Ask HN: I Used My Credit Cards to Fund My Failed Startup and Now They're Suing

daveramsey.com is a good source of information. See for example http://www.daveramsey.com/radio/highlights/?urlVars=2010/7/1...

A few particular points -

Don't use a debt consolidation company, they're a rip off.

Get a copy of your credit report so you know who has your debt and for how much.

Deal with your debts one at a time -- smallest to largest.

When you have some money, call the first debt collection company (the one with the smallest debt). Negotiate a settlement in full. Don't pay them anything until they agree in writing that your payment settles the debt in full. (Email counts for in writing). Do not send them a personal or business check that has your checking account number on it and don't give them electronic access to your checking account -- they will clean it out. Send them a cashiers check for the settlement amount instead.

Repeat for each debt.

Credit card debt is typically sold to debt buyers for about $0.06 on the dollar, and the buyer/collector is usually very happy to collect a fraction of the debt if it means they earn a profit on your account.

It is common for them to get some information from you to figure out how much you can pay. In any case, give them a call. It is very likely that they will be happy to collect the $1000 down payment and set you up to pay the rest (or some fraction of the rest) in installments.

My understanding is that you are better off working this out directly with them than going to court.

Background: I am not a lawyer. However, I worked on issues related to the debt collection industry as part of the FTC's consumer protection bureau.

Some considerations:

1. AGE OF DEBT: If the debt is over 3 years old, consider ignoring it. Bad marks remain on your credit history for 7 years after the LAST payment. By making any payment, even for $0.01 you reset the 7 year clock. If the debt is over 7 years old - definitely ignore the debt collectors.

2. IMPACT: Is if the bad debt is impacting your life: are you having a hard time renting, or doing anything critical? From your post it sounds like you only "noticed" the debt when you started getting calls.

3. LAWS: The process servers are in many cases doing the minimum necessary. Their ideal case is that you do not show up to court and then they get a default judgment against you. Simply by showing up to court to object, you raise the cost of them pursuing your case.

4. DO THEY OWN THE DEBT? Just because some company says they own your debt does not mean that they really do. For example, do they have clear documentation about how much you owe, including interest calculations, and complete documentation about your account. The banks have gotten very, very sloppy about following the law when it comes to documenting payments, interest calculations, and transferring of debt.

A starter website to look at is : http://4closurefraud.org/

I am in much deeper doodoo than you are. I wrote at length a couple of days ago but couldn't manage to post it and now I cannot find it. I haven't experienced any of the malicious sounding tactics that other posts here describe. If you can pay it, do so. Be polite. Be honest. Make a good faith effort. It is a business like any other. They just want the money they are lawfully due and they deal every day with people being assholes to them and lying, hiding assets, etc. Don't be an asshole about it and they will probably not be assholes back.

At least that has been my firsthand experience doing this. Feel free to believe in the boogiemen posited by these folks who are probably generally well off and have never been through something like this.

Is it too late to contact the debt collection companies and try to work something out?

No. If they're debt collection companies and the debts are 4 to 5 years old, your $5k debt cost them less than $200 to acquire. I would say something like "Look, I'm unemployed and looking at several different companies who all want more money than I have. I'm making this same offer to three credit card companies this week: $1k paid immediately in return for full satisfaction of this debt. I will understand if you feel the need to reject that offer and sue me, but I have no assets. This represents the best deal you're going to get."

Do this negotiation entirely on paper, delivered in the postal mail, with return receipt requested. Don't talk to anyone on the phone for longer than it takes to say "What is your postal address?" Your first letter to each company should include language similar to "It is inconvenient for me to receive debt collection communications via telephone or any other means but postal mail. This letter constitutes written notice under the Fair Debt Collection Practices Act that you are not to contact me about this matter via any method other than the postal mail."

Our overarching strategy here is avoiding having folks sue you (n.b. the process server is in play because someone is already suing you, and merely ducking him will not make that impossible -- they'll just put a notice in the newspaper and the judge will certify "service accomplished by public notice"), because you'll probably not go to court in time to contest and if you do contest you'll likely lose (you do, after all, owe this money). You will then have a default judgment entered against you, for the entire sum you borrowed plus interest plus collection costs and legal fees. This will likely be more than double the amount you think you owe. The debt collection agency will then begin contacting every bank/etc in the area to see if you have an account and then seize the contents to satisfy the judgement. If they don't recover 100%, they will petition -- and receive -- a court order to garnish your wages for the next several years until that amount is satisfied.

This process will be stressful and costly for you. It is highly in your advantage to avoid it. Ignoring it will NOT make it go away.

I can probably swing a 1k down payment and the rest over monthly payments for a year to a year and a half.

I would suggest that you be Very Darn Sure (TM) that you can actually handle this this time, because if you get to month 7 on one of those agreements and then miss a payment by even a day, you're in a situation which will be in every possible way worse than the situation you are in today. You should strongly prefer paying part of your debt today in full satisfaction versus a payment plan. They will suggest payment plans, because that gets them some money and because probabalisticly you like virtually all other debtors will default on that payment plan, after which point collection costs will inflate the debt to a number at least as large as the number they are claiming now.

There's also the additional issue that I may have exaggerated my freelance income somewhat on the applications.

I am not a lawyer, but to the extent that you trust me: you have nothing to worry about with regards to this.

I'm not a lawyer either, but I am married to a former debt collector and I agree with what patio11 said.

The first thing you should do is deal with the lawsuit that's already underway. Contact who's suing you and offer a settlement. Make sure you get a written notice of debt discharge and keep the settlement papers forever.

Most debt collectors are just ordinary people doing an unpleasant, high-pressure job. Yeah, I know some of them can be assholes, but that's life. The good ones can be very professional until you really piss them off. Be polite to the people you talk to. First, ask to be mailed proof of debt. If they can't provide this, then they don't have a leg to stand on in court. Make it clear that you simply can't pay the entire amount owed. They would rather settle for a smaller one-time amount than have to sue and then deal with the difficulties of collection (lots of people who owe money will change jobs frequently to avoid garnishments, don't have any assets in their name, etc.).

Negotiate: don't take the first number they offer and don't take a deal you can't live with. In the end it's just money; you won't go to jail, it doesn't make you a bad person, it was a business venture gone bad and now you need to clean up the loose ends.

It might be a good idea to join one of the online debtor's forums to see how some people handle it. Trust me, you have lots of company, especially after the last few years of this economy.

Offering less to settle the debt in full is an excellent suggestion. As patio11 pointed out they probably bought this debt for very little.

One thing to remember, though: you're dealing with bottom feeders here so get any deal in writing before you send any money and never give them electronic access to your account or they'll clean you out.

Also once you've got the written agreement make sure you save it forever. Debt collectors resell debts all the time and you're just one line in a big spreadsheet - very easy to accidentally end up in the wrong file. If someone else turns up trying to collect this debt you'll want to have proof that it's been settled.

I made this comment below but it was kind of buried, so I just wanted to say again thanks so much to everyone for your assistance here. This has been incredibly useful, and I'm already feeling much more optimistic about the situation.

if I could upvote this +1000.

I am in the US and this is great advice for handling this.

Also, they may threaten you with all sorts of stuff (like taking your furniture, car, etc). This is illegal to do and COMPLETE scare tactic. Tell them to come and try it.

They will also tell you that they cannot accept payments. Hold strong and tell them that is the only way you can make it work.

Also, if you need some time to get this underway request 'original proof of debt'. This takes them a bit of time to get to you. You are entitled to it and gives you some breathing space to get ducks in a row.

How long after your last payment to the credit card company does it take until they pursue a lawsuit? Do most (all?) wait 4-5 years before they file a lawsuit? Is there a table that shows roughly what percent is paid for debt by collectors over time? For example, you say they probably paid less than $200 to acquire debt 4-5 years old. What about debt that is 2-3 years old or 3-4 years old?

The credit card company pretty much never sues (I worked for capital one) but they will sell the debit to collecors who will.

Well if your credit is ruined, you have seven years before it is taken off your credit history.

If you don't contact the debt company the debt you owe will be written off and the IRS will send you a 1099 form of the debt as income. So you will have $5000 added to your 1040 and taxed on it.

If you do contact the debt company and make arrangements to pay you will be contacted by other debt companies as well. So that 1K down payment and $X month, the other debt companies will want a settlement as well.

What you might want to do is contact a debt settlement company that can consolidate your debts into one monthly payment. Your credit rating is already ruined by owing debt and being sued. Contact a debt lawyer or debt consolidation company to reduce or consolidate the debt and make payments if you want to go that route.

Owing debt and taxes is all too common in the software consultant area. Sometimes software consultants are stiffed by contracting companies, clients, brokers, etc and still have to pay taxes on income they earned but were not paid for. If they ask about your income changing, just tell them it was higher when you had more work and it adjusts to the market. Most credit card or debt companies don't care what you earn, as long as you make payments. They will eventually see your tax form and then make adjustments to your credit based on that. Debt collection companies, by the way, get your contact info from the IRS from what you put on your 1040 form. So whatever contact phone or contact postal address you list, they will contact you with that. Some people skip debt collection agencies by putting a PO box listed as an apartment or a phone number that is always busy or rings and rings and never is answered as their contact phone to keep debt collectors away. But you didn't hear that from me. :)

Thanks so much everybody. This has been incredibly helpful to me.

Congrats on taking the risk and using your personal credit cards to start doing what you wanted to do. Not a lot will do this and accept the stress it brings.

There is a lot of good advice in this thread.

You will be fine.

Keep pursuing your dream.

You should certainly contact your creditors, preferably in writing. I have no idea where you are or what the laws in your state are, but the FTC has a bunch of good advice and resources: http://www.consumer.ftc.gov/articles/0150-coping-debt

Good luck.

Not sure if you're still reading this thread, but in case you are, there's a YC startup that aims to help people get out of debt: https://www.readyforzero.com/. You may find it useful.

If you have funds available save up and try to settle with them when they contact you. You might be able to pay 1/3 or 1/2 of what you owe. I would offer 1/3 and have 1/2 saved up. Keep in mind that you'll most likely have to pay income taxes on the portion you don't pay back. They would also file a claim against you in small claims court trying to get a judgement against you for the amount you owe. So when you do get served contact them and try to work out a settlement or payment arrangement. And make sure to attend any court dates. I don't expect they are worried about your estimated income at the time the cards were issued.

You should take that $1k and consult a lawyer. I always find it funny that the Hacker News view is that startup failure is a learning experience that has no consequences.

Debit Collection companies sue people all the time, and almost always they have nothing to support the debit if they get into court. A spreadsheet with a line and a balance is all they have so winning a collections lawsuit is almost impossible for them to do, IF you show up in court. Almost everyone doesn't show up in court.