According to the Federal Reserve, the national credit card debt reached a record 104 trillion dollars in 2019! A recent survey conducted by a research group for creditcards.com found that more than 60 percent of Americans cannot pay their credit card bill in full by the end of the month and are paying extremely high interest. With such an enormous debt crisis, many consumers, unfortunately, reach a point where they cannot afford to pay their credit card bills. I have invited a fantastic attorney, my good friend Joseph Harrison Esq., to discuss in detail all the pros and cons, and how to proceed with a debt settlement. Joseph has many years of experience helping consumers fighting and settling their credit card debt. He runs a very professional and responsive law firm (contact details found at the end of the post). In this post, he will discuss everything (everything is an understatement) that you need to know about debt settlements.
What Is a Debt Settlement?
Debt Settlement is the settlement agreement where one who is in debt chooses to settle his debt, typically for a discount, so that the creditor does not have to file or proceed with a lawsuit. Prior to discussing debt settlement, it is important to understand the typical route most credit card accounts go through after one defaults on his account.
The typical credit card account is active as long as you are making your minimum monthly payment. As soon as you stop making payments and pass your payment due date, you are in default. Federal law requires a creditor to ‘charge-off’ the account from its active accounts and re-characterize it as bad debt after an account is 180 days (6 months) in default. Essentially, they close your account, and it does not get reopened after this point.
There are two points to note. First, up until the charge-off, the creditor is allowed to charge you interest, fees, penalties, etc. So, therefore, you will see the balance continue to climb with interest, finance charges, late payment fees, and any other fees that are applicable. Second, an account that is charged-off is not forgiven debt; the creditor still has the expectation that you will repay the debt. They will put you in collections, and it is in no way forgiven.
Most creditors will not start calling until you are one full month in default. Meaning, you missed your payment, and then during the entire next month’s billing cycle, you do not make another payment, and you subsequently miss the second consecutive month without a payment. At this point, the creditor will place the account with their collections department, and typically cut off the card so you do not have the ability to make any additional charges. The collections department will start calling you to attempt to prompt you to make a payment. This collection department is an internal department at the bank, and they will keep it in that department for several months.
After several months of non-payment, the creditor will eventually assign the account to an outsourced collection agency. This can be prior to the account charging-off, or right after the charge-off. Some of these collection agencies are subsidiaries of the bank, while others are non-affiliated collection companies. They will send you letters and call to attempt to make payments. Although you may see a different name on the header of a collection letter, the account is not sold off to a debt buyer at this point, but is still owned by the creditor who is using the outsourced collection company to collect its debt.
If the collection company is unable to convince you to make any payments, the bank will generally recall the account from the collection agency and place it with a different collection agency. This is because the standard collection agencies are having tens of thousands (if not much more) of accounts monthly. As soon as they get new accounts in, they start working on the new accounts by placing phone calls and sending letters. If they cannot achieve any collection results within approximately six months, the collection agency will typically pay less attention to the account, and will be busy working on the new accounts placed in its office. Accordingly, the creditor will recall the account and place the account with a new collection agency, so it receives renewed attention.
Accounts Are Graded
This is where different creditors verge on their collection strategies. However, note that there is no master collection strategy that is consistent with every creditor for every account. Creditors will typically grade each account on its expectations of recovering the outstanding balance, depending on its own collectability criteria. For example, defaulted accounts for individuals who are 65 and older will be graded much lower than someone who is between 20 and 40. Additionally, if the creditor is aware that you are a homeowner, a business owner, live in an affluent area, earn more than $100,000 a year, or have other accounts that are not in default, they will grade you higher than one who doesn’t appear to be as collectible. Additionally, if you previously advised the creditor that you are dealing with a major illness or disability, or you advised them of other factors that may affect your collectability, then they will notate the account, and this could affect how the creditor approaches your particular account.
Creditor Will Eventually File a Lawsuit
Some creditors will push the case immediately to a lawsuit. They will send it out to a collection law firm, where they will attempt to collect on the account for several months, and if unsuccessful, they will file a lawsuit. As I am presently practicing in New York, I will use my experience in New York for this article, but creditors’ strategies can differ depending on the state you are in. This is simply because some states are not as creditor friendly (i.e. New Jersey appears to be more pro-creditor, while New York appears to lean towards being pro-debtor) or may not have certain collection features in that state’s law (i.e. Texas does not allow wage garnishments while Michigan allows wage garnishments as well as freezing your state income tax return directly from the state). For example, if you default on all of your credit card accounts, American Express is typically the first creditor to file a lawsuit. They have sometimes been so quick to do so, that the lawsuit is filed before the account is charged off. Other creditors will let it linger longer in collections, such as Discover, Bank of America, Barclays, or Capital One, but they will still send it out to a collection law firm to file a lawsuit within three years. Still others, like debt buyers buying Citibank accounts with a six-year statute of limitations, may wait until year 5 to file a lawsuit.
Other creditors will consider selling off the debt to a debt buyer, which can be based on various factors, including what state you are in and whether they have a collection law firms set up to file lawsuits in your jurisdiction. If the bank sells your collection account, the debt buyer is required to send you a notice that they have purchased the debt, and they are the new owners of your debt. Once this occurs, your collection letters will have a notation on the account details stating “original creditor” and “current creditor,” listing the debt buyer as the current creditor. If your account is sold, typically the debt buyer will send it to a collection agency to attempt to collect on your debt. At this point you could be in for another round or two of collection agencies calling you and sending you letters attempting to convince you to pay.
In New York, the banks that typically keep 90%+ of their debt are American Express, Bank of America, Barclays, Capital One and Discover. The banks that typically sell are all the rest of the banks, including Citibank, Apple Bank, Synchrony Bank, US Bank, and any other banks not listed above. Citibank still sues in New York, as well as TD Bank, Wells Fargo, US Bank, Department Stores National Bank and a couple of others, but they file lawsuits much less frequently than the big five listed above, and only keep roughly 10% of their defaulted accounts, selling off the other 90%+ to debt buyers.
Whether your creditor sells your debt, or keeps your account and sues on the debt in its own name makes a big difference in settlements. Original creditors typically want a larger settlement and know they have the ability to bring a bank employee to trial as a witness, and they believe they can win every case. Debt buyers have a harder time proving their case against an experienced debt defense attorney and are much more likely to give you a sweetheart deal if they believe it will be difficult for them to win their case in court. Note that this analysis is specifically in jurisdictions that uphold hearsay objections to debt buyer testimony (like New York), but some jurisdictions allow debt buyer testimony in collection lawsuit (like New Jersey) and they will still attempt to get higher settlements.
Another factor to consider is whether the creditor has your account on a course where they will eventually sell off your debt. The bank will typically sell off the debt for less than 20% of the face value of the debt, which can go lower than 5% of the face value of the debt. Accordingly, we have seen collection letters from Citibank offering to settle an account for 20% of the debt. If the offer is not accepted, they will typically sell the debt off to a debt buyer for less than that amount. Thus it may be fiscally prudent to grab a $400 settlement on your 2k credit card debt (20%) instead of waiting for a debt buyer to sue. If you don’t grab that deal, you’ll have to either hire an attorney to go fight it for you or take off a couple of days of work for several court appearances. However, if the balance is 20k and they are offering 4k as a settlement, you may be able to get a cheaper deal by hiring an attorney who can get the case dismissed.
Statute of Limitations
Another factor is the age of the debt and whether your debt is still within the statute of limitations, where the creditor or debt buyer can still sue on your debt. The statute of limitations is a rule which essentially says that in order to bring a lawsuit in court, the lawsuit cannot be too old. As time passes people forget or lose documents, and it is unreasonable to allow someone to sue many years after the event happened and expect their opponent to keep the relevant documents needed to defend oneself. The difficulty for the average person with computing the statute of limitations is that there can be several relevant statute of limitations that can apply to your account. For example, there could be a four-year statute of limitations for oral debt and a five-year statute of limitations for written debt (like in Florida). Additionally, even if you are in your home state, your home state statute of limitations often does not apply. That is because the credit card agreement says that the account is governed by the law of the state where the bank is headquartered in, and you can be applying Utah’s or South Dakota’s statute of limitations on your lawsuit in New York. Additionally, some banks will have different choice of law provisions for different types of loans, such as their credit cards can say Delaware law applies and their business loans can list a different state’s choice of law provision. If you are able to determine the statute of limitations that apply to your account, generally old debt (i.e., debt that is past the statute of limitations) will typically be able to be settled for much lower than if the creditor is still able to sue on the account. 
Likelihood Of Recovery
There are a couple of other distinctions to make as well, which could drastically affect a settlement. If it is a business account and the business has gone under, it possibly can get greater discounts if you can show the creditor that the business failed, and their chances of recovery are slim. If you are getting close to retirement age, you can use that to your benefit as creditors know that once people retire and are on social security, the chances of recovering debt rapidly decline. If you have a genuine medical hardship, some banks have hardship programs that you may be able to qualify for if you know who and what to ask for. When I did collections, I saw that one client even had a clergy discount (which I only saw used once). If you have been sued, I would also try to find out a little about the judge who is presiding over your case. If your judge is pro-consumer, then the judge will often help you settle and may even help push the creditor to accept a lower than normal settlement. Conversely, if the judge is pro-creditor, you may want to settle the case before it goes in front of the judge as they could rubber-stamp any judgment placed in front of them. There could be various other factors that play a role in your settlement, and thus it is impossible to write one clear rule that applies to everyone.
Lastly, each creditor typically has settlement guidelines, which will change depending on the stage the account is in. For example, they can have a 50% settlement guideline for accounts that are pre-litigation, 75% for accounts where a lawsuit has been filed, 85% on judgment accounts, and 40% on judgment accounts older than seven years old. Thus, your account can have different settlement guidelines at different stages, depending on where you are in the process. Additionally, I have seen creditors offer discounts lower than their standard settlement guidelines on occasion. When I worked as a collection attorney, I remember one bank sending out a memo to our firm saying that for the next two months (until the end of the fiscal quarter), we were allowed to take an additional 10% off all settlement guidelines. Apparently, they needed to come up with a certain amount of money by the close of the quarter for investors and/or corporate. The settlement offer can also change depending on who it is coming from. For example, Amex can offer a settlement of 50% via its local law firm. If you take that settlement, Amex will only actually receive approximately 37.5% of the debt. That’s because almost all major creditors pay their attorneys by giving them nothing out of pocket but rather a percentage of the amount they recover in collections, where 25% is a standard payment. Accordingly, Amex would receive 37.5%, and the local collection law firm would receive 12.5%. If Amex recalls the account and continues collections (or prior to the law firm getting the account on collections originating from Amex directly), we have seen settlement offers at 40% lump sum.
How Much Can a Debtor Expect To Save With a Settlement?
Back to debt settlement. I was asked to write a list of what a debtor can expect to save on a settlement. After factoring in all of the above, you can understand how sometimes it will appear that there is no set rule as to how much you can save on a settlement on any particular account. There are many debt collection strategies, and the creditor can be applying one of many different collection strategies to attempt to recover the debt.
However, I can give you the general list of what I am getting on my settlements. First, I do not settle accounts pre-suit. I wait until they file a lawsuit against you. If the bank forgets to file your lawsuit or just doesn’t have a smooth and streamlined process to get all of its collection accounts in suit, then you can get a big break due to the creditor’s inability to bring you to court.
Once it goes to court, I generally do not settle debt buyer lawsuits. If my client asks me to try to settle it, I will see whether I can get a mutual dismissal (as I do sue debt buyers back for collection violations and they see me as somewhat of a threat). If a mutual dismissal is not agreeable then I typically can settle it anywhere between 10% – 33% on payments. But that is only if the debtor is pushing for a settlement; I typically let the case sit and wait to see if they make a mistake to sue them back in federal court.
On original creditor lawsuits, I am typically getting 50% of the balance paid out up to 5 years. Based on my experience, creditors will typically reserve the 50% settlements for lump-sum settlements. They have been giving me the discount with the long term payout, probably because they know I can fight them and be a thorn on their side. The creditors will try to push for more than 50%, or for quicker payouts, but I am getting those numbers on most original creditors. The only exception is American Express, where it’s a fight to get down to 50%, and it is the main creditor that doesn’t believe a 50% payment plan is acceptable on any account (except for the occasional lump sum settlements). If it is a lump sum settlement, the banks still tend to stay at the 50% mark. However, there is an important distinction in that if the account is a larger account, such as 40k or 80k, the numbers do go down. This is because as the amount of debt goes up, it makes a lot more sense just to file for bankruptcy rather than settle for such large numbers. Accordingly, banks will get more flexible as the numbers go up. However, remember, the creditors do not like to negotiate against themselves. If I ask them what they will settle for, they will always say they want the full balance. You have to offer lower, and it can often be a struggle to get them to 50% on a payment plan.
|American Express||50% over five years is a great deal|
|Capital One, Barclays, Discover, Citibank||50% over five years|
|Citibank (prior to selling its debt)||We have seen these go for 20% lump sum. However, if they don’t sell the debt, they are typically back up to 50% like the other original creditors.|
|Bank of America||They ask for 50% over two years, will do 50% over three years, and you have to work on stretching it to 5 years|
|Debt Buyers (Portfolio, Midland, LVNV, Cavalry, JHPDE, JH Portfolio, Crown Asset, etc.)||I like to wait to see if they mess up and sue them for FDCPA violations. If the client pushes settlement, no more than 33% at most, and have frequently received 10% – 20% as well on payment plans)|
Note that I have not mentioned Chase Bank anywhere in the article until now. Chase had a problem around seven years ago, where they dismissed every single one of their lawsuits nationwide on their credit card portfolio. They did not sell the debt, nor did they sue. They just put it in collections and let it stay there. Apparently, they had internal issues with their documentation to the point where they were uncomfortable going to court and saying their information is accurate. This appears to be in the midst of changing. Last summer (summer 2019), they issued a notice on all account holders regarding updated mandatory arbitration procedures. Just this month (January 2020), I had a client reach out to me where he received a Chase collection letter from a law firm that typically files suit on every account. It appears that Chase is changing its process again and starting to file lawsuits again, which they haven’t done in years. As they have not yet filed the first one, their settlement guidelines are still unknown, and we are not sure if they will be suing on all of its debt, like the big five above, suing on some, or going straight to arbitration. Accordingly, Chase is somewhat of an unknown at the present.
What’s The Downside Of A Debt Settlement?
Now for the downside of debt settlement. If you settle your debt and attempt to dispute it on your credit report saying you don’t recognize the debt, they will have a signed settlement agreement on file, which they can send to the credit bureaus as verification that this is your debt. Additionally, if you settle an account for less than the full balance, the creditor can send you a 1099-misc for the forgiven amount of debt, which means you may have to pay taxes on the forgiven portion of the debt. Lastly, if you default on a settlement agreement, there are two scenarios. If the account was previously in court, the settlement agreement would typically contain a provision stating that a default results in an automatic judgment for the full balance minus payments. If the settlement agreement is prior to going to court, you have just extended the statute of limitations on the subject account.
An additional downside to debt settlement is that not all companies will send you a written settlement agreement, or the terms may be draconian. If you don’t have a written settlement agreement, it is very hard to prove that you got a 10k discount on 20k worth of debt, and all you will have when you go to court are payments showing how the balance went from 20k to 10k. Make sure you get it in writing before paying anything! Remember, if you end up in court, they just have to show how it reached 20k; if you are alleging that there was a settlement for less than the full balance, that is your burden to prove the existence of a settlement agreement. The account is likely to have changed collection agencies by that time, and most people don’t even remember who the settlement was with.
I have also seen settlement offers that provide a settlement where you pay $25 a month for three months, and then the creditor will reevaluate/reconsider. If you have read the above, it is very easy to see through that trick in that the creditor is trying to extend the statute of limitations. They possibly also verify where you are presently banking in case they can get a judgment and thereafter, levy your bank account. Additionally, they may throw in terms stating that you will waive all defenses and counterclaims, you waive the right to a jury trial, you consent to judgment, etc. Make sure to read through all the paragraphs of your settlement agreement prior to signing it and sending it back to them.
Settling Debt Yourself
If you are planning on attempting to settle your account, good luck, you are in for many phone calls, you will get hung up on, you will get harassed, and it can be a royal pain. However, do make sure to tell them hardships that you are enduring. The creditor may have a hardship program, and something you will say may trigger them to get to a lower settlement authority. Tell them about your medical issues, psychological issues, anything that can paint the picture that you do not have money, may qualify for hardship, and that they should have pity on you. They also typically want to know how you are coming up with the money. Is it a loan from a family member, tax return money, or money saved up? Use your common sense on what to say. They may also ask for your financials, such as last year’s tax returns, w-2, the last three months of bank account records (I never like to send these as they can see where you bank, where you work, etc.), or other documents. If it helps your hardship case, it may be beneficial to send it. Otherwise, brainstorm to see if there is something else you can show them. For frequent customers of mine with multiple lawsuits, I have sent the creditors a copy of all the other lawsuits and tell them that they have five active lawsuits for 60k right now. I tell them that they can either take lower than what they would want and be the first to settle or wait in line, and we will fight it all the way and see if there is anything left to recover if we don’t go bankrupt.
Hiring a Debt Settling Company
If you don’t want the headache of court cases, you can hire a debt settlement company. Like with any business area, there can be great debt settlement companies that help you for a reasonable price or horrible ones that will rip you off. Get referrals, ask for all the fees upfront, and read the small print. If you don’t understand it, write what the agreement is in your own words on the contract and try to get them to sign that as an overview of the charges, or make them sit down and explain it to you line by line. If their own representative can’t figure out how to read their charges and advise you how you will be charged, it seems like that’s a red flag that there are a lot of hidden charges built into their agreement.
I typically do not recommend the big debt settlement companies. Their overall strategy is to attempt to settle every single account on a lump sum settlement at the lowest they can get, which is typically somewhere around the 50% mark. They will force you to pay the monthly payment into their account on a monthly basis, skimming the payment for their own fee, and settling for the same amount that you can get if you had the courage and stamina to deal with the collection calls. This strategy has downsides, as they will settle the accounts in any order without any logic to the order of settlement. They will settle accounts that have been sold to debt buyers at original creditor settlement rates, they will settle accounts that are past the statute of limitations or with creditors that don’t sue, they won’t handle the more dangerous creditors first, and they do not handle any case which ends up in court, as they all clearly tell you in your retainer that they don’t deal with anything in court. If you need money out of the account to settle a case that is in court, it is hard getting your money out for a settlement. Frequently, I see people in court telling the debt settlement company just to take that account off the list, and they will handle it themselves in court. Furthermore, using this method, there is absolutely no chance of hitting the home run and not paying anything on any particular account, and thus you will pay a settlement on every single account. Additionally, for this service that they offer, they will charge somewhere around 20%-25%, so you are paying roughly 70% of your debt back, which isn’t that great of a deal. Accordingly, I typically tell people to steer clear of National Debt Relief, Freedom Debt Relief, and others.
Save The Collection Letters
Lastly, save all collection letters and do not throw them out. You will see what settlement offers you are getting, the range of offers being made by any particular creditor, whether the account is sold to another entity, and whether they are charging you interest. The same way we typically go online and compare prices on everything ranging from hotels and airlines, save the information and compare. See whether the current offer is a good one or another overstated offer. Additionally, if there are mistakes on the collection letters, you may be able to sue them back, make money, and use that lawsuit as leverage for a favorable settlement. Most lawyers who sue for debt collection mistakes do not charge you any money as a true violation requires the debt collector to pay the $1,000 violation plus your attorney’s fees, so your attorney will be paid in full by the debt collector. As a last piece of advice, if they are getting aggressive on the phone, just hang up the phone. You don’t even have to say bye. Don’t feel ashamed to hang up or think that it is impolite. They are calling you and intruding into your life. It’s not a good time for you to be on the phone. You don’t need the aggravation. Just hang up. I do it. They do it to you. It’s just another day of work as a collection representative. They are certainly used to getting hung up on, so think nothing of it.
Joseph Harrison, Esq. can be reached by email at JosephHarrisonEsq@gmail.com or by phone at 203-444-3551.
More information about Joseph can be found on his website www.DebtChamp.com.
 See https://www.incharge.org/understanding-debt/credit-card/what-is-statute-of-limitations-all-50-states/ for a list of the statute of limitations by state for different types of credit relates contracts. See also https://www.thebalance.com/state-by-state-list-of-statute-of-limitations-on-debt-960881.
 See https://www.creditcards.com/credit-card-news/credit-card-state-statute-limitations-1282.php for a list of credit cards and their statute of limitations (which is generally accurate, but there may be exceptions).
 When I did collections, I remember a debtor sending in pictures of his medical ailment, which were quite grotesque. It got him a really great deal, though, and it was definitely worth it…
 While writing this article, I decided to search whether I could find how much these debt relief companies charge. I found https://www.thesimpledollar.com/credit/debt-relief/best-debt-settlement-companies/which gives somewhat of a breakdown of how they work. National Debt Relief’s review was right on target, with the site stating that the average savings after fees are 30% (settle at 50% + 20% fees). CuraDebt says they average 40% after fees, and the rest only focus on one of the above two numbers (i.e., lowest settlement or lowest fees). However, further down the page, the site clearly states that the first disadvantage of debt settlement is ‘big fees’.