Residential Debt Negotiation

The Department of Banking has started licensing “Debt Negotiators.” Licensed Debt Negotiators, for a fee, offer the services of assisting a consumer faced with significant debt or negotiating on behalf of a consumer, the terms of a consumer’s obligation to a mortgagee or creditor, including:
• Negotiation of a short sale of residential property (one to four family owner-occupied real property);
• Providing services related to avoiding or delaying actual or anticipated foreclosure proceedings; and
• Addressing the delinquency and default of a mortgage loan. No fees may be received until the Debt Negotiator fully performs the services.
Persons exempt from acquiring a Debt Negotiator license include:
• Attorneys licensed to practice in Connecticut when engaged in debt negotiation as an ancillary matter to such attorney’s representation of a client
• Financial Institutions
• Licensed Debt Adjusters while performing debt adjuster services
• Bona fide non-profit organizations

Consumer Protections

Debt Negotiators are required to provide in each debt negotiation contract the following consumer protections:

• Complete and detailed lists of services, costs, and statements of the results to be achieved.

• A statement that the Debt Negotiator has reviewed the consumer’s debt and an individualized evaluation of the likelihood that the debt negotiation services will reduce the consumer’s debt or, if applicable, prevent foreclosure of the consumer’s home.

• A three-day right of rescission along with the statement: “If you wish to cancel this contract, you may cancel by mailing a written notice by certified or registered mail to the address specified below. The notice shall state that you do not wish to be bound by this contract and must be delivered or mailed before midnight of the third business day after you sign the contract.” “ Business day” means any calendar day except Sunday or any of the following business holidays: New Year’s Day, Washington’s Birthday, Memorial Day, Independence Day, Labour Day, Columbus Day, Veterans’ Day, Thanksgiving, and Christmas. Any debt negotiation contract that does not comply with Connecticut Banking Law will be voidable by the consumer. In addition, the Banking Commissioner has established a schedule of maximum fees that the debt negotiator may charge for specific services. The Commissioner has the authority to review any fees and charges assessed by the debt negotiator and order the reduction of such fees that the Commissioner deems to be excessive.

Avoid Foreclosure “Rescue” Scams

Be aware of foreclosure rescue scams that target homeowners having serious problems making their mortgage payments. In these “rescue” scams, a con artist promises to help you save your home, but is actually intent on stealing your home or most of the equity you have accumulated in your home.
According to the Federal Trade Commission, the following predatory scams have been reported:

• The foreclosure prevention specialist: The “specialist” really is a phony counsellor who charges hefty fees in exchange for making a few phone calls or completing some paperwork that a homeowner could easily do for himself. None of the actions result in saving the home. Turning to a HUD-approved counsellor for assistance is one way to avoid this type of fraud.

• The lease/buy back: Homeowners are deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back. Usually, the terms of this scheme are so demanding that the buy-back becomes impossible, the homeowner gets evicted, and the “rescuer” walks off with most or all of the equity.

• The bait-and-switch: Homeowners think they are signing documents to bring the mortgage current. Instead, they are signing over the deed to their home. Homeowners usually don’t know they’ve been scammed until they get an eviction notice.

Debt Settlement

Debt settlement occurs when a debtor successfully negotiates a payoff amount for less than the total balance owed on a debt. This lower amount is agreed to by the creditor or collection agency and is fully documented in writing. Ideally, this lower negotiated amount is paid off in one lump sum, but it can also be paid off over time. Negotiating and paying lower amounts to settle debts is far more common than many people may imagine.

Why Would a Bank Settle Debt for Less?

At first blush, it may appear surprising that banks would be willing to settle for less than what is owed them. However, banks are aware of the statistical certainty that not all borrowers to whom they extend credit will pay them back. This bank’s carefully formulated lending model accounts for defaults. Knowing this makes it easier for a debtor to understand that there are numerous opportunities available for settlement. From a bank’s perspective, as an account grows more and more delinquent, the probability of receiving even one more payment on it progressively diminishes. In fact, roughly 80% of all accounts that go unpaid for more than ninety days and are then dispatched to collection agencies, law firms, or sold to debt buyers never result in any further payments being made on them. Banks and other creditors, therefore, are focused on losing as little as possible, recognizing that taking a smaller piece of the pie is better than not receiving anything back at all.

Basics of Debt Settlement

One of the basics of settlement is to focus primarily on unsecured debt, such as credit cards. This type of debt is known as unsecured because there is no collateral behind it that can be seized in the event it goes unpaid. Now, when it comes to deciding which cards you should settle, there are several things to consider and to be aware of. Importantly, be aware in advance that debt settlement will only take place on an account in which you have already fallen behind three months or more. In fact, the best savings are often realized when an account is closest to charge-off status and a bank is eager to negotiate and collect a settlement. Because it takes several months of missed payments for an account to approach charge-off status, it is best to leave cards with low balances of $1,000 or less out of any settlement plan. This is because the late fees that accrue with the resultant higher interest rates that often result from missed payments will disproportionately raise the debt balance on a percentage basis. This often makes any eventual settlement close to a break-even (or worse) than your out-of-pocket costs would have been had you simply maintained making relatively small payments while doing no further damage to your credit score. However, if you have small balances that are already charged-off, then you should include these in your settlement plan, as the balances have already risen due to late fees and the damage to your credit score has already taken place.

Subtleties to be Aware of during Negotiations

The existence of balance transfers on your card balance can impede the effectiveness of any potential settlement. Both the recency and size of balance transfers are considered. Banks may frown upon settlement (or raising the percentage of debt owed that they may ultimately accept) on accounts that show balance transfer activity within 12-24 months of when payments stopped being made or when the percentage of balance transfers held on the card approaches 20% of the total card balance. Similarly, cards that show aggressive recent purchasing activity will likely be less eligible for settlement. In these type situations, it can make better sense to wait to settle with an outside collection agency than with the original creditor bank that issued the card. It may also make sense to keep one or more of your accounts open. Part of keeping a reasonably healthy credit score is maintaining open and active revolving accounts within your credit profile. Keeping open one or two accounts with low balances that you can then use responsibly will help mitigate the damage that settlement on other accounts may do to your credit score.

Don’t Pursue Settlement Too Soon

A basic fundamental to debt settlement is that creditors won’t show a willingness to settle until the debtor has already demonstrated an inability to pay. If you fall behind on payments temporarily as a result of a relatively brief rough patch, then the debt settlement process might not be your best option, given its irreversible quality once it has begun and the negative consequences it can have on your credit profile. Individuals in this situation should consider a credit counselling service or investigate short-term hardship plans that a creditor bank could make available. However, if you’ve already fallen behind on payments by four or five months and there isn’t much light showing at the end of the tunnel, it could be time to start negotiating directly with your bank for the best settlement before it assigns your account to a collection agency. This is often the sweet spot in terms of timing – the bank still controls your account but also knows that the clock is ticking closer to charge-off, the point at which it would likely never recover anything from the account again – and your credit score takes a hit. This moment in time is a win-win for all involved – the debtor pays less than is owed while limiting credit score damage, and the creditor loses the least by recovering some value from a delinquent account that would otherwise be recognized as a loss on its books.

Get Your Settlement Documented in Writing

It is important to understand that a settlement agreement is not fully closed until it is agreed upon in writing. In other words, a verbal agreement with a creditor simply is not enough. Reaching a settlement agreement rarely happens in a single phone call to a creditor, rather, it usually evolves over several well-placed calls spanning several weeks or months. However, once a deal has been struck, be certain to get all of the following critical information drafted into a dated settlement letter:
• Your Name and Account Number,
• The name of the Creditor/Collector,
• The outstanding balance on the account and the amount agreed to as settlement,
• The terms of the payment (lump sum vs. periodic payments over time) along with payment due dates, and, finally, a clear written statement indicating that the account has been satisfied in full.

A reputable debt settlement company will never guarantee a specific settlement amount, but rather, it will provide a realistic estimate and time frame for making offers to creditors that can ultimately result in settlements that save you significant amounts of money. Since creditors actually have no legal obligation to settle, any debt settlement company that goes so far as to guarantee settlement is acting dishonestly. When contacting a debt settlement company, expect all fees and costs to be disclosed up-front, and look for clear written guidelines regarding their debt resolution program. You should be provided with an estimate of how much time may elapse before settlement offers are made on your behalf, and how much money you must save up before these offers will be made. Finally, make certain that the settlement company has a practice of sending all settlement offers to you, its debtor customer, for your approval, prior to them being sent to creditors. A reputable debt settlement company staffed with experienced credit counsellors who have relationships with major credit card lenders and an understanding of the marketplace can help you wade through these waters. A settlement company can also advise you as to how much money you should put aside in advance of negotiations and set up an escrow account in your name that will be managed by a trustee or administrator. Depending on your individual budget constraints and size of your settlement, you will make regular monthly payments into this FDIC insured bank account for several months or years until your debt is fully paid. However, there are a few more things to consider. Debt settlement companies often charge a fee equal to 25% of the amounts saved in your settlement, or 15% of the original total debt load. Additionally, the IRS recognizes forgiven debt as taxable income, so if you save anything over $600, you will have to pay taxes on it. Be especially wary of any debt settlement company that promises to settle your debt for “pennies on the dollar.” With rare exceptions dating back to the financial crisis of nearly ten years ago, these claims have almost always proven too good to be true.

If you decide that a debt settlement is the right move, the next step is to choose between doing it yourself or hiring a professional debt negotiator. Keep in mind that your credit card company is obligated to deal with you and that a debt professional may not be able to negotiate a better deal than you can. Furthermore, the debt settlement industry has its fair share of con artists, rip-offs, and scams, which is why many people choose to try it on their own first. Debt settlement can adversely impact your credit score, making it more difficult to borrow money at affordable interest rates in the future.

Whether you use a professional or not, one of the key points in negotiations is to make it clear that you’re in a bad position financially. If your lender firmly believes that you’re between a rock and a hard place, the fear of losing out will make it less likely that they reject your offer. If your last few months of card statements show numerous trips to five-star restaurants or designer-boutique shopping sprees, your lender will be unlikely to view you as being in need or worthy of sympathy. To raise your chances of success, cut your spending on that card down to zero for a three- to six-month period prior to requesting a settlement. On the same note, if you’ve been making your minimum payment (or more) on time every month, you will look like someone who is attempting to walk away from your debt obligations. Your debt settlement offers should always be directed toward companies with which you’ve fallen behind on your payments.

Start by calling the main phone number for your credit card’s customer service department and asking to speak to someone, preferably a manager, in the “debt settlements department.” Explain how dire your situation is. Highlight the fact that you’ve scraped a little bit of cash together and are hoping to settle one of your accounts before the money gets used up elsewhere. By mentioning the fact that you have multiple accounts on which you’re pursuing debt settlements, you’re more likely to get a competitive offer. Offer a specific dollar amount that is roughly 30% of your outstanding account balance. The lender will probably counter with a higher percentage or dollar amount. If anything above 50% is suggested, consider trying to settle with a different creditor or simply put the money in savings to help pay future monthly bills. Last but not least, once you’ve finalized your debt settlement with your lender, be sure to get the agreement in writing. It’s not unheard of for a credit card company to verbally agree to a debt settlement only to turn over the remaining balance to a collections agency. Be sure the written agreement spells out the amount you have to pay in order to have your entire balance excused from further payment. While the possibility of negotiating a settlement should encourage everyone to try, there’s a good chance you’ll hear a “no” somewhere along the way. If so, don’t just hang up the phone and walk away. Instead, ask your credit card company if it can lower your card’s annual percentage rate (APR), reduce your monthly payment, or provide an alternative payment plan. Often your credit card’s debt settlement representative will feel bad for having had to reject your offer and may be willing to agree to one of these other options.

Debt Negotiation Lawyer

When you need help to negotiate a debt or to file for bankruptcy, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.