No, You Don’t Have a Right To Settle Your Credit Card Debts For a Fraction Of What You Owe

No, You Don’t Have a Right To Settle Your Credit Card Debts For a Fraction Of What You Owe

By: Jason L. Van Dyke, Esq.

There is a running joke between one of my best friends and I concerning commercials for a product known as “Shari’s Berries”. The two of us are fans of many local Dallas/Ft. Worth talk shows on 660 AM (The Answer) or 820 AM (WBAP), where advertisements can be particularly....bad. A few of these advertisements are incredibly annoying. One, for example, is for an anti-snoring product that utilizes an obnoxious sounding New Yorker with a thick accent to promote it. The voice is like nails on a chalkboard to any Texas. Others are rather unfortunate because of how they were designed or played. One is a vitamin supplement for dogs, called Dinovite, while another is a vitamin supplement for people, called Dr. Black’s Superfoods. Since both products contain similar ingredients (which are read during the advertisement), the running joke is that Dr. Black merely discovered that people can also benefit from taking Dinovite and that the products are really the same thing. Then there are those advertisements played with such frequency that we can recite them verbatim. Shari’s Berries and MyPillow are the worst offenders. We get so annoyed by these advertisements that we often send each other joke text messages pretending to sell Shari’s Berries or MyPillow products. However, there are no advertisements that cause me to scream at my radio louder than those offering financial products and services that are so blatantly fraudulent that....even a caveman would be able to spot the scam (I don’t use Geico, but I do miss their caveman commercials).

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These commercials are usually for debt settlement companies. They typically begins with a blaring siren warning their potential marks that “this is an alert” or saying the word “warning” repeatedly. They will typically warn a consumer to not declare bankruptcy, and instead, knowledge of a special program where marks can get out from under their credit card debt while paying

only a fraction of what they owe (one commercial even advised those who have already filed for bankruptcy to change the station). They promise similar “settlement” or “reduction” services for all types of debt (medical, personal loans, etc.) and, all too often, potential customers jump at the same kind of opportunity for “free stuff” which caused a majority of Americans to elect Barack Obama to The White House twice. It’s truly a brilliant scam. These companies are taking advantage of people they already know to be fiscally irresponsible by selling them the opportunity to be even more fiscally irresponsible.

My grandmother (God rest her soul) was very frugal and resented salesmen with “sticky fingers” that took her for an idio. She would tell my brother and I such things as “save your money or spend it wisely” or “have a place for everything and keep everything in its place.” She wouldn’t have suffered radio pitchmen trying to convince her of the existence of a program or legal right that isn’t even believable. If you had a legal right to settle your credit card debt for far less than the balance owed, why would any bank other issuing one in an era where information on such programs is available with the click of a mouse? They wouldn’t.

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The “right” to settle your debt does not exist.
Period. Debt settlement companies claiming
otherwise have nothing to offer you other than their
knowledge concerning how credit card companies,
junk debt buyers, and other collection agencies
conduct their business. The first thing a debt
settlement company will direct a client to do is to
completely stop paying their credit card bills and to
notify the credit card company that they are “represented” by the company. An amount that is roughly equivalent to the monthly payment will be sent instead to the company, which will deposit that money into a trust account on behalf of the customer (after deducting their fee, of course). Lawyers for the company might even assist the client in getting collection calls to stop (a debt collection agency is required by law to stop calling you once you demand, in writing, the such communications cease). Meanwhile the customer will believe that all is well in the world while the credit card companies and their collection agencies ravage the customer’s credit score.

Eventually, most credit card companies start making settlement offers. This is standard operating procedure because, if they are unsuccessful in negotiating a settlement, their final remedies are to either sue or sell the debt for pennies on the dollar to a junk debt buyer (such as Midland Funding, LVNV Funding, or CACH). The debt settlement companies want to settle with the credit card companies, not the junk debt buyer. They know that very few credit card companies sue their clients. When an individual is sued for credit card debt, it’s almost always by a junk debt purchaser rather than their credit card company. The debt settlement company, if they’ve been doing their job, knows the price typically paid a debt settlement company to the credit card company for a debt (pennies on the dollar). They also know the margins of both companies, that the collectors employed by these companies work on commission, and that immediately prior to or after this write-off of the debt is the best time to settle. Settlements will typically be for between 40 – 60% of the credit card balance, which causes the customers to believe that the paltry 18 – 20% they paid the debt settlement company was a great bargain. Unfortunately for the customer, the entire process will leave their credit rating in ruins and could stick them with a significant tax bill.

The debt settlement companies don’t want their customers to know that the entire process an extraordinarily dangerous house of cards. Since the “right to settle” they have advertised and sold to their client doesn’t exist, there is nothing stopping the holder of the debt from filing a civil lawsuit to collect the entire amount owed, with interest, at any given time after an “event of default” under the cardholder agreement or a contract. The only reason a debt settlement company’s product works is because mass litigation is not part of a typical credit card company’s business model. They leave that to the junk debt buyers and collect the low-hanging fruit. They get a tax write-off for bad debt that isn’t paid. A settled, forgiven or written off debt is considered to be part of the debtor’s income. That means that the tax burden shifts from the credit card company over to you and, at the end of the year, you may be responsible for paying federal income tax on the any amounts settled or otherwise written off.

The debt settlement companies also neglect to tell their customers and all of these settlements will be reflected on the customer’s credit report and will negatively affect their credit score for up to seven years. On average, the settlement (non-payment) of a debt will result in a 80 – 125 point deduction. This often puts the credit conscious customer in the position of trying to hire a new company to repair the devastation to their score caused by the fiscally unsound advice of the debt settlement company. While debt settlement companies are required to inform their clients that the services provided will hurt their credit score, most customers have no idea how much damage will be inflicted or what the long term consequences of the damage will be. The debt settlement company doesn’t care either. I have included the chart below to show the meaning of certain FICO scores. In most cases, an individual with a FICO score under 640 will be declined for a mortgage, an apartment, and most other forms of credit without a co-signor.

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The damage typically inflicted to your credit by working with a debt settlement company will not be limited to your ability to find suitable living accommodations. Employers are now, more than ever, running pre-employment credit checks on their employees as a means though which to weed out the untrustworthy. Those with unsatisfactory credit are typically ineligible to serve in or remain in the military or in law enforcement because credit history is considered for the purpose of obtaining andmaintaining a security clearance. A person with a poor credit history will be viewed by most employers, and especially the government, as a security risk. Even obtaining a loan to purchase a vehicle is very difficult for customers with poor credit. They are typically required to either pay cash or buy an inferior used vehicle from a “buy here, pay here” dealership at interest rates north of 16%. The number of doors ultimately shut by the debt settlement process invariably leads to the customer obtaining more credit cards to pay for living expenses until he finds himself completely trapped and ready to file for bankruptcy anyway. Of course, this doesn’t have to be the case! For the next article in this series, we will examine the bankruptcy process in detail and discuss the ways in which those who are in debt over their head are often able to avoid the process altogether.

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Jason L. Van Dyke is licensed to practice law in Texas, Colorado, Georgia and Washington D.C. He has been practicing in the areas of criminal defense, debt collection, and real estate law for ten years. He is a member of the Texas chapter of The Proud Boys and lives in Crossroads, Texas. The views expressed in this article are general in nature and should not be used or construed as legal advice for any specific situation.