Bluffing your Creditors? Debt Settlement Ain’t Poker
In poker, people sometimes bluff when they have a bad hand, hoping the other players can’t read the truth and will surrender the chips they’ve already played although they have the better hand. In settling debt, bluffing rarely works because most of the time the borrower lacks leverage, and bluffing can seriously backfire on you.
I’ve helped many clients settle their debts when bankruptcy was a bad option or when bankruptcy was simply an option the client discounted for another reason.
I’ve often said to clients that convincing a creditor to take less than what is owed is not poker. Sure, there may be some bluffing involved; a majority of the time, however, we believe that full disclosure is a more effective technique than withholding information. If we’ve got the winning hand, we tell the world, often and with conviction. Debt negotiation is not criminal law – there is no such thing as “innocent until proven guilty” or in debt settlement terms “unable to pay until proven an ability to pay.” In fact, it is the opposite – debt collectors will try to repossess assets, garnish wages, or levy against bank accounts until the borrower proves those assets are exempt, over-encumbered by debt, or simply not worth pursuing. The debt collectors have “heard it all before” so they’re unlikely to be swayed by any argument other than facts (and sometimes not even facts will dissuade them from attempting to collect). Therefore, disclosing the nature of your assets, although it reveals their existence to the creditor, also shows the creditor that those assets are protected, unavailable for forced collection, or simply not worth pursuing.
Recently, a client told me they would refuse to provide a spouse’s information for fear that the lender would pursue the unemployed spouse for debt collection, on a debt that was incurred prior to the marriage. While we respect that decision, we think it was wrong for two reasons: (1) the spouse had no obligation, thus no liability to the creditor, so providing the spouse’s information posed no danger to assets owned individually by the spouse. Providing her information to the creditor would have been as “dangerous” to her as providing my information to the creditor, that is, it would have had no impact. Neither me nor the spouse owed the creditor money. (2) Because the spouse was unemployed, providing her information to the creditor would have proved that the husband (the borrower) was exempt from garnishment as the Head of Household.
If you end up going to court and losing, or if you ignore the lawsuit and a judgment is entered in favor of the creditor, the borrower is required to provide a Fact Information Sheet and failure to do so will possibly create penalties of contempt or other sanctions against the borrower by the judge (which in the most extreme or egregious cases would include jail). In many cases, providing the information will assist us in the settlement of the debt and, in rare cases, cause the creditor to drop collection activities entirely. We had one client who did have the creditor stop calling after we disclosed that the client: (1) was a realtor during the recent Great Recession, (2) who had no pending listings, (3) had no IRA, 401(k), savings, or money in the bank and (4) was unable to find employment. What the creditor didn’t know was that this client lived with his significant other, who was taking care of all or most of his expenses. Accordingly, we haven’t heard from the creditor, as of the time of drafting this chapter, in over five (5) years, and it’s unlikely we’ll ever hear from this creditor again!
If you want to be prepared, or are just curious and you want to see a copy of the Fact Information Sheet, please email me at Shawn@YesnerLaw.com and include “Fact Information Sheet” in the subject line. The Fact Information Sheet requests information such as (this is an incomplete list, see the Fact Information Sheet for more details):
- Legal Name and Aliases
- Residence Address
- Employment Information, including rate of pay and commission structure
- Social Security number and Driver’s License number
- Marital Status and spouse’s employment information (if applicable)
- Information about children that live with you
- Real estate you own
- Motor vehicles you own
Certainly, there is some bluffing involved and there are creative ways to answer questions included on the Fact Information Sheet; although we would never endorse or recommend lying to the creditor on this form because it is requirement of the court and lying on this form could be criminal perjury (even a lie by omission – “they never asked for that information.”) However, presenting the information in such a way that the creditor sees the borrower’s assets are non-existent, or exempt, or that secured assets are upside down (more is owed than the value of the property) will go a long way towards a quick and easy settlement – and if that information is provided at the outset of our negotiations, that’s even better.
Some other information you may want to consider providing to the creditor, to show that you are “uncollectible” include: three (3) to six (6) months of bank statements, two (2) years of previous tax returns, a profit and loss statement if you own your own business, pay stubs if you are a W-2 employee, proof of other debt or judgments you have against you (the maximum garnishment is 25% of income from any source, so if one creditor is garnishing the maximum 25% then no other creditors can garnish until the first is repaid), proof of any alimony or child support you pay, and a hardship letter (more about the hardship letter in the loan modification chapter.)
What happens if you have assets and/or the creditor finds out about assets you own? Florida law (or the law of your home state) protects your property by exemption.
Currently, Florida law provides the following exemptions:
- Equity in your homestead (primary residence) is 100% exempt
- Wages of the Head of Household
- Life Insurance policies
- Annuity contracts
- Disability income
- IRA, 401(k) or other retirement account
- Money in a qualified tuition program, medical savings account and similar programs
This is not a comprehensive list and I would encourage you to talk to a local attorney to determine if you have exemptions to protect your property, especially if you live outside the state of Florida.
Many times, my advice to a client depends on whether the client has a “thick skin.” If the client is un-phased by creditor collection calls, if the client has no fear of a lawsuit because they have nothing the creditor can take, then we can negotiate with the creditors to settle the debt. If, on the other hand, the client is afraid of being harassed by creditors, or simply wants to avoid the hassle, then bankruptcy may be a better option.
Along the same lines, for a debt settlement to be an effective strategy, the client must have money saved that they can use to settle with the creditors. Typically, we can settle anywhere between 25 and 35% of what the client owes, unless we’re dealing with a credit union (who typically never settle) or American Express (who rarely accepts less than 90% of what is owed).
For more information on debt settlement, or if you’re being harassed by debt collectors and want to discuss your options, please contact us to schedule a free initial consultation to discuss your options at 727-261-0224 or email me directly at firstname.lastname@example.org. Please also subscribe to the Crushing Debt Podcast, on Apple Podcasts, Spotify, and other podcast players, including Amazon Echo (“Alexa”) for more free information about these topics.
Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.