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

About four or five years ago I applied for several credit cards to augment my freelance income, so that I could drastically cut back on the hours I spent working for others and focus mostly on my project. We're not talking huge amounts here - three cards with around 5k each. Anyway, fast forward a couple of years and the freelance market collapsed in my region and my startup failed. I recently received notice that a process server is trying to track me down to serve me. I'm assuming the other debt collection companies will too at some point. Is it too late to contact the debt collection companies and try to work something out? I can probably swing a 1k down payment and the rest over monthly payments for a year to a year and a half. There's also the additional issue that I may have exaggerated my freelance income somewhat on the applications. I'm not sure how worried I should be about that at this point.

anigbrowl 14y ago
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 http://www.consumer.ftc.gov/articles/0150-coping-debt Good luck.
deleted 14y ago
[deleted]
saluki 14y ago
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.
orionblastar 14y ago
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. :)
dbecker 14y ago
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.
awwx 14y ago
daveramsey.com is a good source of information. See for example http://www.daveramsey.com/radio/highlights/?urlVars=2010/7/15/Dont-Find-Yourself-In-A-Zoo 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.
deleted 14y ago
[deleted]
codeonfire 14y ago
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.
pm24601 14y ago
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/ http://4closurefraud.org/
patio11 14y ago
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.
ThrowawayTheDay 14y ago
Thanks so much everybody. This has been incredibly helpful to me.
- jason_slack 14y ago
  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.
sskates 14y ago
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/ https://www.readyforzero.com/. You may find it useful.
Mz 14y ago
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.
johnrgrace 14y ago
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.

anigbrowl 14y ago

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 http://www.consumer.ftc.gov/articles/0150-coping-debt Good luck.

deleted 14y ago

[deleted]

saluki 14y ago

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.

orionblastar 14y ago

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. :)

dbecker 14y ago

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.

awwx 14y ago

daveramsey.com is a good source of information. See for example http://www.daveramsey.com/radio/highlights/?urlVars=2010/7/15/Dont-Find-Yourself-In-A-Zoo 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.

deleted 14y ago

[deleted]

codeonfire 14y ago

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.

pm24601 14y ago

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/ http://4closurefraud.org/

patio11 14y ago

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.

ThrowawayTheDay 14y ago

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

jason_slack 14y ago
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.

sskates 14y ago

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/ https://www.readyforzero.com/. You may find it useful.

Mz 14y ago

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.

johnrgrace 14y ago

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.