“Reduce your debt”? Bullshit.

You’ve probably seen ads all over the place saying “you can reduce your debt and settle for a fraction of what you owe”. Some even go so far as to call this a “right”. I’ve been doing a lot of research on debt and debt collection laws, and let me tell you that you are being misled by them.

If you have a debt account that is in the hands of a debt collector, you can certainly negotiate a settlement, and that settlement can be for a fraction of the balance. But they don’t have to accept your offer. Standard laws and rules regarding contracts come into play here.

Don’t be misled into thinking that you can offer to settle a $10,000 debt for $5,000 and the debt collectors must accept that offer. They don’t.

And they typically will not accept it unless you’re including a check for $5,000 along with your offer or you provide some other kind of consideration in the offer, such as a short payment schedule (read: 1 or 2 fiscal quarters at most, depending on the balance). Of course about the only thing you can offer is a lump sum or accelerated payment schedule.

They don’t have to reverse any assessed interest and penalties, reduce or eliminate the interest rate, allow for a reduced monthly payment, or any of the other glorious and sensational claims that some of these “debt consolidation” and “debt relief” firms are spouting. Again, the only way they’ll do any of that is if you offer something in return that they find appetizing, such as a short payment schedule or a lump sum payment.

Instead if you have accounts that are with debt collectors, do some research so you know what your rights actually are.

For example if you are receiving a first communication from a debt collector regarding an account, one tool that might stop them cold is called debt validation [15 USC 1692g(b)], but you have a limited amount of time to exercise this right. I could probably write a long, long dissertation on what your rights are with regard to debt collection (yes, I’m that well read on the topic), and given how much misinformation is out there, I just might consider it.

Here is the reality behind debt collection.

First, a debt collector cannot sue you without first contacting you attempting to collect on a debt. After that initial contact, you can send a debt validation request to them (if you want a hand in drafting one of these, let me know), but they must receive it within 30 days after you receive their initial communication by mail. The 30-day clock doesn’t start with the first phone call, only the first mailed communication, and the clock doesn’t begin until you receive it.

After that 30 day period, the debt collector can assume the debt is valid and can pursue it further. But the actions they take must be within the boundaries stipulated first by the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA), second by any applicable State laws. Other State laws and local ordinances may come into play with regard to collection activities.

So step 1 after receiving an initial communication from a debt collector is this: send a validation request, and try to send it within two weeks after receiving that initial letter. In that validation request, include this statement:

I request in accordance with 15 USC 1692c(a) that you not attempt to contact me at my place of employment, as my employer does not allow such communications, nor should you attempt to contact me at any time or place, except in writing, as no other time or place is convenient.

Absent that statement (which must be provided in writing to have any legal effect), they can contact you by phone only between 8am and 9pm for your timezone, or they can confront you publicly, such as by physically showing up at your home or place of employment. They cannot, however, confront you at any “unusual” place, and if they confront you publicly, other local and state laws come into play, and they are still restricted by the 8am to 9pm time block.

With this statement, they cannot contact by by phone or confront you publicly without permission from the Court. Note that they can still confront you publicly to serve you with papers for a lawsuit, but they cannot do anything more than that without permission from the Court.

And if you read around about debt validation, you might find some sites that provide lengthy letters requesting all kinds of information while claiming that all of that information must be provided or the debt is not considered validated. Bullshit.

To validate the debt, the collector must show only a small amount of information. In Chaudhry v. Gallerizzo, the United States Court of Appeals for the Fourth Circuit adopted a relatively lenient standard:

Verification of a debt involves nothing more than the debt collector confirming in writing that the amount being demanded is what the creditor is claiming is owed; the debt collector is not required to keep detailed files of the alleged debt. [174 F.3d 394 (4th Cir. 1999)]

In Clark v. Capital Credit & Collection Servs., the Ninth Circuit adopted the same standard [460 F.3d 1162 (9th Cir. 2006)]. At a minimum, the debt must be confirmed with the original creditor, and to satisfy a validation request, many collectors will attempt to obtain and provide the last statement for the account, and their ability to obtain that statement also verifies that they are authorized to collect the debt. One debt collector with whom I’m currently under a payment agreement provided a two-year statement history in response to a validation request.

Of course, keep detailed and accurate records of all communications, written or otherwise, between you and the collector. If they confront you publicly and you have a cell phone with a camera, use it. Anything you mail to the debt collector should be sent via Certified Mail, return receipt is your choice, but recommended if you are sending a settlement offer. Be sure to photocopy or digitally scan and save the Certified Mail receipt.

If you retain an attorney to represent you in regard to the debt or all of your debts, and you or the attorney informs them you have retained counsel, the debt collector cannot contact you directly. All communication must be tunneled through the attorney.

And bear in mind that they can sue you at any time after that 30-day statutory period has lapsed.

The best way to defend yourself against debt collectors is by knowing your rights. Practically all debt collectors bank on you not knowing what your rights are under federal and state laws. They may also bank on you not knowing what a debt collector can and cannot do. And if they do sue you, they bank on you not showing up so they can get a default judgment.

And while you’re at it, look up your state’s laws or send a letter to your Attorney General asking what maximum amount can be garnished from your wages, just in case they threaten a lawsuit. Knowing that number in relation to what you make could give you some leverage in negotiating with them, but never tell any debt collector how much you make.

But knowing your rights is the best way to knock a debt collector on their ass while keeping them on their toes at the same time. Don’t be misled into thinking that you have a “right” to settle your debts for fractions on the dollar, because you don’t. It doesn’t matter if you owe $1,000, $10,000 or $50,000, you don’t have any right to settle it for any amount. You can attempt to settle it, but you don’t have a right to settle it because they don’t have to accept any offer you make.

Oh, and one last little bit: if you settle a debt for more than $600 less than what is owed, the remainder is treated as income and is taxable. One thing to keep in mind when you start drafting settlement offers. Note that the $600 applies to only one debt and is not cumulative across all of your debts.

And one last note: any payments you send to a debt collector should always be by money order or cashier’s check.