If you're being suffocated by debt, there is help available. Debt management includes several options to get your debt back down to where you can breath again. These options include credit counseling, bankruptcy, debt consolidation and debt settlement. Doing nothing may sound like the way with the least amount of hassle but it doesn't produce long-term results.
What is Debt Management?
Debt settlement is only one option of debt management. Other options include credit counseling, which means you'll meet with a counselor to review your income and expenses and come up with a plan that pays off your obligations in full. The counselor will work with your creditors to accept the plan. Bankruptcy is a legal procedure where the court discharges most of the debts -- child support and alimony arrearages, back federal taxes and school loans are examples of debt that won't be discharged. Debt settlement requires convincing each unsecured creditor to accept a payment that pays only a portion of what you owe, as payment in full.
Once you're at least six months behind on your payments on your unsecured debts, such as credit cards, the original creditors may write off the debt. At that point they don't believe that you will pay the debt. The creditor has the choice of settling the debt for less than what you owe; filing a lawsuit to collect what they're owed, assigning the account to a collections agency or even sell the account outright to a collections agency. Debt settlement has a negative impact on your credit scores where other methods of debt management such as debt consolidation may not.
You, or someone on your behalf, must negotiate with the original creditor until you reach an agreed to amount that settles the debt. The payment may be from 20 percent to 50 percent of the amount owed. When you pay the agreed amount, the account is considered satisfied and no further action will be taken. If the account has been assigned to a collection agency, the original creditor still owns the account but you'll have to negotiate with the collection agency. If the debt has been bought by the collection agency, it was most likely for pennies on the dollar based on how old the debt is. Since the agency paid less for the debt, they may be more likely to settle for less.
It's never fun talking with the collections department of the original creditor or with a collection agency. Their motivation is to convince you that you must pay the entire balance with no other options. Before making any payments, get that agreement in writing. Until the debt is paid you are still subject to litigation from either the original creditor or the collection agency, depending on who owns the debt. Since other methods of debt management, such as credit counseling, pay off the debt, litigation is less likely an option.
The statue of limitations limits the ability of a creditor to successfully obtain a judgement for the collection of a debt. If the creditor knew, or should have known, that the debt was outside the statue of limitations, it's against the Fair Debt Collection Practices Act to pursue litigation. The statue of limitation varies by state. Paying even a small amount on the debt past the statue of limitations can start the clock ticking again and renews the date for the expiration.
As a consumer, you have rights under the Fair Debt Collection Practices Act. However, these rights only apply when a secondary party, such as a collection agency, attorney acting to collect the debt, or junk debt buyer is attempting to collect the debt. They do not apply when the original creditor is attempting to collect the debt. Know what your rights are if you're contacted by the secondary party. When you receive the first collection notice, don't assume the debt is legitimate, request in writing that the debt be verified.
Katie Jensen's first book was published in 2000. Since then she has written additional books as well as screenplays, website content and e-books. Rosehill holds a Master of Business Administration from Arizona State University. Her articles specialize in business and personal finance. Her passion includes cooking, eating and writing about food.