The process server just left your office, and now everyone you work with knows you’re getting sued by a creditor. Yikes. How you handle this can make or break your credit rating and your ability to refinance your mortgage or get a new home loan.
Don’t run, don’t hide. If you have the funds to pay the debt, call the creditor and try to negotiate a discounted settlement. Accompany your payment with a letter reiterating that you have an agreement to settle the debt for a reduced amount. The wording of this letter is crucial if you want to make the agreement stick. For larger amounts, paying for an attorney’s advice is a good idea. At minimum, find a sample letter online and use it to get the correct verbiage in there. Use a cashier’s check to pay the debt, and put a conditional or restrictive endorsement on the check, so that by accepting your check (in many states–check the law for yours) the creditor acknowledges that the amount constitutes payment in full.
Creditors don’t like to sue if they can avoid it; lawyers are expensive, and more importantly just being granted a judgment is no guarantee that they will be paid. If you don’t have the money to pay the debt in full, try to negotiate a low payment. Remind the creditor that if you end up in court the judge will probably let you make a lower payment anyway. And most importantly, get a written agreement that the creditor will report your account paid as agreed and not as a charge off or other derogatory category.
If you and your creditor can’t come to an agreement, go to court. By not showing up you throw your rights away. Document your tiny income and horrible debts (that’s why you haven’t paid what you owe in the first place, right?) and express your wish to pay what you owe if only the amount can be made manageable. The judge won’t cut you any breaks on the total amount but chances are you will get a lower payment.
Pay as agreed. A judgment against you is bad anough on your credit report. An unsatisfied judgment is worse. Pay it off and make sure that your report is updated to reflect this.
As with just about everything, the best way to handle credit problems is to hit them early and hit them head on. Contacting creditors as soon as you lose your job or become ill can minimize the effect on your credit rating. Conservative solutions like credit counseling and debt management work best when you haven’t yet totally screwed up. And you are far more likely to qualify for debt consolidation loans and other lifelines when you haven’t been blowing off your bills for months. Even bankruptcy can be filed without tanking your credit score if you do it right. File BEFORE you begin missing payments and you can be respectable again within a year.
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(4 votes, average: 4.75 out of 5)
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This is really great information. A lot of consumers don’t even realize that they have the powers to negotiate with their creditors, including me.
Thanks.
Isn’t there certain coverage that protects you if you become ill or unemployed?
Companies offer (and many employers subsidize) long and short term disability insurance for employees who can’t work due to illness or injury. California even has state disability insurance that kicks in once you are off work for a week and it pays about 80% of your wages I believe. Unemployed people get unemployment insurance paid for by their employers. There are supplemental unemployment policies and “mortgage protection” policies sold but I would be very careful about the company I bought them from. The wrong one can be expensive and so hard to collect on that it’s all but useless. A better bet is to insure yourself by setting aside at least 2 months’ of expenses in an emergency fund (if self-employed, on commission, or in a risky profession 6 months is better).