- When you can no longer afford to make payments on high-interest debt, it might be possible to negotiate a settlement of the debt for less than the full balance owed.
- DIY debt settlement requires you to understand the debt collection process and be comfortable negotiating with aggressive debt collectors to obtain a lump sum or term settlement agreement of the debt.
- Debt settlement companies have relationships with creditors and understand when and how to negotiate, which gives you an advantage in the debt negotiation process when settling your debts through a debt settlement company.
Another piece of mail arrives promising you an escape hatch for your debt problems. The notice endorses relief from debt, suggesting you can pay 40-50% of outstanding balances for a few hundred dollars a month.
A quick look at your budget, and you realize your current minimum monthly payment is closer to $1,000 per month. The problem is you are not making any real progress on eliminating your high-interest credit card debt.
The idea of settling those debt and saving 50% or more of outstanding balances is very appealing. But what’s the catch? Can you really pay creditors less than you owe? And if so, will doing the job yourself save you even more.
Creditors charging double-digit interest want you to pay the full balance. They encourage options like credit counseling instead of debt negotiation because they want to receive 100% plus interest of what you owe.
The challenge for creditors is that they have limited means to collect unsecured debts if you cannot make the monthly minimum payment. Getting behind on an account means collection calls begin immediately.
Only when it becomes clear that you cannot catch-up the account will they show any interest in negotiating the debt.
What Debt Negotiation Means for Your Credit
Debt negotiation only becomes an option if you experience a financial hardship that prevents you from making any payment at all. You must have delinquencies before creditors will agree to negotiate the settlement of your debt. Creditors report delinquencies on your credit report, which will temporarily lower your score.
You can, however, keep one or more accounts current to speed the recovery of your credit once your other accounts have been settled in full
Step-by-Step-Process to Negotiate Debts with Creditors
Once you have a delinquent account, you can reach out to individual creditors to discuss payment options. Missing payments for several months will motivate an original creditor to accept a lower payoff.
Continued failure to make a payment could also result in the creditor selling your account to a debt buyer. A debt buyer only pays pennies on the dollar for the right to attempt to collect the full balance owed, creating more motivation to negotiate a payoff for less than the full balance because they have less invested in the account.
When working with creditors or debt buyers, take excellent notes of every conversation and keep all paperwork you receive. It is essential to respond to any legal action taken against you, because failure to respond could lead to a default judgment, even if you do not legally owe the debt.
Professional Help Settling Unsecured Debts
Debt settlement companies charge for their services in exchange for handling all the debt settlement negotiations. You benefit not only from the expertise of a debt settlement company, but also from the relationships they have with creditors. Debt settlement companies understand the process, and advisors know when to negotiate to achieve the lowest possible settlement of your debt. They also keep current on creditor policies and know how much they will agree to reduce balances and which creditors are more likely to resort to litigation.
Lastly, they are experts in the law. They can spot illegal debt collection efforts, help you verify the account, and use any errors for your benefit.
The expertise of advisors at a debt settlement company can not only save you time and frustration by dealing directly with creditors on your behalf. They could also save you money through lower settlement agreements.
Can I settle a debt on my own?
Creditors only negotiate with consumers in financial distress. The creditor MUST believe you cannot pay the full amount before they accept a lower payment. If the creditor thinks you CAN pay, they will not negotiate. With an understanding of how the debt collection industry operates, it is possible to settle debts on your own, assuming you are comfortable negotiating with an aggressive debt collector.
What factors are negotiable when settling debt?
When negotiating a debt, the top three things you want to reach an agreement on include: the total amount you must pay, the payment schedule, and credit reporting. It is possible to get the creditor to remove negative items from your credit report once the settlement has been fulfilled.
What discount can I expect in a debt settlement?
When creditors agree to a settlement of less than the full balance, the discount is typically between 30% and 80% of the outstanding balance. However, debt settlement companies always negotiate from the balance of the account at the time of enrollment in the debt settlement program, regardless of the interest, penalties and fees that have accumulated since you enrolled.
How does debt settlement impact my credit?
Creditors will not negotiate the balance on an account that is current. To negotiate debt, you must be behind on payments on one or more accounts. Late payments remain on your credit for seven years. Accounts reporting delinquencies, or that are closed and charged off due to non-payment after six months, will negatively impact your credit score. The negative impact on your credit score declines over time. Having current accounts will help the recovery of your credit score.