Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.
Facing the stress of mounting debt can feel like a never-ending cycle of late notices and relentless calls from creditors. Yet, what if these challenges were actually opportunities in disguise?
Opportunities to take control and significantly reduce what you owe. Negotiating your own debt settlement isn’t just a fantasy, it's a practical step towards financial relief.
This guide clarifies the process, equipping you with the knowledge and tactics to turn your debt struggles into a journey towards financial freedom.
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Introduction
Debt settlement is a process where you negotiate settlements of either a decrease in the total amount owed, a decrease in fees and interest charges, or both. Creditors want to be paid, and sometimes accepting fewer means that they will be paid instead of losing the debt all together.
The Process of Debt Negotiation
The process is fairly simple. However, you will most likely need an absorbent amount of time dedicated to waiting on hold just to get a hold of these companies. First, contact the creditor, explain your financial hardship and situation, and offer to settle. The company may accept your offer or may offer a different amount. If everyone is happy with the offer, GET IT IN WRITING.
Importance of Negotiating Your Own Debt
If you are considering bankruptcy to get out of delinquent debt, a do-it-yourself settlement may keep you from the stigma and expense of bankruptcy.
If creditors understand your desperation, they may work with you.
Understanding Your Debt
There are five factors in understanding your financial situation. These will help you understand who may settle and for how much.
Age of debt
Look at the debt age. Most states have statutes of limitation that define how long a debt can be collected. This depends on where you acquired the debt, the state you live in, and the type of debt. A financial advisor may be able to explain these statutes.
In general, debt "ages out" in about 6 years, but your state may differ.
If it has aged out and you have not made any offers to pay or payments, you do not owe the debt.
If the debt is nearing the statute of limitations, you are in a stronger negotiation period. The creditor knows you can wait it out and pay nothing. The credit report damage is already done, and aging out. Negotiating really shouldn't make your credit score any worse.
Types of debt
Next, determine the type of debt. The two basic categories are secured and unsecured. The difference is that secured debt has an asset backing it - for instance, a mortgage or a car loan is secured debt. A creditor can take the house or car in exchange for the unpaid debt. A creditor with a secured debt is much less willing to settle.
Unsecured debt includes credit card debt, medical bills, utilities, and student loans. Creditors of unsecured debt will be more willing to settle.
Amount owed
The amount owed will also determine if the company will settle. The more you owe, the more willing a company may be to settle.
Most professional debt settlement companies will not take on debt under $500 as the effort is not worth the reduction. If you are doing your own debt settlement, it is worth trying to settle a small debt.
Interest rates
Interest rates vary based on your credit score and type of loan. Lowering the interest rate on a small loan may be a better option than a decreased outstanding balance.
Focus on your highest-interest debt to decrease the owed amount and the interest rate. This can greatly affect how quickly you can pay off your debt.
Who holds the debt?
The final factor is who owns the debt. This can be the original creditor, their in-house collection agency, or a third-party debt collector.
Settle with original creditors first. You may be more successful if you can get the debt dealt with before it goes to collections. Generally, creditors do not settle on less than 90 days old debt.
Attempt third-party debt collectors next. They bought your debt for pennies and may be far more willing to settle. Finally, work with the in-house collection agency.
You do not need to do one at a time, just need to keep good notes on each attempt to settle.
Negotiating Your Debt on Your Own - A DIY debt settlement Primer
Understanding your rights as a consumer
As a consumer, you have certain rights and responsibilities. Understanding these will help you work with a debt buyer more successfully and even decide if you want to try settling debt.
To this end, do not ignore your mail or phone calls. This issue will not go away.
Your Rights
The federal Fair Debt Collection Practices Act (FDCPA) defines what debt collectors can do and how they can behave. Debt collectors generally have a bad reputation for good reason, so this act was put in place to protect consumers. The basic premise is that you cannot be harassed, bullied, or abused.
If you think a debt collector violates the FDCPA, check out this article and contact a lawyer.
Some states have expanded protection acts that cover original creditor behaviors, as the FDCPA only covers third-party debt collectors.
Your Responsibilities
You have the responsibility to pay your debts. If this is not possible and you use debt settlement, you now have a responsibility to report the settlement to the IRS.
The IRS considers any forgiven debt over $600 to be income and must be reported as income. You will receive Form 1099-C. For more on this form, check out this
blog.
How to negotiate with creditors
Before you call to inquire about a debt settlement, get your facts and figures straight. Write down the following information:
- Name of debt holder
- Name of the original creditor
- Outstanding balance
- Interest rate and penalties
- Age of debt (how long has it been since you made a payment or offered to make a payment)
Next, look at your finances and your personality. Determine the following:
- Do you have enough money to make a lump sum or partial payment, or do you need a payment plan?
- Are you a confident negotiator?
Finally, you need to understand what you will offer the creditor. Consider the following:
- Desired settlement agreement - this is based on how much you can pay off at now time or monthly. Start with a lowball number, for instance, creditors might settle for 40% to 50% of your original balance. Start higher and work your way down.
- For instance, you have a debt of $5,000. Offer to repay 30% or $1500. Realistically, the creditor will probably settle for $2500 (50%), but the low offer is a better starting place for debt relief.
- Will you make a lump sum payment or need a payment plan on the remaining balance? Companies prefer the lump sum and may settle for more just to get something. Remember that if you agree to a payment plan and have missed payments, the creditor will revert to the original amount and be unwilling to renegotiate.
- How will your settled debt be reported? If the creditor reports your debt as "Settled" or "Paid Settled," the damage to your credit score can last up to seven years. Request that the creditor reports the debt as "Paid as Agreed."
Your next step is to contact the creditor. It may take more than one phone call to settle. Keep good notes and get a written agreement.
We will describe professional negotiation tips next.
Tips for successful debt negotiation
- Do not start negotiating until you have worked through the previous section and have a plan.
- Remember that this takes time. Don't be afraid to let there be silence in the negotiation.
- Do not get mad or abusive. This is tough but very important. Bullying the creditor will not help!
- If you do not like the deal, don't take it. Stop and return later to see if there is more willingness to deal.
- Know what you want to ask for and ask for it. If you get it, don't haggle for more.
- Make the first offer in clear terms. For instance, "I can pay 20% of this debt in a lump sum, and I would like it marked 'Paid as Agreed' on my credit reports." or "I can pay 20% in a lump sum or 30% in monthly payments of $x."
- Let them respond and make a counteroffer.
- Suggest that settling the debt is a win-win situation.
- Get the final offer and acceptance in writing.
- Make your payments as agreed.
Determining If Debt Settlement Is Right for You
Pros and cons of debt settlement
Before you pursue debt settlement, understand the pros and cons.
Pros
- May be able to pay off debts for less
- Might avoid bankruptcy
- May help you pay off your debts faster
- May stop collection calls
- May save more money
Cons
- It may hurt your credit score
- It may be considered taxable income
- Creditors may not agree to negotiate
- You may end up with more debt if you stop making payment
- May be charged fees on remaining debt
Alternatives to debt settlement
There are some alternatives to debt settlement.
Debt Consolidation
Debt consolidation involves finding a low-interest personal loan to pay off all or most of your debts. You then focus on paying off the loan. This works if you can get a loan with a lower interest rate than your existing debt. This can result in money saved in interest charges.
Nonprofit Credit Counseling Agencies
A nonprofit credit counseling agency offers education on how to manage finances, set up a budget, and other important financial concepts. These often involve a debt management plan to manage debt and save money. It may include negotiating a lower interest rate or even decreased debt, a debt consolidation loan, a budget, different monthly payment dates, and other techniques.
Bankruptcy
This legal option is a final option because it is expensive, time-consuming, and carries a lot of stigmas. If you are considering bankruptcy, you will need a qualified attorney to help guide you. Depending on which bankruptcy you qualify for, most of your debts can be erased or the court will set up a debt management plan for you to complete.
Bankruptcy does not stay on your credit report for seven years - it stays for up to ten years!
Factors to consider when deciding whether debt settlement is right for you
Before undertaking debt settlement negotiations, decide if you are willing to have more credit damage - most people who consider debt settlement already have damaged credit. Once your debt is settled, you should see your credit score improve.
You must also understand
how debt settlement affects income taxes and other tax implications.
Researching Debt Settlement Companies
If debt settlement sounds like your best bet to get out of debt, but the debt settlement negotiations are beyond your skills, time, or comfort levels, you may be considering a professional debt settlement company. Here is what you should know.
Understanding the services offered by debt settlement companies
A professional debt settlement company like Pacific Debt Relief will negotiate your debt on your behalf. The short version is that you have enrolled debt with the company. You then make affordable monthly payments into an escrowed account.
As you build up your savings, the debt settlement company negotiates a settlement. When each debt is settled, the debt is paid off. It can take 12 to 48 months to settle all debts.
Advantages and disadvantages of using a debt settlement company
The advantages of using a debt settlement company are professional negotiators and knowledge of willingness to settle. Not to mention, Pacific Debt Relief has existing relationships with most creditors and debt collectors.
Factors to consider when choosing a debt settlement company
Before you choose a debt settlement company, do your due diligence. Look for the following accreditations:
- The Consumer Debt Relief Initiative (CDRI)
- International Association of Professional Debt Arbitrators
- Better Business Bureau
Also, read reviews by real clients and professionals like US News and World Report. Pacific Debt Relief has been named
one of the best debt relief companies by US News and World Report.
Pacific Debt Relief offers a
FREE consultation with no obligation
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