When debt negotiations fail, both creditors and debtors are left with a difficult choice. Creditors must determine whether to file potentially costly and ineffective legal action, and debtors must consider bankruptcy or be faced with continued attempts to collect debt and possible litigation. It is beneficial to both parties to attempt to negotiate and settle debt before litigating or declaring bankruptcy, but when this fails, often creditors and debtors must choose from the best options from these undesirable choices.
When debt negotiations fail, creditors have several options. A creditor can attempt to sell the debt to a third party collection agency. Usually, the bad debt sells for a very small fraction of the total amount owed. However, if the creditor feels the debt is uncollectable because the debtor has no assets or is insolvent, it may be better to get something than nothing.
Creditors can also continue trying to collect debt from the debtor themselves. They must operate within the guidelines of the Fair Debt Collection Practices Act when doing so. Among other things, the rules prohibit early morning or late night phone calls, calls at work, or providing debt information to the debtor’s relatives and friend.
Creditors can also bring legal action against a debtor when negotiations fail. This can involve an action for replevin (seizing property) or garnishment (attaching property or taking money form a debtors paycheck to satisfy a debt owed). Creditors can put a lien on the debtors property, which in some cases will allow them to prevent the debtor from selling their home, or allow the creditor to force the sale of a home or keep the debtors car or other material possessions until the debt is paid. Creditors have the burden of proving that they have a right to collect the debt and that the debtor actually owes the claimed amount.
Legal actions can be expensive, and if a consumer declares bankruptcy, unsecured creditors often collect nothing and are stuck with the fees. Creditors must think carefully before filing a lawsuit, and should consult with an experienced debt collection attorney.
Debtors have several options when debt negotiations fail. If they were attempting to negotiate themselves, they should consult with an attorney or a consumer credit counseling agency, who may be able to facilitate negotiations where they could not. Debt settlement attorneys and consumer credit counselors often have a relationship with credit card companies and will be able to structure a plan that works.
If an attorney and/or credit counseling agency is unable to negotiate a debt repayment plan, a consumer has several remaining options. They can choose to pay the debt as required by the creditor. This may be difficult or impossible. Furthermore, they must remember that the statute of limitations on the debt begins running from the date of their last payment. If they have not made a payment for several years and they make even a small payment, they are restarting the statute of limitations.
If a debtor is unable to pay, then they can consider a bankruptcy action. In order to file for Chapter 7 bankruptcy, in which most debts are liquidated, you must meet certain requirements. Your income must be under a certain level, and your assets and disposable income must also be below a certain level. If you do not qualify for Chapter 7 bankruptcy, you may have to file Chapter 13 bankruptcy. Under Chapter 13 bankruptcy, the court establishes a repayment plan that you must pay. This can sometimes involve automatic deductions or garnishments from your wages. You may also have to sell assets to satisfy debts, depending on the situation, or your creditors may be able to seize assets.
If you do not wish to declare bankruptcy or are not eligible to do so, your only option is to wait for a potential lawsuit and to cope with calls from collectors. Know and understand the Fair Debt Collection Practices Act, and if creditors violate the terms you are entitled to collect penalties in court. Know the defenses to a debt settlement lawsuit, including the statute of limitations and the rules regarding burden of proof. If a creditor is unable to prove that you owe the debt and that they have a right to collect it, or if the creditor waited too long to file suit, they may be unable to sue you.
When debt settlement negotiations break down, it is imperative to consult with an experienced attorney. The potential for litigation is high, and both debtors and creditors need to understand the options available to them.