3 Important Features about Debt Settlement Laws

Debt settlement laws are in place to protect both the lender and the consumer. The lenders you work with will have law firms and legal specialists working on their behalf to find the ways the laws protect them. For your part, you should work to learn how the laws also protect you. There are a number of key features that assure no person will be unduly punished for unpaid debt, which is not a crime in the United States. Since it is not a crime to fail to repay debts, the laws are designed to best resolve the situation without legal penalties.

#1 Debt Has an Expiration Date

You may be surprised to learn that a past lender cannot reopen your account in order to attempt to collect. In all 50 states, there is a set statute of limitations on each type of debt. You may pass the statute of limitations if the lender has not attempted to collect in a given amount of time, if the account has been inactive for a period of time or if the debt was simply incurred far in the past. Most states set this limitation between seven and 10 years. However, the period of time may be longer for certain types of senior debts like mortgage debt.

#2 Collections Agencies Are Not Primary Debt Holders

If you are entering debt settlement, you likely have a number of debts that have gone delinquent or are nearing default. On a few of these accounts, you may have been contacted by a collections agency on behalf of the lender. This typically means the lender has written the debt off as a loss and does not anticipate recovering the money. The lender may not have a further interest in negotiating a settlement with you. Instead, you will be speaking with the collections agency, and this agency may not even have a right to continue to enforce the debt. You should always ask for verification of the legal right to collect the debt. Ask your settlement agent or attorney if the debt can be closed with the agency without repayment. Your credit score may suffer, but in some cases, it is worth the penalty to save thousands of dollars.

#3 Settlement May Be Required by a Court

When you are working through settlement, loss mitigation becomes a key concern for the lender. The lender would like to handle the situation by collecting as much as possible with the lowest amount of time in court or in legal discussions. If the debt does enter a bankruptcy case, the court will determine how much of the debt you can reasonably repay. This court-ordered settlement is almost always lower than the agreement you can reach with a lender prior to bankruptcy. Lenders know this, so they will be interested in cutting a deal with you before you have to declare bankruptcy. This is particularly true with low-priority lenders who are likely to be last on the list to collect from you in court. Reminding a lender of the threat of a low court-ordered settlement may help you get a better rate today.