How to negotiate your debt settlement

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You’ll have to pay taxes on the amount of debt forgiven.

Negotiating your debt with creditors can be cheaper and faster than using a debt settlement company.
Your first offer should be lower than the maximum amount you can pay toward your debt.
Make sure you get everything in writing once you and your creditor have reached an agreement.

When debt piles up and it’s no longer possible to pay, consumers may feel trapped. However, it’s not necessary to hide from collection agencies until the statute of limitations expires. If lowering your total debt would help you pay it off, a debt settlement may be a good option. This process can be as simple as sending an email and asking. This is called a debt settlement

You can hire a debt settlement company that will negotiate with creditors on your behalf (you can find our guide to the best debt settlement companies here). However, these expensive programs can take years to complete. It may be cheaper and faster to try and reach a debt settlement on your own.

What is a debt settlement? 

When someone has unsecured debt that they have no hope of completely paying off, they may negotiate with their creditors and have the amount they owe reduced. Under these agreements, called debt settlements, a creditor accepts that they need to accept less than the full amount owed if they’re to recoup any of that money at all. Once the borrower pays that settled amount, the debt is considered paid in full.

According to Ryan Byers, an attorney at Rammelkamp Bradney, P.C., creditors may enter into settlement agreements when they know they may not otherwise get anything or don’t want to go through the time and expense of going through collections

How to negotiate your own debt settlement

According to Byers, debtors regularly negotiate debt settlements on their own. Felix Shipkevich, founder and principal of Shipkevich PLLC, says, “It’s not exactly rocket science.” Attempting a settlement without assistance is attractive to many debtors because they will save money by doing it on their own.

According to Shipkevich, a successful debt settlement results in one of two outcomes: 

Lump sums: A debtor (the person in debt) can offer to make one lump sum payment. In these types of settlements, the debtor makes a single payment that is less than the total outstanding balance. In exchange, the creditor agrees to forgive the remaining debt. 

Debt settlement program: Under this approach, the debtor makes monthly payments into a third-party escrow account. Once the debtor accumulates the amount they agreed to pay, the funds are used to settle the debt. 

Some companies are open to negotiating settlements that involve small monthly payments over time, but most are “more interested in receiving larger, lump sum payments as opposed to negotiating to receive small payments for many years,” Byers says. 

Step 1: Consider if a debt settlement is right for you

Before starting the debt settlement process, debtors should determine whether their debt is secured or unsecured. That’s because debt settlements are usually only available for unsecured debt, Shipkevich explains. Unsecured debts encompass credit card bills, medical expenses, and personal loans.

Those facing a debt lawsuit should consider a debt settlement as well. “Offering to settle instead might keep you out of court,” says Leslie Tayne, founder and managing director of the Tayne Law Group. 

On the other hand, people with large amounts of secured debt should find alternate forms of debt relief. Debt that is secured by property, such as a mortgage or car loan, is usually not eligible for debt settlement because creditors may be able to repossess the asset to recoup the amount they are owed, explains Tayne.

A creditor will only accept a debt settlement agreement if they think the best option is to settle with you. They’d rather collect some money than none. They might think this if you haven’t made any payments toward your debt in recent months and you’re in severe delinquency. If you’ve been able to keep up with minimum payments, you should also look elsewhere for your debt needs, like a non-profit credit counseling service.

Note: It’s also worth looking up the statute of limitations on debt in your state, usually between three to six years. If your debt falls outside of the statute of limitations, it means that your creditor can no longer take legal action to collect a debt you owe.

According to Byers, anyone who owes money and cannot pay their debts should consider negotiating a debt settlement — as long as their debt qualifies and they can make payments. “Negotiating a settlement can be a way to use what resources you do have to save money over the long term and get a fresh start financially,” he explains.

Step 2: Prepare your finances for bargaining

Before contacting a creditor, Byers recommends determining the maximum amount you can pay toward the settlement. This amount should be a number you’re confident in paying, as breaking any agreements can land you right back where you started.

“When you begin your negotiations, offer something less,” he advises. Byers recommends this approach because the company may accept a lower number and because, after some back-and-forth, they may believe they talked you into paying more.

That means that people who are able to make larger payments may have better luck negotiating a debt settlement. “For example, if you have recently received a tax refund, gift, or even a small inheritance, you will have more leverage to negotiate a settlement,” says Byers. 

Step 3: Call your creditor

Every creditor will have a different approach to the debt settlement process, Byers explains. However, he says the borrower can start the process “by contacting whoever is attempting to collect the debt on behalf of the creditor.” Depending on how severe your outstanding debt is, this could be the creditor’s accounts department, a collections agency, or even a lawyer if your creditor filed a lawsuit.

Regardless, making a phone call or email is usually enough to start the process. “There is a chance that the individual you first contact may send you on to somebody else affiliated with the creditor, and you should communicate with whomever you are directed to,” Byers says.

After that, Byers says there is “some communication back and forth regarding what you are willing and able to offer the creditor and what the creditor is willing to accept.” According to Byers, negotiations typically take less than a month. That’s because “creditors are not interested in lengthy negotiations when they could be putting that time and effort into collecting on the full amount due through other means,” he says.

Tayne also recommends being honest about your financial situation, remaining persistent and professional, and offering a reasonable and realistic settlement amount. She adds, “The larger the settlement amount a borrower can offer, the faster the creditor is likely to accept it.”

Step 4: Get your agreement in writing

After negotiating, sometimes the parties reach an agreement, and sometimes they don’t. If the parties successfully reach an agreement, Byers recommends putting it in writing and having both parties sign it after reviewing the terms carefully. He stresses that they “need to be extremely careful in reviewing anything that you sign or otherwise commit to as part of the settlement.”

In your terms, ask your creditor to report your account as “paid in full” instead of “settled.”

“At that point, the only thing that remains is following the terms of the agreement,” he says. 

Step 5: Make your payments as agreed

Once you’ve established the terms of your settlement, make sure you make all your payments as agreed, whether you’re following a payment plan or paying one large amount. Ideally, you’ll want to pay without giving your creditor any bank account information.

Step 6: Follow up with credit bureaus

While the hard work is done, you’re not out of the woods yet. You should keep tabs on your credit report to ensure that your creditors have reported your payments and that the account is settled. You can request a free credit report from each of the three credit bureaus annually through AnnualCreditReport.com.

If your credit reports haven’t been updated, you should reach out to your creditor. You can also write a letter to the credit bureaus to dispute the incorrect information. Be sure to include any documents you gathered throughout the debt settlement process.

Note: You can access free weekly credit reports until the end of 2023. 

What is the impact of negotiating a debt settlement?

The biggest impact of a debt settlement is that it lowers your overall debt burden, Tayne says. However, as attractive as reducing debt sounds, Tayne cautions that there are several downsides to consider.

She says that setting a debt for less than the full amount owed is noted on your credit report and considered a negative mark. This will stay on your report for seven years. However, she notes that anyone who has gotten to the point of negotiating a debt settlement may already have poor credit because they likely have a history of missed payments. 

Additionally, there are costs involved in debt settlement. The amount of any debt that is forgiven may be considered taxable income. “The borrower may face a large tax bill for the year their debt is settled,” Tayne says. Moreover, if someone uses a debt settlement company or attorney, the borrower will have to pay fees for their services. “It’s important to factor in that cost when determining how much you can afford to pay creditors,” she says. 

Don’t use a debt settlement to stall creditors

Trying to enter into a debt settlement to delay payment or when you know you won’t be able to pay isn’t a good idea. 

“Negotiating just for the purpose of stalling out a creditor or avoiding regular payments can backfire, in part because a creditor could work additional provisions into a settlement that will make the debt mount even higher if you default,” Byers says.

These additional costs could include “late fees and penalties being reinstated, higher interest rates, the account being sent to collections, further damage to your credit score, and, potentially, legal action,” Tanye explains. Moreover, Byers says that “defaulting on a negotiated settlement could result in their showing less leniency in future collection efforts.”

Hiring a debt settlement company

There are times it’s advisable to seek help. “You should consider seeking help if creditors are simply unresponsive or if you feel that you have been presented with a proposal that is dense or that you cannot fully understand on your own,” Byers says. A debt settlement company may also be helpful if you have debts with several creditors, none of which you can pay. 

For those who decide to get help with the process, Shipkevich recommends asking a lot of questions about the cost involved. He strongly advises against enrolling in a program that charges upfront fees since there is no guarantee that the company will agree to settle your debt. Instead, a reputable company will charge a percentage of the debt owed or the amount forgiven. 

Shipkevich also explains that using a debt settlement company is not a guarantee that the creditor won’t go after someone in the future. “If a consumer defaults on settlement, then they can be sued by creditors while still having paid fees to a debt settlement company,” he says. 

Debt settlement alternatives

Other than paying your debt in full or defaulting, there are several alternatives to debt settlement.

Bankruptcy is one option. “If you qualify for bankruptcy protection, most of your debts can be eliminated, or your debts can be restructured in such a way that they are affordable,” Byers says. Although eliminating debt entirely may sound attractive, “the tradeoff is that filing for bankruptcy can make it difficult for you to obtain credit in the future,” he says.

Debt consolidation is another alternative. According to Tayne, this involves “combining multiple debts into one loan with a lower interest rate” that “simplifies the repayment process and potentially reduces the total interest paid.” Here’s our guide on the best debt consolidation loans

Credit counseling can be useful to many debtors. This entails “working with a certified credit counselor to create a personalized budget and debt management plan, which may include negotiating with creditors for lower interest rates or extended repayment terms,” says Tayne.

Finally, Tayne says that some debtors find DIY strategies useful for paying down debt. “Implementing strategies such as the debt avalanche or debt snowball methods to prioritize and pay off debts, combined with strict budgeting and expense reduction to free up additional funds for debt repayment” can be successful she says.

Negotiating your debt settlement frequently asked questions

How much debt qualifies for debt settlement?

Most debt settlement companies require that you have at least $10,000 in outstanding debt. 

What percentage should I offer to settle debt?

Starting at 25% of your total debt owed is a good start to negotiations. The amount you settle on will probably be higher than this. 

How to get debt collectors to stop contacting you

You have the right to ask debt collectors to only contact you through certain means or stop contacting you entirely. You can use one of the CFPB letter templates to make these requests.

Read the original article on Business Insider

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