Editorial Policy

Negotiation Can Fend Off Debt Lawsuit

Erica Sandberg

July 31, 2012

QDear Erica,

I have tried to work with a law firm that is representing my old credit card company (Capital One). The firm has sent me a letter saying I have 30 days to respond. I owe $15,000, with most of it being interest (the actual amount I spent was much less). In the letter, it calls Capital One the original creditor, so I’m not even dealing with Capital One anymore. What should I do now? I have a job again, but I don’t have the entire $15,000 to pay, which is what they want. I can afford to make payments, though. When I start, will my credit improve? — Hope

ADear Hope,

Your name says it all — you have hope. Keep that in mind and act fast, as the clock to a potential lawsuit is ticking. Here’s what you need to do.Ask Erica

Write to the law firm immediately and outline what you would like to have happen. You do not want to be sued for the debt  as that will only add to your troubles. Because you legitimately owe the money, chances are high that you would lose the case. After that, you’d have a judgment on your credit report and would possibly open yourself up to some nasty post-judgment collection actions, such as wage garnishments and liens.

Ideally, you’d pay the entire debt right away, but since you can’t, ask for a reduction of the total bill, payable in installments. I believe the law firm is acting as a collection agency, which means they bought the account for a percentage of the balance. Therefore, they may accept less, as long as they still come out ahead. In your letter, suggest half or just over the amount you owe. They may counteroffer, but any reduction will help you out.

Also request that they accept payment arrangements. For example, if they reduce the bill to $8,000, perhaps you can swing $800 for 10 months. You may also ask that when you’re done that the firm report to the credit bureaus that you paid the debt in full instead of as settled, though I’m hesitant to recommend doing so. That would be asking them to provide false information, and a credit report is worthless to anyone unless it’s accurate.

Be sure to write the letter in proper business form and end it with a request that they respond to your offer by a certain date so you can start paying. Send it certified mail, return receipt requested, and keep all copies. After that, the collection agency will either accept your terms or not — and you’ll enter into a negotiation process. For example, they may say the balance needs to be cleared in less time and for more money. Hear them out, and take what’s reasonable. Just don’t agree to terms you can’t meet.

What’s most crucial right now is that you get on the ball. Do not let the 30 days lapse without responding, or you will lose by default.

As for when your credit will heal, third-party collectors typically do not report monthly payments to the credit bureaus. Consequently, you’ll have to wait until the balance is repaid before you see the fruits of your labor. A debt paid in full looks better on a report than a settled one, but if you do get a break on the balance, don’t worry about the difference too much. Your credit is already damaged, and even a settled account is better than an outstanding one. As time passes, it will become less and less important. After seven years has passed, evidence of the bad debt won’t even show up.

In the meantime, consider getting a secured credit card with a low charging limit. By using it wisely as you’re cleaning up the past, you can demonstrate responsibility and speed up your credit comeback.

Got a question for Erica? Send her an email.