When you get into trouble, document the reasons for your hardship and sent your creditor a certified letter. Make sure you tell them that they are not to call your place of work as your employer does not allow you to take personal calls. Tell them not to call your relatives, friends or neighbors. They want money which you do not have, so just do not talk to them. Tell them also that you will pay when you are able.
Do not commingle exempt funds (Social Security, worker’s compensation, Veterans benefits or unemployment benefits are all examples of exempt funds) with non-exempt funds. Once you do, you lose the protection. If you have such funds, make sure you also do not commingle exempt funds with your spouse either. Commingling funds with another will also cause you to lose the protection. This becomes very important if the creditor obtains a judgment against you or your spouse.
After 90-180 days, your debt is “charged off.” This is an accounting term meaning that the original creditor can now write off your debt. The creditor will now send your debt for collection. They also will call you. Anything between 8:00 am and 9:00 pm (using your time zone) is allowed. Calls on Sunday are allowed. Anything outside this time, overly frequent calls or calls to others after you have told them in writing not to call work, etc. is harassment and you can sue them for violating the Fair Debt Collection Practices Act.
After 5 business day, the debt collector will send you a letter with important information about the debt. In the letter, dispute the debt, ask for proof (called “verification of the debt”) and again remind them not to call you at work and not to call your friends, neighbors, co-workers, etc. The debt collectors are not allowed by law to do that unless they do not have your location information. If they know where you are, then they do not need to call others.
When things get better for you, start putting money aside. Open up an account a credit union, small community bank, online bank or a small bank more than 25 miles from your home. Don’t worry about interest rates! Yes, your debt is going to grow over time. You can’t help that. However, you are not going to pay all that. When you have saved up between 50% and 80% of whatever the balance is on your debt when you are ready to settle, call your creditor or keep tabs on correspondence that you receive to see who has the debt. Usually buyers of debts will be willing to offer a deal. Try to settle towards the end of the month or end of the year as the debt collectors or buyers often want to clear their books and that is the best time. If your creditor refuses to accept, then move on to the next account. Tackle one debt at a time, starting with the highest.
When you settle a debt, get the terms of the settlement in writing. This is very important. Keep the terms of the settlement forever. Once you have settled a debt, ask your creditor to send you a letter, if it is not in the settlement letter, acknowledging that the debt is paid in full. Keep this forever.
If you settle a debt for less than is owed, the creditor will report any forgiven debt that is over $600 on a 1099 and you will have to report the forgiven debt on your taxes. However, you may not have to pay tax on this at all. Use federal form 982. If you have a CPA, then ask him or her. If he/she does not know about the form, then find one who does. The form allows you to exclude the forgiven amount if your debts outweigh your assets by the forgiven amount or more.
Rachel Hunter is an attorney who practices law in Cary, North Carolina.