Should I do Debt Settlement on my own?

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Question: A collection agency sent me a letter advising the amount of total debt owing to a bank. Along with this letter the agency stated on the fax cover sheet they would settle for less than the full amount owing but I needed to submit a hardship letter, proof of income, 2 yrs tax assessment from RCA, breakdown of expenses.

What is the risk if I negotiate a debt settlement amount and have a family member pay the full amount agreed upon.

  1. Is it wise to settle on my own like this?
  2. If I pay the amount agreed and pay the amount agreed upon, will this stop the actions of the collection agency?
  3. Is it necessary to submit the hardship letter, proof of income, 2 yrs tax assessments and breakdown of expenses if I pay the full amount?

Thank you

Answer (provided by J. Douglas Hoyes, CA, Bankruptcy Trustee):

This answer, coming from a bankruptcy trustee may surprise you, but yes, it is possible to settle your debts on your own.  The trick is to make sure that your debts are, in fact, fully settled.  Here are my thoughts:

Debt Settlement or Debt Collection?

First, I find it surprising that a collection agency would ask for detailed financial information, including two years of tax assessments from Canada Revenue Agency.  Personally, I would be reluctant to provide anyone with documents that show my social insurance number and other private information.  It’s possible that they are asking for the information to determine your ability to pay; it’s also possible that they are asking for additional information to help in their collection efforts (such as to determine where you work), so I would be reluctant to provide any extra information.

In my experience, collection agents want money; they are less interested in your tax situation from two years ago, so that information seems irrelevant to me.

Is Your Debt Settlement Binding?

Now, to your main question: if you make a settlement, will that stop their collection actions?  In theory, yes; once they have their money, they should stop calling you.

However, what happens if you send them a cheque, and they decide to keep calling you?  Then what do you do?  That’s the problem with “do it yourself” debt settlement.

If you want to make a deal on your own, I would ensure that I had a letter from the collection agency stating that:

  1. They are authorized to act on behalf of the original creditor (the bank, or credit card company, or whomever); and
  2. They are willing to accept $XXX in full and final satisfaction of your debt to NAME OF CREDITOR, ACCOUNT NUMBER, AMOUNT.

Only once you have that written confirmation would I send them a cheque.  I would also want a copy of the cashed cheque from my bank, so I could prove that I paid the amount agreed.  By doing that, if the creditor attempts to pursue you in the future, you could defend yourself in court with your proof of settlement.

That’s a lot of work; is it worth it?

Other Debt Settlement Options

As you can see, to protect yourself there are a lot of steps to take, and that’s just to deal with one collection agency.  If you have more than one debt, you may need to repeat the process many times.  And again, there is no guarantee that they won’t pursue you in the future.

You should therefore consider your other options, which include:

  1. Using a debt settlement company or a lawyer to negotiate the settlement for you.  They will be more experienced at getting the proper proof of settlement, but they will charge you a fee, which may negate some of the savings.  Also, there are some not-very-reputable debt settlement companies, so you have to be very careful who you deal with.  I have written numerous articles in the past about some debt settlement horror stories, so be careful.
  2. You could have a credit counsellor work out a plan for you.  Again, some are reputable, some less so.  In most cases they can negotiate a debt management plan where you pay the full amount owing, but with no further interest, so there is a savings to you.
  3. You could file a consumer proposal.

Obviously I’m biased, because I make my living doing consumer proposals, but there are some distinct advantages to filing a consumer proposal instead of trying to deal with the debts yourself.  The main advantages of a consumer proposal are:

  1. You aren’t negotiating directly with the creditors; that’s the job of your consumer proposal administrator;
  2. In many cases you pay less than the full amount owing; and, best of all
  3. The settlement is legally binding.

“Legally binding” means that once the creditors accept your proposal, they can’t change their mind later; the deal is done.  As long as you make the payments, your debts are dealt with, and you have no worries.

Each situation is different, which is why I recommend that you talk to a licensed consumer proposal administrator to fully review your situation (which they will do for free), and then you can make an informed decision.

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