditor you’d really prefer not to file bankruptcy, but if the negotiation fails the creditor may get little or nothing in a bankruptcy discharge.
We are a business debt settlement company based in New York City, and we work with owners in 49 states. Our senior advisors negotiate with lenders and funders on your behalf for less than the balance you owe. We don’t sell you another loan. We’re not a law firm either, so if your case is a better fit for bankruptcy (e.g. Subchapter V) or litigation, we point you to an independent attorney. First consultation is free and confidential, and if we think there’s a cheaper option, we’ll say so on the first call.
