Reprint from Had Enough (soon to be published)
with permission of Ken Gross Copyright 2009
We refer to the process of compromising credit card debt as “Debt Resolution.” The financial crisis has witnessed an on slot of “Debt Settlement” companies that seek to assist people in settling out their credit card obligations at a discount. Before addressing some of our misgivings as to the business practices of these Debt Settlement companies, let’s explore my approach to Debt Resolution.
First and foremost, you must recognize that the credit card companies will not discount or assist you if you’re paying the cards current. The collateral consequence here is that you must stop paying on the cards in order to derive the best discount. This means, if you’re overly concerned with your credit score you’re going to have a difficult time taking advantage of the terrific results that can be achieved using Debt Resolution as a tool for financial crisis management. Shedding debt is the key to this outcome and, in my view, far outweighs the cost of seeing your credit score dip for a couple year period.
Before going too far, let’s discuss the basics of when Debt Resolution is a good idea. The best case scenario is someone with substantial credit card debt who still has regular income such that we can facilitate settlement of the card balances by saving the money that was being paid to service the monthly payments on the cards. Even better is the situation where that same person has, for one reason or another, already let his credit slip such that his or her credit score is low – which in my view is a rating of 550 or less. We often time adopt this strategy on clients who are seeking a loan modification, short sale or deed in lieu of foreclosure on their house (“not home”) or other property. The reason is that this is a person who we are attempting to shed debt and preserve future income without utilizing a bankruptcy filing. Keep in mind, though we think bankruptcy is a great solution when you can pass the “means test” and discharge debt, the current law does not always cooperate. Fortunately, Debt Resolution can facilitate reaching the designated goal.
Here’s how the process works. Once we decide a client is right for debt resolution, we have them provide me with a copy of each of their credit card statements. We instruct them to stop making payments on the cards effective immediately.
Calling the Dogs Off
Most clients simply cannot handle the telephone calls and pressure that the credit card companies impose on them once the payments are in arrears. We therefore intervene early and notify the companies of our representation – as a means of “calling the dogs off.”
We “call the dogs off” by sending a letter to each of the credit card companies and any other creditors informing them of our representation of the client. Our letter indicates that we need verification of the amount claimed by the creditor and requests that they provide to us written evidence establishing the cardmember agreement. Most of the time the credit card company does not have a copy of the written signed card member agreement. In fact, over the last few years, many cards have been issued via online sites such that the only evidence of the agreement would be the electronic data file showing the card user’s acceptance of the terms. We ask for it as a matter of course.
The cardmember agreement does pose a couple of interesting issues in two scenarios. Have you ever wondered how many cards have been issued in the last five years online in the name of the spouse or friend of the person who has received the mail or email solicitation to become a card member? I don’t know the number – but my guess is it is big. The solicitation is typically in the mail and indicates the person is “preapproved” with the only requirement to go online and insert the “approval code.” When you do that, if you know the social security number of your spouse (or your friend), that is all it takes. The account application is processed online, approved (in the good old days) and the cards are mailed within a couple of days. So the legal question is what if the card is never used by the person it is issued to – instead it is used exclusively by the other spouse or friend. In this instance, I do not believe the credit card issuer, if challenged, could successfully pursue the claim. While I have not encountered this type of suit in our years of practice it certainly gives me food for thought. I do see a distinction here from the situation where the card is obtained, initially without the spouse’s knowledge, but subsequently the card is used by the named person to whom it is issued. In this case, the acceptance of the benefits would give rise to many legal theories that would tend to favor the card issuer.
The other situation where the card member agreement comes into play is in the case where a business card is issued in the name of the business and, or the name of the user of the card. If, at the time of obtaining the card, the named person’s social security number is provided to the issuer, the issuer typically takes the position that the individual is liable on the card as a joint user or guarantor. I always ask to see what proof the card issuer has that the individual, as opposed to the business entity is liable on the card.
You should understand, the card issuers encounter these arguments on a relatively frequent basis. They tend to simply ignore the issue and proceed forward with the normal collection process. In the current environment, where the ability to settle with the card issuers is relatively easy and inexpensive, these issues do not have great relevance. Simply put, if you’re able to settle the card issuers claim in the range of 15-40%, the cost of settling is less than the cost of paying the legal expense of attempting to defend the claim on the basis that the card issuers is claiming the wrong person is the card holder.
The entire strategy here is to create the clear impression to the credit card company that they are not going to get paid no matter what they do. Once the credit card representative makes an offer, we indicate to them that we will review the matter with our client and get back to them in the next couple of days. The credit card representative always wants to conclude matters right away and, in many cases, they only have a limited number of days to resolve the account, otherwise it passes to another collection group, which can be an internal or external third party collector. Here is when it gets interesting. In most cases, the person who is speaking for the credit card company is paid a commission on the settlement and has a fixed deadline as to the amount of time he has to “work the file.” The cycle in which they must settle the account typically ends during the last week of the calendar month. It is in this window that the best deals can be cut. If possible, we try to set the stage in the third week so that there is room to negotiate and have the credit card representative come down to give me the best deal. The first call with the representative is not the time to settle. We tell them that we have several deals with other card issuers in the works and that I will not settle any of them unless everyone comes down to 10 to 15%. We then tell the representative that his number is way too high and that he should call us if he really wants to make a deal. We are cordial on the phone, but we give the clear impression that we are pessimistic as to making a deal and that we do not want to stay on the phone. The representative wants to earn a commission and tries hard to keep us on the phone and point out the benefits of the transaction. I often here, “Mr. Gross, a 60% discount is very generous and far better than we give to our other clients. You should accept this while you have the opportunity.” My reply is typically, “Listen, do you think I’m a Debt Settlement company that takes the first offer and sells his client down the river. I’m an attorney trying to help these people through very difficult financial problems. Please lets not waste each other’s time.” I then add that I’ve told the client it is in their best interest to file bankruptcy and discharge the debt and that I don’t want to waste his time (the representative) or mine, so if you can’t come down to 15% we don’t have anything to talk about. This little chit chat back and forth usually results in the representative lowering his offer from the 40% range that he started at down to the 20-25% range.
Should We Take the Deal?
The decision as to whether to accept or decline, in my view comes down to two issues. First, for some of my clients, the game plan is not to file bankruptcy, so I know in that case I need to settle the case at what I believe is the most optimal point. As long as the account remains in the hands of the credit card issuer or a third party collector, I know I have more time and the offers will at least stay the same and sometimes get better. The cut point for me is to reach a settlement before the account is sent to a local attorney to file suit. My experience in the last two to three years indicates that the settlements obtained through the attorneys are not as good. If the file ends up with an attorney and the strategy for this particular client does not really include bankruptcy, there is immediate pressure to settle in order to avoid having to burn the costs of defending a lawsuit.
This is an issue people often do not understand. What happens if the credit card company or any creditor sues you? Do you need to do something? What can happen? Too often people do get sued and ignore the papers. When you are sued, you must be served with a Summons and a Complaint. In most jurisdictions, this requires that you either accept a certified mailing of the documents or that you are served personally with the papers by a process server. Once “service” has occurred, you have anywhere between 21 and 30 days in most states to file an “Answer” to the Complaint. If you do that, the court process continues for a time until there is either a trial or the matter is concluded as a result of the creditor filing a motion for summary judgment or summary disposition prior to the trial date.
If you ignore the papers and do not file an Answer, either on your own or with the assistance of an attorney, the creditor, who is the “plaintiff” in the lawsuit will obtain a default judgment against you. Shortly thereafter, typically 21 days, the creditor can then seek to garnish wages or attach your property in an effort to collect the judgment. This is not a good thing and this is a situation that you want to avoid. First and foremost, if the lawsuit stage comes and you do nothing, you lose your bargaining position if the creditor gets the judgment against you. By answering the lawsuit, you buy more time to negotiate and you cause the creditor (or the creditor’s attorney) more costs and time in ultimately trying to collect from you. For this reason, I do not want my clients to ignore lawsuits and have default judgments taken against them. The only exception to this rule is where we have already decided to file bankruptcy and the case will be filed before the creditor can cause any problems.
So in the Debt Resolution arena, if we don’t settle the case before it ends up in the hands of an attorney, the next part of the plan will require us to either settle with the attorney or the client must expend the money on attorney fees to defend the lawsuit. You might ask, “Can’t I defend myself.” The answer is yes – but I don’t advise it. The process is too complicated and taking on that process puts you in far too disadvantageous of a situation from the standpoint of settlement. Attorneys work with attorneys. The credit card company attorney is not the enemy – it is their clients that are. When I have a lawsuit come in, I will call the attorney, shoot the breeze with him or her for a bit and find out what is the “best possible” deal they can get this particular creditor to go along with. The collection attorney wants to close cases quickly more so than to collect the most amount of money. Thus, the strategy at this stage is to find out what the best deal is and then make it. Keep in mind, Debt Resolution is a strategy for someone that has cash flow and too much credit card debt. We are freeing up the money that was being used to pay the credit cards and using it to fund the settlements and any necessary legal costs incurred. If you have no money and no income, Debt Resolution is not the strategy to use in the first instance.
So in the Debt Resolution strategy, if a creditor ends up suing you, the game plan here is to defend the suit, buying time to reach the best settlement with the plaintiff’s attorney. The trick, which requires finesse and experience, is figuring out when to settle the accounts before they land in the lawsuit stage. If, however, the lawsuit ensues, the strategy is to buy time and then use that leverage to settle. I know, you may be saying to yourself, “Geez, this is complicated, I don’t want to be sued.” I understand this thought but want you to resist it. The goal of preserving your future income for your family and your retirement and not paying the debts of the past (since no one is returning the assets you’ve lost) is a solid, smart goal. Just because the process is not as simple as pie and there are nuances that have to be addressed along the way, you should not, I repeat, should not, allow them to deter you from pursuing what could well be the most important decision of your future.
Debt Settlement Companies
Debt Settlement and the services offered by the so-called “Debt Settlement Companies” is similar to Debt Resolution but there are major differences. First and foremost, Debt Settlement Companies are one of those “new businesses” that have emerged during the financial crisis along with the proliferation of “loan modification” businesses. I’m not a fan of these companies for a couple of reasons. First of all, if they only offer one service, whether it is Debt Settlement or Loan Modification, they are going to attempt to sell you on their service as the cure all, fix all, save all solution for your life. If they don’t sell you, they don’t do any business. They are biased from the beginning because other solutions, which may be in your best interest, are not in their interest. To me, this is a big problem. Another major issue to me is that you are engaging them to settle your debts with the credit card companies but you have no idea what skills they bring to the table. You can be sure they are not attorneys. What do they know about negotiation? Can they effectively threaten bankruptcy when they are not capable of representing the client in a bankruptcy? Can they challenge the credit card issuer’s right to enforce the cardmember agreement?
My point is that right off the bat – these companies lack the ammunition that is very helpful in gaining the best settlement. There is a big difference between settling a $20,000 credit card debt for 45% compared to 15%. The difference is, in the macro view, the difference between ultimate success and failure of the program. Keep in mind, my goal in Debt Resolution is to use the money that was being paid monthly on the cards to settle the debt over time. If the settlements are not as low as possible, there simply will not be sufficient funds to take advantage of the settlements.
There have been numerous complaints filed with the Federal Trade Commission as to the abuses and practices of the Debt Settlement industry. It is not my intention to trash the entire industry. I’m sure there are some responsible and established providers of this service out there. My caution, however, is that before you even pursue Debt Settlement, you need to determine if this one of the correct components in the overall goal of shedding debt. You will not be able to determine this by talking to the Debt Settlement company. Of significance, as well, is the distinction and protections you receive when you use the services of licensed professionals compared to the lack of protections when you don’t. Attorneys and certified public accountants are licensed by the state they practice in. If they failure to abide by the rules of professional conduct dictated by their profession, there are strict consequences that attach to disciplinary actions that can be initiated by the State acting on the complaint of an aggrieved party. In the unlicensed arena, where debt settlement providers and loan modifiers reside, there is no such protection. Remember the “Wild, Wild, West?” Well – I do from television and the movies and my advice to you is not to vest your future strategy with people who can come and go with the wind.
By contrast, my concept of Debt Resolution is that the service should be provided by an attorney. Attorneys are licensed and therefore you gain this level of protection. Additionally, the right attorney is well versed in negotiation. The difference between settling these accounts at 30% to 35% compared to 15% to 20% lies in the talent and strategy employed in the negotiation process.
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