If you are getting calls and letters from debt collectors and want to resolve the debt, you need a plan. Your first priority should be developing a strategy that makes sense for you financially. You need to know your monthly budget and the amount of money you can commit to resolving collection accounts. And if you have more than one account in collections, you also need to know that not all debt collectors are the same.
1. You Can Work With the Original Creditor...
You can often work out some form of payment by calling your creditor directly, or by working with a nonprofit credit counseling agency. But when credit card payments go more than six months without a payment (sometimes sooner), calling your creditor often means being routed to a third-party debt collector. If your creditor tells you they cannot work directly with you; has not sold your account off to a bad debt buyer; and has already charged off your account, you will typically have to work with the debt collector they sent your account to.
Your strategy to resolve a debt can be adjusted depending on what kind of debt you have, and the type of collector you are dealing with.
2. ...Or a Third-Party Debt Collector
The collection industry is large. There are thousands of companies, big and small, working to collect billions of dollars of debt each year. Your strategy to resolve overdue bills can be adjusted depending on what kind of debts you have (medical debts, utility bills, etc.), and the type of collector you are dealing with.
Debt collectors that work directly with your credit card lender are typically going to be larger contingency collection agencies. They make calls and send you collection notices in an attempt to collect. All of which is motivated by the fact that they will get paid based on what they get you to pay. A common earned contingency fee is 15% of the balance they collect.
3. Debt Collectors Have Limits
All collection agencies have to follow federal and state laws when communicating with you. These laws protect you and limit things like when they can call, and what the collector can say. But contingency debt collectors also have limits set by your creditor. One of those limits is time.
Credit card lenders sending accounts out to an agency for collection do so with a "best collected by" date. When the date expires, your account is pulled back by the creditor, and the collector loses the ability to earn a fee. These collection contracts can be for as little as 60 days, or for several months. This fact is useful for you in the following ways:
There is indeed a sense of urgency for the contingency collector. That pressure they are putting on you to pay is also the pressure they have to beat the clock before they lose your account.
This type of collector is graded on their performance (how much and how often they collect), by your creditor. The agency cares about their performance because they want to receive future accounts to collect on from your creditor.
Individual collectors at the agency are often motivated by monthly quotas and performance rewards of their own.
These three elements can help you understand the motivations of this type of collector, while helping you plan and prepare to resolve your debts.
4. You Can Reach Out to Your Debt Collectors
You usually know who you are dealing with by the most recent collection calls and letters you have received. While you can contact the last known collector, I often recommend you call your original creditor and verify with them who they have the account placed with. Simply call the regular number on the back of your credit card (or on your original statement). Your call may get routed to the recovery department at the bank, but don't expect to resolve anything with them at this point. They have a contract with the debt collector, and will provide you the name and contact phone number to the agency. Try to verify the balance owed on your account during a call like this.
Making contact with you is one of the hardest things for a debt collector to do. When they do get someone live on the phone, they know they need to make the most of it. Not just because people avoid collection calls, but their agency also may be running out of time to collect from you. This is one of the reasons why debt collectors have earned the reputation of being pushy and abrupt.
When you pick up a call, or make one to a debt collector, their goal is going to be to get some form of payment, or commitment to pay, during virtually every call.
5. Your Collector Wants to Work With You
How you ultimately resolve a debt with a contingency debt collector is going to depend on: your monthly cash flow that can be used to make payments; the parameters the collector has to work with on their end; and even by the date on the calendar.
Setting up a payment arrangement you can afford given your monthly budget is not all that difficult. And if the collector can get you set up with a payment, they often get to retain the account while your payments are being made. This means your interests and the collector's are aligned when you are actively looking for a solution.
If you have multiple debts you are struggling to pay, are nervous or uncomfortable talking to a debt collector about payment options, or just want expert help, there are resources available.
I asked a nonprofit credit counseling group about what they would advise people do before tackling accounts in this stage of collection. Christopher Viale, President and CEO of Cambridge Credit Counseling had this to say:
Before committing any part of your monthly budget to paying down collection accounts, it's important to have a complete understanding of what your household budget actually is and what you can truly afford. We speak to people every day who make promises to debt collectors that they simply cannot keep. A budgeting session with one of our counselors is free and it can really help you get a full understanding of what you can and cannot afford before making any type of payment commitment.
6. Monthly Payments Aren't the Only Option
In many instances, if you cannot commit to a monthly payment, debt collectors are authorized to accept settlements. What your debt can be settled for when dealing with a debt collector is a moving target. The amount you can save from negotiating a lower payoff will have to fit within the collector's guidelines in most cases. And you need the money available to pay any deal you negotiate in a single lump sum, or over a short period of time.
You may be surprised by how simple it can be to call a collector and come to an agreement to resolve your account. If you cannot reach a deal that works for you on the first try, don't get discouraged. Try calling around the last week of the month. My experience shows that more affordable agreements are often available when a collector's or agency's monthly goals are not meeting expectations.
You can also time your efforts to resolve accounts with a debt collector using the "best collected by" expiration date. In one of your first calls with a collection agency you could ask "I am trying to come up with a plan to resolve my debt. I do not have a plan put together yet, but will be calling back when I do. Can you tell me the balance owed on the account now? And also, so I know who to call back, how long will you have this account for?" Not all debt collectors will tell you how long they will have your account, but many do. Knowing these dates can be useful for two reasons:
You can set up payments with the collector before they lose your account. This prevents your account from going to another collector, or worse, being sued later.
You can time your negotiations for a lower payoff with the performance goals of the collection agency.
When it comes to settling collection accounts, you may be tempted to hire a company rather than do it yourself. Before you do that, I recommend you find out what debt settlement companies don't tell you. Hiring a professional negotiator can often feel like the right solution, until you calculate the costs that come with the help.
There are certainly other details to consider when dealing with debt collectors. But the basics of resolving debts at this stage of collection are not complicated. If your personal finances are still too wobbly to commit to paying off collection accounts, don't allow yourself to get pressured by a debt collector. The "best collected by" date will expire and the debt will go back into the collection pipeline. If you are committed to trying to avoid bankruptcy, there will be options to manage your debt all along the way.
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Think again. Even student loan debt can chase you into retirement.
The Treasury Department has been withholding as much as 15% of Social Security benefits from a rapidly growing number of retirees who have fallen behind on federal student loans -- five times as many as in 2001. Even something as simple as credit card debt can hurt you in retirement, says John Ulzheimer, president of SmartCredit.com.
"When it comes to credit card debt, you absolutely have to get out of it before you hang up your company badge," Ulzheimer says. "It's very likely the most expensive debt you're carrying at 13 percent to 15 percent interest on average, and twice that in some cases. No retirement nest egg can guarantee that kind of growth."
Leaving the workforce might help you cut costs in some areas -- for example, your pricey commute to the office -- but you can never underestimate the cost of aging.
"Many studies show that some retirees even spend more in retirement than they did when they were working," says Susan Garland, editor of Kiplinger's Retirement Report.
"In the early years, you may be embarking on long-delayed travel and hobbies. And as the years go by, your health care costs are sure to rise. House-related maintenance costs, insurance and property taxes are sure to be on the upswing as well."
"More and more Americans say they plan to pay for retirement by working longer, but in reality, many retirees end up quitting sooner than planned," says Greg Burrows, senior vice president for retirement and investor services at The Principal.
One third of American workers said they plan on working past age 65 in a recent survey by the Employee Benefit Research Institute, but more than 70 percent of retirees said they actually quit before that milestone.
Then there's the job market to consider, which doesn't take kindly to workers who are past their prime. In 2011, the median length of unemployment for people 55 and older was 35 weeks, up from 10 weeks before the recession, according to the Government Accountability Office.
Medicare is an excellent resource for retirees needing health care support, but here's a wake up call: It doesn't cover all long-term care.
Medicare coverage excludes extended nursing home stays, custodial care, or an in-home nurse to help out if you're unable to dress, feed or bathe yourself.
"Medicare pays for limited nursing-home and home-health care for short periods to provide continuing care after a hospital stay," Garland says. "For example, skilled care in a facility is limited to 100 days. It may be wise to consider long-term care insurance to cover those costs."
Never underestimate the crippling power inflation has over your retirement savings.
"Too many people have the illusion that money is safe as long as the balance doesn't go down, but the reality is that inflation will eat into your purchasing power unless you learn how to properly manage and invest your wealth," writes David Ning of MoneyNing.com.
"Those who put all their money in a savings account may not experience the volatility that comes with different investments, but they are sure to be able to afford less and less as years go by, which is a real threat too."
Contrary to popular belief, investing savvy isn't something only the rich are born with.
But if you want to invest wisely, do yourself a favor and leave the stock picking and day trading to the professionals.
"Stick to the boring but effective strategy of saving early and often, watch investing fees, and picking an asset allocation plan where you can stay the course when the market inevitably takes a dive," says Ning.
And start as early as possible. According to personal finance expert Kimberly Palmer, someone who begins investing at age 25 will only have to save $4,830 annually to reach $1 million by age 65, accounting for an annual return of 7 percent after fees.
That figure triples to $15,240 if you wait until your 40s.
At some time (and for a lot of you, many times), life eventually will get in the way and you'll find yourself on the wrong side of your bank or, worse, a debt collector.
Stand your ground and watch them like a hawk. That means reading the fine print before signing up for a high-interest, high-fee credit card and taking a proactive approach to lower your interest rates on credit and mortgage loans. Sometimes, all it takes is a phone call and a little math work to figure out you could be getting a better deal elsewhere.
When in doubt, think about Kenny Golde, a 40-something producer we spoke with last year. He managed to negotiate $220,000 worth of debt down to $70,000 on his own.
It turns out one in four workers resorts to taking out 401(k) loans each year, to the tune of $70 billion, nationally.
"You might be cheating your future self," says Catherine Golladay, VP of 401(k) Participant Services at Charles Schwab. "While paying back a 401(k) loan, many people stop saving in their 401(k) plan, which can really derail retirement savings."
And don't forget about the fees. Workers under age 59 1/2 who dip into retirement funds must generally pay back their loan quickly, between 30 to 90 days in most cases. Otherwise, you could wind up paying income taxes on whatever you've taken out, along with a 10 percent early withdrawal penalty. And you still have to pay back the loan with interest -- and with after-tax money, which then gets taxed again when you withdraw it in retirement.
We'll never tire of the Roth vs. Traditional 401(k) debate. With a Roth 401(k) or Roth IRA, all of your contributions are taxed immediately according to whatever tax bracket you fall into today. Traditional IRAs are tax-deferred until retirement.
The general consensus is that it's better to convert to or start a Roth now, since it's likely that you will wind up retiring in a higher tax bracket than you occupy now, in which case you'll pay significantly more in taxes later than you would today.
But investors who've already built a substantial IRA or 401(k) often can't stomach the thought of paying taxes on everything at once if they make the switch.
"Sometimes it just takes a lot of handholding because investors don't like to write that check," says Janet Briaud, chief investment officer of Briaud Financial Advisors. "There is sticker shock, but in the long-term, our clients really get it. They're really happy."
Ultimately, that money will be taxed one way or the other, either starting at age 70 1/2 when required minimum distributions take effect, or during the life expectancy of the beneficiaries, she argues. And if you leave a Roth IRA to your loved ones, you'll have the peace of mind of knowing they won't have to pay taxes on the money they withdraw.
To help ease the blow, speak with your advisor and try a partial conversion by moving just part of your savings to a Roth each year.
"Start by estimating your post-retirement expenses. Average it out across a year. From there, estimate what sort of investment returns you'll be able to generate -- yes, you'll need a crystal ball for this.
"From there, divide that rate (as a decimal) into one to find your multiplier. So, for example, if you think you can generate 4% real returns (i.e., 4% returns after accounts for inflation, so more like 7% nominal returns) then you'll need 25x your annual expenses (1 / 0.04 = 25). If you think you'll only be able to generate 3% real returns, then you'll need 33x your expenses. And so on."
The benefit of saving for your children's college education early (ideally via a 529 plan) is that you limit your saving burden by spreading it out over time.
But even if you come up short of tuition costs, don't immediately dip into you retirement savings to make up the difference.
"You can always fall back on financial aid. Grants, scholarships and student loans can help pay your child's way," writes Learnvest's Laura Shin. "When it comes to your retirement, however, there are no loans."
Of course, few people have the benefit of unlimited cash flow without putting in a little leg work first. But there are higher priorities in life than working overtime and depriving yourself of a few pleasures today just to save a buck or two.
"People spend most of their time planning their finances for old age, but not their fulfillment" along the way, says Ken Budd, executive editor of AARP The Magazine.
"We once profiled a man who decided that for the first year of retirement he would do whatever he wanted. So he went for long walks, he skimmed the newspaper online, he sat in Starbucks and read Grisham novels. But after that, he [felt so bored] he decided to become a chaplain."
Without a plan in place, you could leave your estate's future in the hands of squabbling family members or your state, which would appoint an administrator to handle everything.
"[A will] enables you to start thinking about issues like whether you have the right insurance coverage, life insurance, and ways of replacing your lost income," RocketLawyer founder Charley Moore says.
This is doubly important for gay spouses, as states that don't recognize gay marriages would pass over same-sex spouses in favor of next of kin.