The other day I was talking with a person who had $12,000 in credit card debt and wanted to file for bankruptcy. This amount of credit card debt seemed way too low for this person to file for bankruptcy protection. I asked: “Have you thought about settling your debts on your own?” Her response: “No, I could never do that!” I was a little surprised by her response, but on inquiring further, I discovered her trepidation was simply in trying something she’d never done before—or even considered.
We had a nice little chat, and I’ll share with you what I told her: Of course you can settle your debts on your own. (Imagine that— a lawyer telling you that you don’t need his help to do this!) Here is what I’ve learned over the years.
Just because I’m a lawyer and I write the credit card companies a letter, it doesn’t automatically mean they are going to be shaking in their boots and accept what I offer. While I would like to believe that when I put pen to paper, I can create magic, the reality is you will be paying me for my time—and the credit card companies don’t care who I am.
You will need to be patient, as this will take some time. The credit card companies will not rush a deal, so patience is key.
You will need to stop paying your credit cards. This will put the credit card companies on notice that you mean what you say. After your account goes delinquent for a couple of months, you become a bankruptcy risk. “Bankruptcy” is one word that the credit card companies do not like to hear.
Provide a financial statement to the creditor only if it helps your case—and make it a very generic one at that. You do not want to send them a detailed financial statement showing your bank account numbers, or that you spend $100 a month at the spa. If you truly live on a shoestring budget, however, a financial statement may benefit you in the long run.
Never mention filing for bankruptcy. The creditors know that bankruptcy is always an option—so there’s no reason to throw it out there in a negotiation. If the creditors think you are speaking with an attorney, they will shut down communications.
Never accept any deal that you cannot afford to keep. If your maximum payment is $75 a month, stick to your guns. Remember, they are not getting anything right now.
In any settlement agreement, you always want to add language that gives you wiggle room in case you have a bad month and/or are late on a payment. You never want to sign anything that allows a creditor to garnish your wages either.
Lastly, the settlement of debts will probably create tax consequences for you, so please, please, please consult a tax professional to see if you will incur a tax liability.
