Managing Debt

What Happens to Your Unpaid Debt

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In the first part of the Debt 101 series I talked about taking advantage of lower credit card payment opportunities that many lenders offer to their customers who fall behind with payments. Depending on the situation, capitalizing on the earliest opportunities to work directly with your credit card lender can deliver the results needed to turn your finances around.

What about when you run out of time to work directly with creditors you fall behind in paying?

The Credit Card Debt Collection Cycle

In part one of the Debt 101 series, you learned that timing is a critical factor when you are burdened with debt. If you have fallen behind on credit card debt, your first and sometimes best window of opportunity to get a grip on the situation will be by working directly with your creditor or lender. How big of a window you have to work with your original creditor can vary, but with credit card debts, working something out directly with your lender will generally be between day one of delinquency up to the time your lender will “charge off” your account.

The term charge off is a recurring theme in the Debt 101 series because it is the earliest controlling factor in how and when you may choose to manage debts you have fallen behind in paying. As mentioned in part one of this series:

“Charge off is a term used to describe an accounting function followed by lenders. Charging off a debt means the lender is no longer expecting to get paid on the balance of what you owe. The accounting function of a charge off essentially means moving your balance from the asset column (where it was while you were making timely payments), to the loss column. Lenders, especially those issuing consumer credit cards, are required to account for losses no later than what has traditionally been 180 days of consecutive nonpayment.”

There are 3 options your credit card lender will choose from when it comes to how they treat your account after they charge off the debt.

Unpaid Credit Card Debts Get Assigned to 3rd Party Debt Collection Agencies

Credit card lenders send accounts to debt collectors who will contact you through the mail and over the phone in order to get you to pay. These assignments are generally 60- to 90-day contracts. If the collector can get you to pay some, or all of the debt during the time they have your account, they will typically get paid a contingency fee of between 15 to 20 percent of what they get you to pay on the debt.

Setting up payment arrangements with a debt collector is one way to stop the phone from ringing. But you should always stop and calculate whether payments are something you can afford to agree to. Debt collectors can be persistent and insistent in their collection efforts. Agreeing to a payment plan with a debt collector just to stop the aggravation of the phone ringing is not a well thought out solution to problem debt.

Your options for resolving a debt that is placed with a debt collector working for your credit card lender will include paying off the debt in full, making monthly payment arrangements, or negotiating a payoff for less than the balance owed on the account and paying that reduced balance in a lump sum, or over a set period of time.

Be aware that some creditors will assign accounts out to collection agencies even though they have not officially charged off the account on the books. This means you may be contacted by a debt collector working for an agency, and not your creditor, after just a few months of missing payments.

Attorney Firms Large and Small Act as Debt Collectors for Banks and Debt Buyers

Banks and debt buyers use different criteria for identifying accounts that will be assigned to a collection attorney or law firm. Some banks have a reputation for working more with attorneys to collect unpaid debts than others.

Some large attorney debt collection firms operate in the same way a collection agency will in order to collect debt. They contact you by phone and mail to apply pressure to get you to pay the debt in full, make payment arrangements, or pay off the balance for less than what is owed all at once, or over an agreed upon time frame.

Other collection law firms may start off with a phone call and a letter, but are also authorized to sue you in court as part of their collection efforts. One method you can use to help identify whether your risk of being sued for unpaid debt has increased is to look at the address of the attorney on a collection letter you received. If the firm has an address in your state, or is licensed to practice law in your state, you should consider that as a signal that your risks of legal collection efforts have increased. This is not to say a lawsuit is around the corner for you, it may not be. But you should always take communication with a collection attorney seriously. I would suggest you take a collection letter from an in state attorney very seriously.

Billions of Dollars of Unpaid Credit Card Debts are Sold to Investors

The savings and loan crisis from the 1980s gave birth to today’s modern day collection industry. Investors, it turned out, were willing to step up to buy bad bank assets on the cheap with an expectation of turning a profit by collecting more than what they paid for portfolios of bad debt. It turned out to be profitable.

Today, debt buyers make up a huge portion of the collection industry. When it comes to credit card debts, they are able to purchase recently charged off accounts in large portfolios for a steep discount. Sometimes debt buyers will later resell accounts they purchased to another investor. Some debt buyers specialize in buying up unpaid debts and re-bundling accounts for resell to investors who only want to collect debts owed in certain states, or accounts that are over a certain dollar amount owed. There are specialty bad debt investors, who focus on credit card debts, while others have a focus on utility bills, or medical debts, even really old debts that have not been paid in many years.

Debt buyers may collect debt internal of their own resources. They will also work with debt collection agencies using assignment contracts similar to how banks assign debt to a debt collection company. Debt purchasers also place accounts they buy with debt collection law firms.

It is worth pointing out that not all credit card lenders sell debts off to investors. Also, some creditors will charge off some debts, assign them out to collection agencies one or more times, and if unable to collect money they will eventually sell off much older unpaid accounts.

How do You Know Where Your Charged off Credit Card Debt Will Land?

The criteria used by banks as to which of the 3 collection buckets they will place your account in once they charge off your balance as a loss will be different from one creditor to the next. It may depend on your balance, account behavior, whether your credit report shows you are paying other credit card debts, even your zip code can be a factor in which bucket your account lands in.

It is difficult to know exactly where your unpaid debt will land once your creditor charges off your account. Once you know where your account ends up though, each collection scenario can be managed with some predictability.

Why is Any of This Important to You When You are Looking for Answers to Deal with a Financial Crunch?

Combining timing with who is collecting on your past due account, prioritizing which debt to tackle first, and knowing what happens the longer your debts remain unresolved — all will help you navigate your options and make better debt intervention decisions.

If you are unable to work out some type of payment solution with your original credit card lender, it is a near certainty you will later be dealing with one of the above collection scenarios. In fact, you may wind up dealing with all three!

In an ideal world, you would determine which path to take to deal with unmanageable debt before your accounts get charged off. Unfortunately, that will not always be possible. Nor will it always be wise. In the next part of the Debt 101 series we will discuss how to manage collection efforts by creditors and debt collectors of all flavor.

Mainstream Debt Intervention Options are Limited

Your options for managing your unpaid bills are limited. Here are the most mainstream approaches to resolving past due debts:

  1. Requesting a more affordable monthly repayment amount from your creditors, or enrolling with a Consumer Credit Counseling Agency. For more details about this non-confrontational approach see part one “How to avoid a debt spiral“.
  2. Negotiating a reduced payoff amount for less than the balance owed either direct with your creditor, or with debt collectors who will later have your account. This approach offers some flexibilities that other methods lack, but it also has risks.
  3. File for bankruptcy where you can either discharge unsecured debts in chapter 7, or where the courts will set a payback amount your unsecured creditors will receive each month for a 3 or 5 year chapter 13 bankruptcy.
  4. While not an actual solution, doing nothing about unpaid bills can make sense if you know with certainty that your financial setback is only temporary.

The above options are a good process of elimination to follow in the order they appear. This will help you narrow down your options based on your financial capabilities at the moment, and your cash flow that you can be reasonably certain of in the near future (the next year or more).

Image: lemonjenny, via Flickr

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