The Debt Collector Lied I Could Settle My Private Student Loan Debt

The background information is something like this: I went delinquent on a student loan (private) after a period of financial hardship.

It defaulted and went over to NCO Financial for debt collections. I wasn't sure how the whole process worked at the time, and I started a payment plan. My agent at NCO was named John and would call every month after the 15th to get a monthly payment. He seemed cordial enough. I was making regular payments via debit card over the phone. This would prove to be a three year plan (so far) and Jim would occasionally ask me if I could settle and told me that they could do 85% of the amount or they would field an offer.

We discussed this and decided I would make minimum payments to keep my account in good status but set aside money for the lump sum settlement to save money, making an offer for less than the 85% (although that number was never formally approved and I was still paying on the loan and bringing the total amount down).

While in the midst of repayment, Jim leaves the company and I receive a new agent to deal with. My debt was now down to around $4,000 and I continued making payments ($200 a month, I had increased it from $100 on my own terms). When I mention to the new agent, Mia, about the plan Jim and I had worked through, she at first played coy that they ever settle.

After a few months I felt like I was in a place to make a lump sum payment. The debt was now at around $3,600 and I made an offer of $2,800. Over the phone, Mia told me that that was a reasonable offer and they were likely to accept, she just had to take it to original loan lender to see if they would accept.

She said she e-mailed the lender and they had declined my offer because I had been so consistent with the loan payments (nearing two years of consistent monthly payments) and unless I could make a case for pending financial hardship, it was within their interest to keep the monthly payments coming or to accept a counter offer of $3,100.

Now I felt like I was being refused because of good behavior, and that if I was inconsistent they might have felt more so the need to settle early. I also felt like I made a reasonable offer (further encouraged by my NCO agent) and perhaps it'd look more appealing if I went a few months without making a payment.

So a few months go by and I am still in communication with them, but they refuse the offer still. Now they are threatening litigation since I have gone without payments. I decided to do some research (what I should have down before ever making the first payment).

Basically, I heard of collection agencies buying debt for pennies on the dollar, so my first thought was playing hardball, rallying for some unforeseen but lower number closer to the amount they may for paid for my own loan. If they counter with $3,100, I counter even lower than my initial offer and lay off some payments. I still can't believe they would take me to court with an offer on the table at only $300 less than their desired settlement.

I then called up my original lender to see if I could work with them directly. They pulled up my account, verified the amount and date of last payment, and that I was in fact dealing with NCO.

They told me that they never settle for less than the full amount (not even the guaranteed 85% I was told from the beginning) and said that it was completely with NCO to settle the loan for them.

The man I talked to also said that they don't and wouldn't receive my offer to settle like NCO led my to believe, which made me think my agent was actually seeking approval for the settlement with her own manager, who in turn hoped to glean more money from me.

Basically, the lender doesn't meddle once it turns over to NCO. it was up to NCO to collect. And yet it has to be satisfied with the lender, which implies NCO didn't outright purchase my loan, and he also said they themselves wouldn't sue, that would again be NCO.

Interesting that I can't work with them directly and cut out NCO (refusing payment from a borrower!), and at this point, they are implying that by NCO taking anything less than the full amount, they are doing me a favor!

So now I am trying to move forward (without being sued) and I realize that guessing whether or not that is an idle threat is just speculation. I have been researching NCO and their tactics and have even read some horror stories of people settling for a percentage of the whole and that amount not satisfying the loan, or still showing up as something to the effect of "paid but not in full" on credit statements.

Is a monthly payment plan really the only way to go to clear this debt off my back? And to think if they took my offer I would have made another debit card payment over the phone in what amounts to essentially good faith. I still don't think I have any actual documentation from NCO (they even refuse to e-mail me payment receipts, instead insisting to read a confirmation number over the phone).

I guess I'm looking for advice to proceed and pay as little of the full amount as possible, and also get the proper documentation so it can't ever come up again. Part of me thinks my NCO agent is just playing me for being on my side against the lender, but ultimately this just being another lying tactic.

Would a debt collection company really sue you when a settlement is on the table for a few hundred less with $3,600 remaining on the loan? Did my agent let slip that they ultimately would settle for my offer, but perhaps they are holding out for more and initiating scare tactics (litigation)? It is also frustrating because when I called NCO last, they juggled me around operators (first available) who apparently have very bad memory and some who flat our deny the possibility of settling.

I finally asked who my agent was (Mia) and asked that she call me back. That was 5 days ago. How can they threaten litigation for going too long without payment but then go days without returning a phone call to me when I am looking to make traction on the loan?

Thanks for reading this long, rambling message.

The good news is that you've learned a number of valuable lessons because of this event.

Corporate Logic is Different Than Personal Logic - The first lesson is you were trying to apply everyday logic to a process that is dictated and managed by a corporate process. Applying logic or assumptions to a corporate policy is never going to work. The agents are limited by the policies and procedures in place at the time of the event. It might have been the policy at the time you were current was you had to be late but that could have quite easily have changed by the time you were late.

Get It in Writing - Whatever the representative told you was worthless unless they put it in writing. It doesn't matter what any representative said or offered unless they made you a firm written offer and you accepted that offer.

Don't Intentionally Default on a Private Student Loan If You Can Pay - There are dire consequences to defaulting on a private student loan. Period. Full stop. Trying to force the hand of a private student loan lender by intentionally defaulting only opens you up to hurting your credit, lowering your credit score, getting sued, getting wages garnished, and the addition of up to a 20 percent collection penalty.

It Hardly Costs the Lender Anything to Sue You - Refer back to the first lesson here. A lender has law firms on retainer and contract. Dropping another low dollar debt into the hopper does happen. It really doesn't cost the lender a whole lot to sue and I've seen people sued over less than a couple of hundred dollars.

Debt Collectors Are Not Debt Buyers - A third party debt collector does not own your debt. They are acting as an agent of the debt owner and they have not paid "pennies on the dollar" for your debt. They are not in a position to negotiate, except in certain pre-defined situations as defined in the contract they have with the debt owner.

Not Everyone Settles - If the debt owner told you they will not settle, then they will not settle. I think that's a pretty clear indication what their current policy is.

And Even If They Did Settle - Settling a debt has consequences. It's not a get out of debt for less approach. The debt forgiven will be reported as a bad debt on your credit report and you may owe income tax on the forgiven debt. For more details about settling your debt see Debt Settlement Pros and Cons. My No BS Guide to Settling Your Debt.

My advice at this point is you should get this loan rehabilitated by getting back on a regular payment plan and pay the thing off. Oh yes, and don't do this again without first checking with me or some other debt coach or qualified professional. Mark this down as a bunch of lessons learned.

You might also want to get a consolidated credit report so we can see how bad the damage caused by this is and come up with a plan to start dealing with that.

Please post your responses and follow-up messages to me on this in the comments section below.

Settle with debt collectors

If you have a credit or debt question you'd like to ask, just click here and ask away.

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settle with debt collectors

If you are struggling to pay off your credit card debt, medical bills, or other unsecured debt, you may be wondering if the advertisements you see on the TV, radio or the Web are for real. The main questions consumers ask are “Can I really get out of debt for a fraction of the cost and pennies on the dollar? Will debt settlement help me get out of debt quickly, legally and safely? What are the effects on my credit rating and future ability to get a loan?

Below you will see a variety of questions and answers that we wanted to share with you. These are among the most commonly asked. By reading on, it is our hope that you’ll be able to make an intelligent decision as to whether debt settlement is the right choice for you.

Debt Settlement (also referred to as debt negotiation, negotiated debt settlement or sometimes incorrectly called debt consolidation) means that your debt is negotiated down to a reduced amount and paid off in a lump sum. In some rare cases, multiple payments are utilized to pay off the debt, settling the account in full. In most cases, when you hear that debt can be paid off for pennies on the dollar, you are being misled. While in very rare cases, some debts can be settled for this very low figure, typically debts are settled within the range of about 15 – 75 cents on the dollar.

Settlement is one of the most effective choices available to consumers. It’s a great choice if you have more debt than you can pay off in a 2 – 3 year time frame or are experiencing a financial hardship that has you falling behind (or just about to be) on your monthly payments. Why would creditors choose to settle debts rather than simply charge you interest and late fees over and over again? Well, it’s really a matter of dollars and good sense. Creditors know that if you get into such a bad financial position that you can’t pay your monthly payments, you may decide to declare bankruptcy or simply do nothing. In this case they may get nothing! Therefore, they are usually very willing to settle for a lower amount, given your hardship, than risk getting nothing at all, especially with a bankruptcy among the alternatives.

Is Debt Settlement a Better Choice Than Bankruptcy?

Bankruptcy may allow you to eliminate most of your debts quickly and this is typically referred to as a “Chapter 7 Bankruptcy.” In other cases, you may be required to pay back a percentage of your debts over time. This is typically referred to as a “Chapter 13 Bankruptcy.” Bankruptcy also offers legal protection under the court so that you don’t have to worry about being sued or harassed by creditors while completing the bankruptcy process. While most reputable debt settlement firms will work to assist in minimizing creditor calls and harassment where possible, debt settlement does not provide the guaranteed legal protection that bankruptcy does.

Chapter 7 bankruptcy is not an option for everyone and it has gone through some changes since the bankruptcy reforms of 2005. Unlike the not so distant past, it has become more difficult to qualify for full liquidation (forgiveness) of your unsecured debts. Chapter 13 bankruptcy requires five years of court-ordered payments to a trustee, and may require you to surrender some of your assets.

However, as getting all of your options will help you make a more informed decision, speaking to a bankruptcy attorney may be a worthwhile discussion. Most reputable debt settlement firms can refer you to a trusted bankruptcy attorney if you have detailed questions or if they determine that you might be better served by speaking to them instead. Typically, if you are in such a financial state of hardship that you can’t even make your minimum monthly payment into our program, speaking to a bankruptcy attorney is highly recommended.

What Makes Me a Good Candidate for Debt Settlement?

There are a few factors that a well-trained debt specialist can go over with you in more detail. In general, if you can afford to pay back your debts on your own by paying more than the minimum payment every month without hardship, it’s probably the best route. It will not impact your credit score (and may improve it), and it will likely be relatively pain free. For those in true (or soon to be) financial hardship, debt settlement from a trusted and time-tested organization is a better option. If your total unsecured debt balances are less than $10,000, Consumer Credit Counseling is an excellent choice as your payments can be consolidated into just one, and typically, interest rates are reduced on your accounts. However, be warned. Many counseling programs have a very high drop out rate, can last up to 5-7 years, and you end up paying back 100% of the debt you owe, plus any new interest.

Where Can I Find A Trusted Debt Settlement Firm?

With the huge rise in unemployment, unmanageable debt, economic problems, and uncertainty in the marketplace, many fly-by-night companies have sprouted up offering debt settlement to consumers that are not legitimate; in fact many are nothing more than scams. Some offer unrealistic settlement expectations or promise nearly impossible monthly payments and time horizons. They are simply doing this to make a quick buck at your expense!

A good debt settlement firm always trains its agents to help you understand what your options are and is very realistic with you about what to expect. Often, companies simply looking to scam you look to collect fees up front regardless of whether they stand behind their promises.

Be very careful! Many firms advertising an offer for debt settlement services are nothing more than lead generation firms that may sell your information to several potentially unscrupulous firms. Many of them will end up barraging you with constant phone calls and have nothing to do with the company you “thought” you were contacting. Make sure to clearly read and understand the privacy policy and terms of use of any firm that you call on or submit your information to.

Will Debt Settlement Affect My Credit Score?

If you are current on your payments, it is very difficult, if not impossible to settle your debt. Creditors typically want to see that you are in a hardship situation before they are willing to negotiate. Therefore, you will have to voluntarily stop paying your unsecured debts; allowing them go into delinquency before settlement. In addition, you cannot pick and choose which debts you wish to settle in most cases. Your creditors and/or collections agencies may review your credit report, and most will be unwilling to negotiate when they see that they are being offered less than what is owed to them while others are being paid on time as agreed. Secured debts, such as a home loan or car loan are collateralized; you should continue to pay these accounts on-time to avoid repossession or foreclosure proceedings.

By not paying your creditors, your credit will be adversely affected by debt settlement. However, having to experience this circumstance may be better than having to file for bankruptcy, especially on your credit rating. During your debt settlement program, your total balances are being lowered over time as they are settled in full – a great start to recovery!

If you have just a couple debts or less than $10,000 in debt, you could to try to talk to your creditors directly to settle the accounts yourself. There is a lot of information publicly available to assist with this, but word to the wise: If you owe over $10,000 in debt, have several accounts you need to settle, or need the structure and the guidance of a knowledgeable professional, you should seek out the assistance of a knowledgeable debt settlement firm.

Debt settlement is by no means an exact science. And it’s difficult for an individual lacking experience with creditors to determine whether a settlement is fair or not. In addition, you have to directly handle all creditor calls and the harassment that comes with the job. Many people are simply unable or uninterested in handling that kind of pressure, especially with the daily complexities of managing a job, household or family at the same time.

Hiring a professional debt settlement firm with a good reputation can no doubt save you more money, give you better advice, and get you out of debt in a much less stressful manner, enabling you can move on with your life. Always make sure that you heavily screen who you are working with, and especially make sure that they are a fully accredited organization by a major industry association. AFCC (The American Fair Credit Council) is by far one of the most successful of these. Many if not most legitimate firms will at the very least be a member.

How Will Debt Settlement Affect My Taxes?

In general, in the United States, the IRS considers debt which is forgiven as income. This means if you borrow $15,000 on your credit cards and settle it for $8,000, the $7,000 difference is taxable as income since it is not repaid. However, the IRS will often waive this tax liability if you can show that you were insolvent during the time in which your debt settlement took place. We highly recommend a quick call to your accountant or tax professional for further discussion. You may be relieved with what they have to say!

There are always very clear and real responsibilities when dealing with debt, especially when you don’t pay back 100% of what you owe. However, once you can remove your debt problem from your life, a whole new world of opportunity can open up for you.

Debtmerica’s Ten Questions to Ask a Debt Settlement Company

Debtmerica is a fully accredited member of AFCC (The American Fair Credit Council) and has been audited to verify that we are fully compliant with all of its best practice standards. If you are thinking about working with a debt settlement company to settle your debts, there are some essential questions we feel you should ask before you sign up::

AFCC (The American Fair Credit Council) is the largest trade association serving the debt settlement industry. AFCC members voluntarily agree to comply with AFCC’s strict industry standards. Any company you choose should be an accredited member. By being accredited, the firm has been audited on-site by an independent third party verification organization, which verifies that the debt settlement firm adheres to the AFCC best practices standards needed for accreditation. Don’t settle for anything less!

2. How long have you been in the debt settlement business and how much debt have you settled?

Many firms out there may have flashy websites or sound professional on the phone, but you’d be surprised of their actual experience level. Many if not most, don’t even have their own marketing initiatives in place and simply buy leads from lead generation companies. In addition, certain agents you speak with may not have experience with debt settlement either and are simply professional salespeople, looking for a fast commission. If the debt settlement firm cannot provide proof of its experience, settlement history, and accreditation, you should not be working with them.

There is legislation in a minority of states which places restrictions and requirements on any form of debt management. While the federal government in many ways regulates debt settlement in addition to state governments, it’s important that you as the consumer follow up with any firm you work with to find out if they are able to legally provide services in your state.

Debtmerica’s programs are performance-based, which means that our clients do not pay any fees until settlements have been negotiated on their accounts. The total fees for our programs range from 20% to 24% of the enrolled debt balances that are settled. Upon each account being settled, a fee will be assessed specific to that settlement and collected from the special purpose account set up specifically to facilitate the debt settlement process.

5. Will you be making monthly payments to my creditors?

Debt settlement firms do not make your monthly payments to creditors for you. Rather, any payments made to creditors are a result of negotiated lump sum settlements or in rare cases, based on a pre-negotiated settlement payment plan.

6. Who is holding my money while I’m waiting on a settlement?

Your funds should be held at a third party account, referred to by many as a “special purpose account” which is FDIC insured. This account should always be in your name with you having ultimate control over its funds regardless of the terms of your settlement program. If the debt settlement firm tells you to save money on your own, the likelihood of graduating from your program historically has proven very minimal. Any reputable debt settlement firm endorses the special purpose account as the most effective method of client savings.

7. When can I expect my first settlement?

If you make your monthly payments on time and follow your program protocol correctly, you should experience your first settlement within 4-6 months. However, settlement isn’t an exact science. If you only carry a couple very large balances, then it may take longer depending on your creditors and your monthly payment. However, you should discuss your specific situation with a certified debt specialist.

8. Can you stop my creditors from calling me?

It is impossible to stop all creditor calls.

Yes, this is a possibility based on the motives of each individual creditor but it is based on several factors and isn’t as cut-and-dry as one would assume. Any reputable debt settlement firm will never put you into a program that lasts over 48 months. This greatly minimizes the risk as much as possible.

10. Will this have a negative effect on my credit report?

Yes, there will be an adverse effect on your credit report while in your debt settlement program. All debt settlement programs will have a negative impact on your credit report and you should be VERY cautious of any firm that tells you to the contrary.

AFCC’s Top 10 Frequently Asked Questions

AFCC (The American Fair Credit Council) wants you to understand both the potential benefits and pitfalls that may arise out of the debt settlement process and to have reasonable expectations regarding the outcome of your program. Below are the questions which AFCC has laid out on its own in its efforts to successfully guide consumers to the most favorable outcome when enrolling in a debt settlement program. We wanted to also include them for you.

1. What is the goal of a debt settlement program?

When you enroll into a debt settlement program, the goal you have set is to negotiate mutually agreeable settlements between you and your creditor(s) for payment of certain unsecured debt(s) described as Enrolled Debts. No specific results can be predicted or guaranteed.

2. What are my responsibilities once I enroll in a debt settlement program?

After saving sufficient funds, you will be responsible for controlling the fund settlements that your debt settlement company will endeavor to negotiate on your behalf. You, and only you, will be in control of all settlement funds. Under no circumstances will your debt settlement company have custody or control of the funds you set aside to fund debt settlements.

3. How much will I be expected to save towards my debt settlements?

The savings plan you are expected to follow will be detailed in your Client Agreement. Summaries of the total settlement amount, monthly savings, and the period needed to reach your goal will be prepared based on the goal you select. Those summaries reflect the minimum amount that your debt settlement company has estimated you will need to save to put yourself in a position to reach your goals and come up with some debt remedy solutions. Actual settlement amounts, necessary savings and the period required to reach your goal may vary based on creditors actions and other factors.

4. Will all of my creditors and collectors negotiate with debt settlement companies?

Most creditors and collectors negotiate with debt settlement service providers. Debt settlement companies cannot force the negotiations and cannot force creditors to accept a settlement. Debt settlement companies do not make regular monthly payments to your creditors. Your creditors may continue collection efforts on delinquent accounts while you are enrolled in a debt settlement program. Such collection efforts can include phone calls and letters to you, charging off the account, sending accounts to collection agencies or attorneys, lawsuits and even garnishments of your wages if a judgment has been obtained. Debt settlement companies should not claim that they will be able to stop these collection activities as these activities may continue while the company is making its best efforts to negotiate your debt.

5. How long does a debt settlement program last?

Debt settlement programs assume an effort that will continue for many months. The time needed to produce a settlement depends on a number of factors. These may include: (a) your financial hardship, (b) the age and balance of the accounts that you owe your creditors, c) the funds you have available to pay for a settlement and (d) the willingness of individual creditors to enter into debt settlement negotiations. While no guarantees can be given, generally the quicker you save money the sooner you will be in a position to reach your goals. Increased savings will provide you with the option to accept lesser discounts and will also enable you to accumulate funds to reach your debt settlement goals more quickly. However, any settlement must be acceptable to both you and your settling creditor.

6. What do the debt settlement company’s fees cover?

The fees paid to debt settlement companies are intended to compensate the company for its efforts and will only be refundable to the extent they have not been deemed to have been earned in the manner described in the Client Agreement. Debt settlement program fees are not being set aside or held in escrow to fund debt settlements.

7. When does the debt settlement company communicate with my creditors?

Communications with the creditors are handled on a case by case basis. In some instances creditors may not be contacted until several months after you enroll.

Debt settlement companies provide consumers with a method of debt resolution known as debt settlement. Debt settlement is an aggressive method of debt management that depends on the negotiation of mutually agreeable settlements between the consumers and the creditors.

9. Is the amount I save on each of my settlements taxable?

When your creditor settles your debt, a savings of $600 or more off what you owed may be reported by your creditor to the IRS as Discharge of Indebtedness income. You may wish to consult your tax advisor to determine whether your individual circumstances may permit you to exclude any such Discharge of Indebtedness Income from your reportable income due to insolvency. For more information on tax ramifications to you personally you may also wish to consult a CPA or Tax Attorney and to refer to the IRS website IRS Publication 908- “Bankruptcy Tax Guide” and IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness available on the IRS website.

10. Can a debt settlement company provide legal advice?

No, debt settlement companies are not law firms and cannot provide legal advice.

Debtmerica Website Disclaimer: Last Updated as of July 26, 2011

* Clients that are able to make the monthly program payments generally experience a 50% reduction of their enrolled balance before fees, or approximately a 29% reduction after payment of fees over a 24-48 month period. Individual results may vary based on ability to save sufficient funds and complete the program, the creditors in your individual portfolio, and amount of debt enrolled. Statements made are examples of past performance and are not intended to be a guarantee that your debt balances will be lowered by a specific amount or percentage, that you will be debt free within a specific time period, or a guarantee of future settlement results. Debtmerica, LLC guarantees it will not receive any fees until the terms of your debt have been altered with one or more of your creditors. While our programs work aggressively to reduce your debt balances, creditors are under no contractual obligation to negotiate or accept settlement offers. We do not assume consumer debt, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice and we do not provide credit repair services. Please contact a tax professional to discuss tax consequences of debt settlement. By providing your contact information, you agree to receive return telephone calls, emails or other communications from Debtmerica, LLC and/or its affiliates and expressly waive any “No Call” preference or registration. Photographs used are not actual clients. Debtmerica, LLC is not affiliated with CNN, MSNBC, Fox, CBS, 500/5000 or OCBJ and logos used are registered trademarks of their respective owners. Programs not available in all states. Read and understand all program materials prior to your enrollment.

Do you have what it takes for DIY debt settlement?

By Allie Johnson | Published: January 29, 2014

Drowning in debt and tempted to call one of those companies that promise to settle your debt for pennies on the dollar? You might want to consider do-it-yourself debt settlement instead.

Negotiating down a debt with a creditor, rather than hiring someone else, can save you money and put you in control of the settlement process. However, many consumers shy away from DIY debt settlement, chiefly because they want to avoid interacting with banks, other creditors and collection agencies, experts say.

"They're scared," says Charles Phelan, founder of, which provides tools and coaching for consumers settling their own debts. "They've heard debt settlement is brutal."

Settle with debt collectors

Tales from the trenches: settling your own debt

Debt settlement isn't for the faint of heart. Doing it yourself requires persistence, hard work and the willingness to deal with debt collectors for months or years.

California filmmaker Kenny Golde was left with $220,000 in business and personal credit card debt after he put up the money to finish a film that went over budget while his main investor was in the hospital. After the movie failed to sell, Golde could barely scrape together the $4,000 a month he owed just in interest.

"I was running out of cash and literally facing bankruptcy," he says.

After meeting with a bankruptcy attorney, Golde decided that settling his debts for less than what he owed would be a better choice for him. He stopped making minimum payments on his credit cards and started banking that money instead.

After about three months of missed payments and many calls from his creditors, he started trying to settle. The first creditor offered to cut just $3,000 off the $75,000 balance. "They'll start high," says Golde. He kept at it and settled that debt many months later for $25,000.

While negotiating down his debts, Golde got multiple daily calls from bill collectors. Some asked how he could stop paying his bills and what his girlfriend would think. He says: "Their goal is to get you emotionally upset so you will write a bigger check sooner."

It took about 18 months and many rounds of negotiations for him to settle all of the debts, for as little as 22 percent of the original balance. In all, he got rid of about $150,000 in debt.

Their goal is to get you emotionally upset so you will write a bigger check sooner.

Another consumer, Gayle Moriner, had an easier time, possibly because her debts were years old and collectors likely had given up hope of getting a penny, she says.

A year and a half ago, the Michigan resident decided to do something about her credit, which had been trashed by the $4,000 she owed across six old accounts that had all gone to collections.

Her unpaid cable, cellphone and credit card bills dated back to 2008 when she was hit by a triple whammy: the recession, a lost job as a patient care technician and her dad's cancer diagnosis.

By the time she decided to try to settle her debts, Moriner had a new job, had built up a small savings account and was tired of cringing every time a Macy's clerk asked if she wanted to apply for a card. "I decided, 'I can't keep living like this,'" she says.

Moriner scoured the Internet, read credit card forums and communicated with other consumers who had settled debts on their own. She drafted a simple letter that said she had run into financial difficulty, that her situation had improved and she wanted to settle her debts. She offered partial payment of each debt if the collection agencies would remove the delinquent payments and collections from her credit report. She asked each agency to sign and mail back the offer.

"I did everything by letter so I would have a paper trail," she says. She was able to settle most of the accounts and clean up her credit within about a month, paying about $700.

She says she'd tell other consumers, "Don't be afraid to confront your debt."

Is DIY debt settlement for you?

The first question should be whether debt settlement is the best option for you, says Jared Strauss, a former debt collector who offers debt settlement services. To answer that question, you need to look at your total financial picture and alternatives such as bankruptcy or a family loan, he says, noting that debt settlement typically will severely damage your credit.

"Credit is important, and if you can solve your problem without destroying yours, you'll be better off," Strauss says.

It's not for everybody. That's why some people hire companies -- because they can't face talking to collectors.

Author, "How to Settle Debts Yourself"

Debt settlement can damage your credit severely when creditors and collection agencies report delinquent payments, collections and settlements for less than the full amounts owed on accounts. "It can destroy your credit," Strauss says. Even if you make a deal with a collection agency or junk debt buyer to delete the collection from your account as part of the settlement, the negative information reported by the original creditor likely will remain on your file, Strauss says.

There is a small silver lining. Taking your outstanding balances down to zero as part of the settlement process might help mitigate the credit damage because 30 percent of your FICO score is determined by how much you owe, Strauss says. And, since many lenders won't extend credit to consumers who have outstanding delinquencies, settling can put consumers in a position to start rebuilding credit, he says.

If you decide to try to settle, you'll need to decide whether to do it yourself. Experts say the advantages of DIY debt settlement include:

  • You save money. Many debt collection companies charge as much as 25 percent of what you owe or as much as 40 percent of what you save by settling, Strauss says. That can add up: if you owe $50,000 for example, you could pay $10,000 or more in fees.
  • Creditors might go easier on you. Collectors who know they're dealing with a debt settlement company might get more aggressive -- and may even be more likely to sue. Why? Because they know they're competing with other creditors and that they might not see any money for a long time because many debt settlement companies put consumers on three- or four-year plans, Strauss says. But if you're on your own, "you're just a normal Joe Schmo account to the collector," Strauss says.
  • It might motivate you to get your finances in order. Settling your own debts can provide a good lesson for consumers who are in debt because they made financial mistakes, says Sandee Ferman, author of "How to Settle Debts Yourself," who used to run a debt collection company. "You actually face up to it and you deal with it on your own," she says. However, it might be too much for someone whose financial problems stem from tragedy, such as loss of a loved one or medical problems, and who is already overburdened, she says.

"It's not for everybody," Ferman says. "That's why some people hire companies -- because they can't face talking to collectors."

8 steps to settle debts like a pro

Debt settlement experts and consumers who have been there say your approach can make a big difference in whether you succeed at settlement. Here are eight tips to increase your chances:

  1. Get expert advice. Before you take the plunge, consult a tax accountant about the tax implications of settlement, experts say. The Internal Revenue Service counts debt written off in a settlement as income. "The last thing you want to do is transfer your credit card problems to the IRS," Strauss says.
  2. Plan your timeline. It's important to settle your debts quickly to increase your chance of success and cut your risk of being sued, Strauss says. "Twelve months or less is ideal, and I'd never go beyond 24 months," he says. It's essential to take a realistic look at your finances and assets to see how quickly you could come up with the money to make lump sum payments totaling 30 percent or 40 percent of your debts, he says. You should also figure that your balance will go up about 10 percent within the first six months of delinquency due to interest and penalties, Strauss says.
  3. Know the typical collection cycle. With credit card debt, an account might charge off when it's 180 days past due, Strauss says. At that point, the account typically would be sent to the recovery department of the bank, and you could start negotiating a settlement, he says. After a month or two, it might be sent to a collection agency. After about six months, a collection agency might consider sending the debt to a collection attorney, Strauss says.
  4. Find sources of money. Finding assets or other ways to come up with cash, aside from just saving, will increase your chances of success, Strauss says. "Do you have an extra car you're not using, or is that Harley-Davidson sitting in the garage 100 percent necessary?" Strauss says. Other assets to look at include collectibles such as baseball cards, coins and antiques. Or you could consider refinancing a mortgage, getting a loan from family or taking on a second job he says.
  5. Take the emotion out. "Treat debt settlement like a business," says Golde, who created an Apple store app called "Do-It-Yourself Debt Settlement." Consumers tend to feel guilt, shame and fear about debt they can't manage, he says. "Banks will take advantage of that." For them, it's just a numbers game. They're in the business of lending money and a certain percentage of borrowers will default, Golde says.
  6. Set up a system to manage calls. The average consumer settling debts has about six accounts, Strauss says. Multiply that by several calls a day -- especially if the collection agency is like most and uses a predictive dialer (hardware or software that increases call answer rates). "It's crazy," he says. He recommends using technology to counterattack: Assign the collectors a silent ring tone on your cellphone to manage calls. Phelan recommends getting collections calls routed to another phone -- a magicJack, a second cellphone or even Skype. Then, Phelan says, listen to the messages daily and return calls on your own schedule.
  7. Explain your hardship. "You've got to have a hardship," says Ferman. "A hardship is not, 'I'm not interested in paying for this big screen TV I just got.' It's you lost your job, lost your spouse, a tornado struck." It's a good idea to detail your situation so debt collectors can understand just how underwater you are, says Strauss, who has advice on how to talk to debt collectors on his site. The amount of evidence you need to provide will vary based on the type of debt you're trying to settle, experts say. For a credit card, you won't need to provide as much detail, but for a second mortgage, you might need to provide copies of bills and tax documents, Ferman says.
  8. Get it in writing. Even if you reach an agreement with an original creditor or a collection agency over the phone, you should always get the agreement in black and white before you pay a penny, Phelan says. If you fail to do so, the payment you thought would take care of your entire debt could be counted as just a partial payment. "We're talking about debt collectors -- they'll say anything to get you to pay," Phelan says.
See related:Bankruptcy's credit damage worse than debt settlement's, Credit card video: The basics of debt settlement

Over 350K New Yorkers settle with ‘shady’ debt collector

November 22, 2015 | 4:27am

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When Bronx homemaker Monique Sykes decided to fight what she believed was a shady debt collector, she thought she was the only victim.

Six years later, Sykes and 355,000 other New Yorkers have achieved a far-reaching class-action settlement against three defendants: Leucadia National Corp. and other debt-buying units of $11.88 billion holding company Leucadia Corp., law firm Mel S. Harris and Associates and process server Samserv.

In addition to paying $59 million, the defendants agreed to exit the debt-collecting business and work with New York’s Office of Court Administration to wipe out roughly $800 million in questionable debts, from default judgments.

The defendants did not admit any wrongdoing.

A widespread practice known as “sewer service” lies at the heart of Sykes’ case. That’s the term for what happens when debt collectors fail to properly notify consumers of lawsuits, then falsify court papers asserting a valid case.

When the consumer doesn’t appear in court, the debt collector wins by default and can then freeze the consumer’s bank account or garnish wages to collect. an unverified debt. The effects can be devastating, particularly on the low-income households most often hit with these suits.

“The due process was skipped,” said Sykes.

Ariana Lindermayer, a lawyer with MFY Legal Services, one of three firms representing the plaintiffs, compared the allegedly false court papers in consumer credit cases to the robosigned foreclosure documents that rocked the mortgage industry five years ago.

Sewer service is a nationwide scourge. The Consumer Financial Protection Bureau and Federal Trade Commission filed a brief supporting Sykes’ case, citing the Fair Debt Collection Practices Act of 1977, designed to protect debtors from shady collection efforts.

Lawyers for Mel S. Harris and Samserv did not respond to requests for comment. A Leucadia spokesman said the company “had no role in the practices alleged in the complaint,” which predated Leucadia’s 2013 merger with the Jefferies investment bank.

5 Best Ways to Negotiate With Debt Collectors

Settle with debt collectors

If you want to negotiate with debt collectors, you should go in knowing that they have one of the most difficult jobs in the world.

They call debtors all day long trying to get them to pay back debts they don’t want to pay. They send letters in the mail threatening to sue debtors if they’re not paid back. And, they report collection accounts to the credit reporting agencies for all to see.

But have you ever considered that debt collectors are simply doing their jobs trying to recover money rightfully owed to their clients?

If you’re receiving calls from debt collectors and you know you owe the debt then it’s not a bad idea to work with them to negotiate a settlement agreement. A settlement allows you to make good on your debt but not have to pay it in full after you negotiate with debt collectors.

Here are five tips to help you get the most bang for your buck when it comes to negotiating before, during and after your settlement with a debt collector:

Before you begin to negotiate with debt collectors, it’s important to do your due diligence.

First, begin by asking them to verify that the debt is valid, which they are required to do per federal law.

It’s also a good idea to make sure that the debt collector with whom you are speaking is indeed employed by a legitimate collection agency. Do some Internet research to ensure that they are a real collection agency and all phone numbers and addresses match. This will help to eliminate any fraudulent attempts to collect monies you don’t owe.

If you became aware of the collection account because it was on your credit reports then it’s less likely to be a fraudulent attempt to collect money from you. If, however, you received an unsolicited phone call or letter from a collector and you have no idea who they are or what they want, then you’re going to want to proceed with caution.

2. Check your statute of limitations

There are two separate statutes of limitations, or SOL, which a consumer needs to be aware of when it comes to negotiating a settlement on a collection account: the credit reporting statute of limitation and the debt collection statute of limitations. Contrary to popular misconception, the two statutes of limitation have nothing to do with one another.

The credit reporting SOL refers to how long a derogatory account is allowed to remain on a consumer’s credit report, which is seven years from the date of default on the original account. The debt collection SOL determines how long creditors are allowed to sue a consumer in an effort to collect an unpaid debt.

Each state has its own SOL that determines how long you can be sued for unpaid debts and when it becomes “time barred.” Depending on the state where you lived when the debt was incurred, your unpaid debts will become time barred somewhere between three and 15 years.

If you’re going to negotiate with debt collectors, it still may be a good idea to settle a time barred debt, especially if you plan to apply for new credit in the future such as a mortgage. However, be sure to settle any time barred debts in one lump sum so that you do not re-open the door to be sued.

Settling collection accounts when you negotiate with debt collectors allows you to save a ton of money.

It’s important to understand that collection accounts are typically bought for mere pennies on the dollar relative to your original debt amount. Because debt buyers purchase defaulted debt in bulk this allows them to purchase any single debt at a very low unit price.

When you negotiate with debt collectors and settle with a collection agency even for a fraction of the original debt amount, you are affording the collection agency the opportunity to make a sizable profit.

Since the debt was purchased at such a low price, collection agencies are usually willing to settle collection accounts for considerably less than the original amount owed. You can use this knowledge to your advantage to help negotiate your debt at the lowest price possible.

If the debt has already been time barred (see tip #2) then you have even more bargaining power to land a better settlement offer since you have the knowledge that the collection agency no longer has the ability to sue you.

It’s not a bad idea to start at 10-20% of the amount owed when you negotiate with debt collectors. The collector will be appalled at the low-ball offer but it sets the table on what you’re willing to pay. Further, even at 10-20% of the original amount the debt collector stands to make several hundred percent profit.

4. Keep a paper trail as you negotiate with debt collectors

The importance of getting verification of your debt in writing has already been mentioned (Tip #1). However, the debt verification letter is not the last piece of paperwork you will need to request.

Once you agree on a settlement amount with a collection agency it’s in your best interest to get the offer in writing prior to making a payment as you negotiate with debt collectors.

It’s also wise to mail your payment to the collection agency in the form of a check rather than paying your settlement through an electronic payment method. Paying with a paper check allows you to stay more in control and it reduces your risk of any unauthorized payments being removed from your account. Plus, once the check has been cashed you can print or save a copy of the canceled check as proof of payment.

After the settlement has been made it’s also a good idea to request a receipt for your records. If the account balance is not updated properly on your credit reports you can always dispute the error by sending a copy of this receipt to the credit bureaus.

5. Understand the credit implications

Settling or even paying a collection account in full will not remove the account from your credit reports. Collection accounts are legally allowed to remain on a consumer’s credit report for seven years from the date of default on the original account. That means if you settle an account that is only two years old then the account is still going to hang around on your credit reports for another five years.

Finally, if you were expecting to see a credit score boost from paying off collection accounts then you may be in for a very unpleasant surprise after you negotiate with debt collectors.

Many times settling or paying a collection account does not have any positive impact upon a consumer’s credit scores whatsoever.

The FICO credit scoring models do not care so much about the balance of your collection accounts as much as it cares about the fact that you had collection accounts in the first place. The fact that you had a collection account indicates that you are an elevated credit risk, despite the fact that the collection was paid, and therefore continues to have a negative impact upon your credit scores. The VantageScore scoring system, on the other hand, ignores collections that have been paid or settled in full.