Debt Settlement: Negotiation Process

What Forms of Debt Can be Settled?

If you have overdue medical bills or credit cards, you probably have the highest chance of settling your debt. That’s because these types of debt have no collateral, if you decide to completely default, your lender will have no way of receiving compensation. Large amounts of credit card debt in this country end up being delinquent, and for that reason lenders are often very interested in reaching settlements.

On the other hand, federal student loans are extremely hard to settle. The government has made extremely strict regulations to prevent individuals from defaulting on this type of debt. There are only a handful of different ways you can come to an agreement, and it normally has much higher repayment thresholds than other forms of debt.

Does Everyone Qualify for Credit Card Debt Settlement?

There aren’t specific requirements for settlement applicants. This being said, lenders look more favorably on those who cannot afford to pay their debt. They want to ensure they’re getting the most they can out of the agreement.

What to do If Creditors Refuse to Settle?

The truth is many lenders may refuse to settle – there’s no legal reason they have to reach a settlement with you. Many will hire collectors or lawyers to recoup their losses.

Debt Settlement Companies

Settlement companies are one of the most popular ways to help settle your current debt. They have experience at dealing with lenders, and many may even have connections to your creditors.

Once you reach out to a settlement company, they will put you in contact with one of their credit counsellors. These individuals will assess your situation and attempt to find the best solution possible with your creditor.

Once initial details have been processed, your counselor will enact a settlement plan. You will be made aware of the details of this plan, and decide whether or not you’d like to proceed. Only agree to details that you can feasibly abide by.

The company will either then receive a fee, or a percentage of the settlement amount. This is the price of their services.

Choosing the Right Debt Settlement Company

There are plenty of sharks in the market. You want to make sure you choose the right debt settlement company. The FTC has released guidelines that you should use to ensure your settlement company is legitimate.

The following traits will be present in a reputable company:

Getting Prepared for Settlement

In order to be fully prepared for debt settlement you should immediately begin saving money for an offer. All good settlement companies will provide you with a figure they believe you should be saving towards – make sure you make this a financial priority in your life. You will most likely begin making a monthly payment into a designated account for an extended duration of time. This will be budgeted to your exact requirements. You’ll want to ensure this account is in your name and full insured by the FDIC.

Debt Settlement: The Credit Impact

If you have reached the point that you are contacting settlement companies for assistance, chances are your credit is already significantly damaged. While this may be disheartening, don’t let it prevent you from eliminating your debt.

Discuss with your lender regarding whether they will be reporting the settlement to a credit agency. Settlements often appear for 7 years on your credit history. If possible, ask your lender if they’re willing to report the settlement ‘paid in full’, it can have a better impact on your credit report. Regardless, if you run a tight financial ship after all debts have been paid you will see your score begin to improve.

The Alternatives

Chances are your creditors may not settle. On top of this, there is a chance you will not be able to afford a settlement at all. Don’t worry, you have a few different options:

Will lenders allow me to settle debt for less than the amount I owe?

In short – yes, they will! The debt settlement industry isn’t a myth, you truly can have certain levels of debt forgiven if you come to an agreement with your lender. 

Debt settlement companies across the nation are able to provide their clients with varying levels of success when it comes to settlement. 

The real questions lie deeper in the concept. 1: How much can be forgiven? 2: Is there a catch? 3: How long is the process. 

The amount forgiven and length of process varies depending on the lender and particular situation. 

As for the catch – there can be associated fees and negative implications for your credit history. 

Don’t fall for the catchy advertisements that claim you’ll only pay back a small fraction of your debt. 

While many lenders will reduce your debt by considerable margins, others won’t. In addition, there are other fees to factor into the settlement you accept. 

For example, say you have an outstanding debt of $10,000 that you can’t afford to pay. It can take ages to come to an agreement, which means you will be accruing interest on the current debt you have. 

Hypothetically, if all goes well after negotiating with your lender, you come to agree to payback exactly half of the debt – or $5,000. 

So – what other charges are involved in paying the debt?

• You will have to pay a fee to the settlement company for the forgiven debt, this is often in the range of 25% (in this case, this adds $1,250 to what you owe)
• In addition, the IRS considers forgiven debt to be an income stream, you will have to pay additional tax on the amount (in this case, this amount could be up to $1,700)
• The lender you have come to an agreement will then report your settlement to the respective credit agencies, this will then be present on your credit report for up to 7 years. 

The total debt could come to $7,950 and destroy your credit report.