Being in debt isn’t great. Being unable to pay your debt is even worse. While no one likes dealing with debt collectors, doing so can help make your debt more manageable—and maybe even reduce how much you owe through the process of debt settlement.
Debt settlement is a process of negotiating with one or more creditors to reduce the balances owed by debtors. Also known as debt resolution, the process can benefit all parties, although the scales are tipped on the side of the person who owes money.
When settling makes sense?
Debt settlement is not for everyone, but it can be a good solution if your only other option is Chapter 13 bankruptcy.
“I recommend that anyone thinking about debt settlement talk to a bankruptcy attorney to see what their options are, especially if they owe more than $10,000,”. “If you do qualify under the new rules to do a Chapter 7 bankruptcy, that could make more sense.”
Changes in the bankruptcy law in 2005 made it difficult for many people to file for Chapter 7 bankruptcy, which liquidates debts. If you have regular income and there is some leftover after you pay basic expenses, then you must go to Chapter 13 bankruptcy, which requires that you pay back some or all of what you owe over five years under a very rigid payment structure.
One way to resolve your credit card debt or other debt is to enlist the help of a debt settlement company. Debt resolution companies often are experienced at negotiating with creditors and may have relationships with major creditors, specifically credit card companies.
The first step in the debt settlement process is for a consumer to reach out to a reputable company that can help. These debt arbitration firms are staffed by credit counselors, people who are accredited in analyzing personal finances. They also have a keen understanding of the current marketplace, including how and why creditors will negotiate debt settlement.
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Which Type Of Debts Are Eligible for Settlement?
Credit card debt is ideal for the debt settlement process because consumers accrue this type of debt in abundance and the creditors are private lenders, rather than government entities. Additionally, credit card debt isn’t secured by property like mortgages and auto debt.
For federal student loans, debt settlement is rarely an ideal option as the U.S. Department of Education is unlikely to settle for a lump-sum payment of less than what they are owed. The DOE does provide consolidation options — where one larger loan replaces multiple smaller loans — for many of the available federal loans.
Private education loans, which may be backed by banks, are more likely than federal loans to be eligible for settlement.
- Credit Card
- Auto Repossession Balances
- Personal Loans
- Utility Bills
- Mortgage “Short Pay” Balances
- Private Student Loans
- Apartment Leases
- Cell Phone & Credit Card Bills
Unsecured debts such as credit card debt, tax debts, medical debts and some personal loans and judgments may qualify for settlement. Credit card debts are the most common form of debt that is settled, especially as credit card companies have increased interest rates and fees on consumers during the recession.
How long does the debt settlement process take?
This depends on a variety of factors including the amount of the debt outstanding, the age of the balance, the funds available to be used as part of the settlement, the individual’s ability to save additional funds as part of the debt settlement program, and the willingness of creditors to negotiate the settlement amount. As a benchmark, programs can take 24 – 36 months or longer. An accredited debt settlement company will help establish a custom debt settlement program that will include a target date for completion.
Will a settlement affect my credit?
In the short-term, it’s possible that a debt settlement program could adversely impact an individual’s credit rating. However, if the consumer is truly concerned with the status of their credit, then the outstanding debt should be addressed.
Can I negotiate my own settlement?
Absolutely. Any individual can take the debt settlement process into their own hands and try to negotiate a settlement with creditors. Many people choose to hire a debt settlement company because of the experience factor. Others simply do not want to negotiate with creditors.
If you’re trying to free yourself from the burden of credit card debt, you have a number of options available. If you lack the means to pay the debt in full over a reasonable period of time but are unable or unwilling to file bankruptcy, debt settlement may be an option.
The Debt Settlement Process: 8 Points To Remember
Debt settlement involves making an offer to the credit card company to settle the amount you owe for a lesser amount. If the creditor accepts, you will need to pay the entire settlement amount up front, in one lump sum. A credit card company might accept a settlement if you’re very delinquent on your payments; it is often less costly for a creditor to accept a lesser amount in settlement than it is to send the account to collections, file a lawsuit, obtain a judgment, and then try to collect on the judgment.
There are two main ways that you can end up negotiating to settle your debt: either with the original creditor, or with a collections agency. If you have failed to make a payment on your debts for a period of more than 3-6 months (typically around 150 days), your debt can be sold to a collections agency. In those situations, your creditor is paid a percentage of the debt (say, 10%), and walks away. Some money is better than no money, after all. At that point, you won’t deal with the creditor anymore. You’ll deal with the collections agency.
If your debt is still owned by the original creditor, however, you’ll go through a different process—and we’ll explain both in separate sections below. However, in both cases, your situation is the same: you owe money, you can’t pay it all back, and the person who owns your debt wants to get as much as they can.
This is important to keep in mind. You do technically owe the entirety of your balance. However, if you find yourself in a bind where you cannot pay it all back, the company you owe money too would still like some of it. A debtor that settles is better than one who defaults entirely. This gives you some room to negotiate. Not a ton, but some. In most cases, the first thing that any debt collector will want is the entire balance, but depending on what you’re able to pay, you can sometimes negotiate the balance down or arrange a more optimal deal for your situation.
1: Make sure the debt is yours by requesting a Debt Verification/Validation Letter. You can request one verbally or by faxing/mailing a letter to your creditor.
2: Try to Settle Before an Account Goes Into Collections – once a debt is defaulted, the credit card company takes a loss and sells off your account to a collection agency, often for pennies on the dollar. According to Fair Isaac Corporation, the company behind FICO scores, once a debt goes into collections, it creates a second black mark on your credit report, on top of the hit for the original missed payments.
3: Make sure that the debt is not past the Statute of Limitations and now considered Zombie Debt. The statute of limitations begins calculating the last time the debt was active. So DO NOT agree anything on the phone until you get your Debt Verification / Validation Letter and can confirm the debt is not Zombie Debt.
Find your state’s statute of limitations on credit card debt here.
4: Try and reduce the balance of your debt to as low as possible. The debt collector bought your debt from the original company you owed and probably paid pennies on the dollar to buy it. Because of this, debt collectors will often take less than you owe if you negotiate.
5: Compile the facts – Before you try to settle your debt, prepare your negotiation strategy and compile the facts: If you can persuasively demonstrate that you can’t pay in full, they may be willing to accept partial payment instead of nothing.Also, know your rights so that you can’t be pushed around unfairly. The Fair Debt Collection Practices Act stipulates when and how often debt collectors can call you, what they can say and what kind of threats they’re not allowed to make.
6: Ask that they DO NOT report your agreement as settled on your credit report (this is VERY BAD and to avoided if possible). Instead, ask that they report it as, “paid as agreed upon.” Also ask if they can erase the trade lines associated with the debt. Trade lines are just the account and its history on your credit report.
7: Know that you may have to pay taxes on the amount that your creditor(s) excused as a result of your awesome negation skills. Uncle Sam views “excused debt” as income and wants his cut. You can avoid this by shaving off no more than $600 on the debt you owe. Anything above that amount will be reported and taxed.
Keep in mind that collection agencies have been known to inflate the amount you owe by rolling in fees and penalties. When you negotiate, make sure you’re starting with the original balance as your baseline, and don’t say “yes” to the first offer the collection agent suggests. Some debt collectors will agree to let you make monthly payments, but the discount on your original debt won’t be as steep. You have more leverage if you’re negotiating a lump sum payment.
8: If your creditors agree to the terms above, MAKE SURE TO GET IT ALL IN WRITING BEFORE MAKING A PAYMENT. This way, if they don’t honor what you both agreed upon, you could use what they sent you in writing as proof.
Negotiating with a Debt Collection Agency
If your account past due longer than 150 days, your creditor may end up selling your debt to a third party. This changes the stakes a bit, as it means that the creditor is no longer involved (as far as you should be concerned at this stage, anyway). You shouldn’t bother calling your credit card company at this stage. They won’t talk to you anyway.
Get everything in writing.
If you agree to settle your debt, don’t send the collection agency any money until you get a faxed or scanned letter saying that they’ll accept your payment and that the payoff will absolve you of any future legal obligation for that debt. After you get that, you’ll have to send over the money within a day or so, which means it’s not a good idea to agree to a settlement unless you have cash in hand.
When you negotiate with a collections agency, here are the specific things you will want to get in writing:
- The amount you are agreeing to pay back and what it’s for: Paying $2,000 against your principal is a very different thing than paying $2,000 to settle your account. When you agree to pay off a certain amount to a collection agency, be sure that the agreement you get in writingincludes what the payment is for.
- Which debt the payment is for: If you’ve reached this stage, it’s possible you have multiple debts in collections. Or it could be that your credit agency is choosing to be vague. Either way, you’ll want something specific in writing to what debt you’re paying off. The name of the original creditor and account numbers should be accessible to the collection agency. If they can’t or won’t provide that information, at the very least, get a statement saying what the debt was for. Again, be specific. A debt for “Medical bills” is not specific. A debt for “Visit to Dr. Realname on October 12th, 2013” is specific.
- When your payment is due: Some settlement offers will have a set deadline. Others will require you pay them “within 30 days.” Either way, if you don’t pay by the deadline, the offer you make may be voided, meaning all your hard work negotiating may be for nothing. Be sure to get a copy of the deadline in writing to ensure you have proof you paid on time.
- Who you’re paying off your debt to: As stated before, your debt may move from one agency to another. Be sure that you acknowledge in writing who you are paying along with what accounts you’re paying for. If you do everything else right, but accidentally pay the wrong agency, you may end up still owing money and no way to retrieve the payment you made.
- The terms of your account standing after payment: As with the previous section, one of the things you’ll want to negotiate—and get in writing—is the standing of your account once the deal is completed. You may not be able to reverse any negative marks that your original creditor made on your credit record, but you can potentially prevent any new ones.
Debt Settlement Companies
Debt settlement programs typically are offered by for-profit companies, and involve the company negotiating with your creditors to allow you to pay a “settlement” to resolve your debt. The settlement is another word for a lump sum that’s less than the full amount you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings.
Before you enroll in a debt settlement program, do your homework. You’re making a big decision that involves spending a lot of your money — money that could go toward paying down your debt. Check out the company with your state Attorney General and local consumer protection agency. If you do business with a debt settlement company, you may have to put money in a dedicated bank account, which will be administered by an independent third party. The funds are yours and you are entitled to the interest that accrues.
A company can charge you only a portion of its full fee for each debt it settles.Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you another portion of its full fee. If the company’s fees are based on a percentage of the amount you save through the settlement, it must tell you both the percentage it charges and the estimated dollar amount it represents.
The debt relief company also must tell you that:
- the funds are yours and you are entitled to the interest earned;
- the account administrator is not affiliated with the debt relief provider and doesn’t get referral fees; and
- you may withdraw your money any time without penalty.
Get out of debt and be financially stable for 2016
Consumers whose credit card debts have grown out of control, to the point where they can only afford to make the minimum monthly payments, can turn to debtpro for help. We will negotiate with their creditors to accept an amount smaller than the total debt owed, sometimes as low as 40 percent of the debt, a debt solution that can be less damaging to one’s credit record than filing for bankruptcy protection.