Wednesday, January 7, 2009

Dealing with Collection Agencies (Part 1)

In these tough economic times, millions of people are falling behind on their bills. To make it even tougher banks and utilities are feeling the squeeze as well and many are turning to hardball tactics in a misguided attempt to make money.
In this post I will detail what you should do if you are unable to pay your bills in full and lay the groundwork for dealing with your credit card companies and ways to keep the debt from going to a Collection Agency. Or to have more weapons at your disposal should a debt eventually go to a collection agency.
In my next post I will deal with what to do ff a collection agency contacts you over a debt. Remember knowledge is power; there are ways to deal with collection agencies, especially ones that take hardball tactics to far.

Step 1:
Make a budget; find out exactly how much you can spend on what.
If you don’t know what you can spend you can’t make proper decisions.

Step 2:
Prioritize your bills.
First: Make sure you have food, rent or mortgage, electricity, heat and a way to get to work. If you rely on a car to go to work (99% of people) make sure you have money to pay for insurance, gas and maintenance and payments (if you have any).
Second: a primary Phone, Internet, and basic TV service (cable, satellite). The TV and Internet may seem like luxuries but they are about the cheapest forms of entertainment available if you par it down to the most basic package.
Third: 5% of your income to set aside for emergencies. If you don’t have this minor unexpected expenses can spiral out of control.
Finally: Credit Cards and unsecured loans. Figure out how much you can pay on these and don’t take money from the other bills to pay them.
Once you’ve figured out how much you can pay on the credit cards you are in a position to start dealing with your creditors.

Step 3: Negotiate with your creditors.
Once you know how much you can pay, you can call your creditors and work out a payment plan. If the credit card company refuses to negotiate and wants more than you have budgeted, it’s their loss. If you made a good faith effort to handle your bill and they refuse to accept payments you can live with then they deserve to lose the money they loaned you. Don’t ever agree to pay more than what you have budgeted. This is just throwing money away as you will not be able to continue to make those payments in the future.
If a credit card company doesn’t except your good faith offer to make payment arrangements, spread the money in your budget around to those who will.
One thing to avoid when dealing with creditors is automatic withdrawals from your checking account, this is a deal breaker. If you are having trouble paying your bills, there is no way you can keep an adequate safety cushion of funds to avoid overdrafts. Between the creditor and your bank it is impossible to tell when the bill will hit, and if your luck is like mine, it will hit on the day that your balance goes $0.02 below what the bill is for. The overdraft fees will kill your ability to continue paying your bills.

Step 4: The Collection Calls.
The companies that refused to negotiate with you will start to call you. The way to deal with them is to restate how much you have budgeted to pay that bill. If they refuse to take it there is no use talking to them. No matter what stick to your guns and don’t promise to pay more than you have budgeted, it will end up costing you more in the long run.
The easiest way to deal with these calls is simply state: “I can only afford $X.XX amount a month, can you do that?”
If they say no, the response is: “Then there is no point speaking further, Goodbye.”
A good collection agent will politely determine if you are serious and give you a name and number to call if things get better for you. The bad collectors will try and get you to commit to something you can’t afford.
The main tactic they will use is to act like a jerk and bring you down to their level, then win through experience.
If you are confident that you can be a bigger jerk than they are (remember they spend at least 8 hours a day practicing) go ahead and get into a contest with them, just remember whether you engage them or not, after they turn down your offer to pay the rest of the call is pointless.

Step 5: Stopping the bill from going to a Collection Agency.
After negotiations fail and a bill goes unpaid for 4 months it will be turned over to a collection agency. If you’re financial situation is temporary and you need to stall for time, or you just want to give the company a hard time collecting look on the back of your bill to billing rights summary. It will have an address to send disputes. Write them a letter disputing something, anything. Ask them how the late fee was determined, if the interest rate is over 18% dispute it on the grounds of state usury laws (most states don’t allow companies to charge more than 18% for consumer loans). It doesn’t matter if the dispute has merit, as long as the bill is in dispute it cannot be sent to a Collection Agency until they respond to that dispute. If they do you can sue them.

Eventually, an unpaid bill will go to a Collection Agency, I will detail in my next post how to deal with them.

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