By Kitty J. Lin, Attorney at Law
Once you start missing payments to your creditors, chances are, after attempting to collect from you, your creditors will sell or transfer your debt to third party collection agency. The objective of these collection agencies is to try to get some sort of payment from you. Most of these agencies try to call you or send you letters indicating that they are willing to settle your debt for less than what you owe to the original creditors. The question then becomes, should you take them up on that offer? The answer is, it depends. Here are some scenarios:
You are about to file for a Chapter 7 bankruptcy
If you are about to file for a Chapter 7 bankruptcy, which discharges all unsecured debt, then the obvious answer to the question of whether you should take the collection agencies up on their offer to settle the debt is “NO.” There is no point in settling a debt which you intend on discharging through your Chapter 7 bankruptcy case. Additionally, any debt you pay to creditors within 90 days prior to filing your bankruptcy case is considered a preference payment. This means that the trustee may potentially go after the creditor and request the money (paid within 90 days) be paid back to your bankruptcy estate. The trustee will then pay the money to your creditors equally.
You are about to file for a Chapter 13 bankruptcy, and you will pay less than 100%
If you are about to file for a Chapter 13 bankruptcy, and your monthly Chapter 13 payments will not pay 100% of the debt, the answer will depend on what percentage will be paid to unsecured creditors. If your creditors are offering to settle your debt for 50% of what you owe, and you will only be paying 10% to your unsecured creditors, then the obvious choice is to reject the settlement offer. If you will be paying 50% to your unsecured creditors in your Chapter 13 plan, and the creditor is offering to settle your debt for 25% of your debt, then it may be a good idea to take the creditors up on their offer and settle the debt for less than what you owe. If you do not know approximately what percentage you will be paying to your unsecured creditors in your Chapter 13 plan, then it may be better to err on the side of caution and reject the settlement. Remember, your creditors only get paid if they file a proof of claim in your Chapter 13 bankruptcy case. If they do not file a proof of claim, they will not be paid.
You are about to file for a 100 % Chapter 13 bankruptcy
If, based on your circumstances, you know you will be paying off 100% of your creditors in your Chapter 13 plan, then your best bet would be to take the creditors up on their offers and settle your debt prior to filing for your Chapter 13 bankruptcy. Chances are, if you are a 100% plan, you will need to pay a little interest on top of the 100% payment as well in the plan. Thus, whatever offer your creditors are giving you would most likely be more favorable than if you were to pay them through your Chapter 13 plan, as you will be paying them over 100% in the plan if they file a proof of claim. The preference payment issue would not come up in a 100% Chapter 13 plan, as all your creditors will be paid at least 100% of the debt
You do not qualify for bankruptcy
If you do not qualify for bankruptcy, or would like to avoid bankruptcy, then negotiating with these creditors is your best option to settle your debt. Remember, you can always negotiate with these creditors! You do not have to take their first offer!
If you would like to know more about your options, feel free to contact an experienced Fremont bankruptcy attorney or San Mateo bankruptcy attorney today at 877-9NEW-LIFE or 877-963-9543 for a free consultation.