According to the Federal Reserve, credit card debt in the U.S. is at $960.8 billion. Fifteen percent of American households carry over $10,000 in credit card debt alone (source). So, if you are swimming in an ocean of debt, you have company.
But what happens when you are no longer swimming? What if you are sinking instead? If your debts are no longer manageable, you may need to start thinking seriously about some form of debt settlement to get your finances back on track.
Cut Your Debt In Half
The credit card companies know that tens of millions of Americans are living paycheck to paycheck, and they also know that it’s better to get something – rather than nothing – from consumers who default on debts or declare bankruptcy.
One of the great truths in business is that everything is negotiable. When it comes to the balances you owe on your credit cards, the opportunity to negotiate what you actually owe is as great as ever. With a little bit of knowledge and guts, you might be able to cut your balances by as much as 50-70%.
Here’s what professional negotiators at top debt settlement companies are currently seeing.
|Description of Debt||*Estimated Payback %|
|Credit Cards, Department Store Cards||40%|
|Cell Phones (Collections over $750)||50%|
|Apartment Lease Re-letting Fees||40%|
|Medical Debts, Collections||50%|
|Pay Day Loans, Signature Loans||40%|
|Collection Balance Greater than $750 Settlements||40%|
|Collection Balances Under $750 Settlements||85%|
|Debts between $750-$1,000||60%|
|Debts under $750||80%|
* These are “typical” results. The best negotiators have even better percentages on average, but these numbers represent professionals as a whole.
** The circumstances of your financial hardship may play a huge role in negotiations.
What types of debt can be settled by negotiation with your creditors?
Debt settlement is a process by which you negotiate with your creditors to pay less than the full amount you owe. The reason for negotiating with creditors is not merely to get a better deal or to avoid paying your debt. Rather, negotiating with your creditors or with a debt collections agency occurs when you are unable to find a realistic way to pay the full amount you owe.
In a case like this, your creditors may agree to accept less than the total amount owed if it means they will be able to collect at least a part of the debt owed. The idea is that something is better than nothing.
Debt settlement covers unsecured debt. Common types of unsecured debt are:
- Credit card debt
- Department store cards
- Telephone, electric, and other utility bills
- Medical bills
- Unsecured personal loans
- Back rent
Unlike your mortgage or your car loan, unsecured debts don’t have assets your creditor could take instead of payment for your debt.
It is important to note that negotiating a debt settlement with your creditors will affect your credit negatively. Accounts settled in this manner are usually reported to credit bureaus and stay on your credit report for up to seven years.
Can you negotiate directly with your creditors?
No law prohibits you from negotiating directly with your creditors to try to settle your debt. It is also true that there is no law requiring a lender to agree to a settlement.
You do have some rights where debt collection is concerned. For instance, debt collectors are not allowed to call you before 8:00 am or after 9:00 pm unless you expressly permit it. Furthermore, debt collectors cannot contact you at work if they are told verbally or in writing that you are not allowed to get calls at work. Federal and state laws prohibit debt collectors from harassing, threatening, or deceiving you.
This does not mean, however, that a debt collector has to be friendly or go out of his or her way to negotiate a settlement with you, which brings us to the next question.
Should you negotiate directly with your creditors?
Negotiating with your creditors can be a lengthy, emotionally draining experience. Let’s face it. Your creditors are in no hurry to agree to take less than what they are owed. Furthermore, they have no incentive to make the negotiation process pleasant or comfortable for you.
Before making the decision to try to negotiate a settlement on your own, think carefully about how much time, energy, and effort you want to spend on the process. Negotiating a debt settlement is not as easy as picking up the phone and making one call. It involves much more.
What are some tips to help you negotiate your debt settlement?
If you do choose to go it alone, there are some actions you can take to help ease the process. Here are some of them:
Before contacting your creditors, sit down and carefully assess your financial situation. Take into account your income as well as everything you owe. Make a reasonable budget based on what you can afford to pay toward your debt.
Understand all your rights, as well as the rights of your creditors.
Find out exactly with whom you need to negotiate. If your creditor is a large financial institution, for instance, you may have to go through several intermediaries before you find the person with the power to make a settlement agreement with you.
After careful consideration, make what you believe to be a reasonable offer. You do not want to offer more than you can give. However, you also do not want to offer so little that your creditor rejects your offer without giving it consideration.
Accept the fact that you will likely have to go through a lengthy process of making an offer and then to receive a counter offer from your creditor. If you owe more than one creditor, you will have to repeat this process with each creditor as many times as needed until you settle all your accounts.
Do not agree to make any payment before you have a written and signed settlement agreement in your hand. If there is any portion you do not understand, do not sign it without consulting legal counsel.
How does debt settlement work?
Debt settlement is a process in which you offer your creditor less than what you owe to pay your debt in full. For instance, suppose you owe your credit card company $12,000. Because of circumstances beyond your control, you cannot afford to pay $12,000. You may even be hard pressed to pay your minimum monthly credit card bill. If things are really tight, you may be missing payments or making late payments often. With a debt settlement, you could offer your credit card company a lump-sum payment of $7000, with the provision that the credit card company will forgive or erase the rest of the debt and mark your account as paid.
In some cases, your credit card company may agree to this. Why? Simply put, the company may decide that you are likely to default completely on your outstanding balance, which would mean that the company would not be able to collect any of the money you owe without a lengthy and potentially costly legal collections process. Even worse for the credit card company, you might file for bankruptcy, making it highly unlikely that the company will recoup any of the money you owe. It is often the threat of impending bankruptcy that encourages your creditors to work with you via debt settlement.
Something is always better than nothing. Your creditors may decide that the old adage is true: “A bird in the hand is worth two in the bush.” If your creditors are convinced that you will not or cannot pay your full debt amount, they will be more likely to accept pennies on the dollar as repayment. That is the premise of debt settlement.
What is a debt settlement program?
If you do not know how to negotiate on your own behalf or if you just want someone else to negotiate for you, you may choose to work with a debt settlement company. Once you hire such a company, you will be enrolled in a debt settlement program.
Here is how a typical debt settlement program works:
- Your debt settlement company will ask you to stop making payments to your creditors.
- An account will be set up in your name into which you will make deposits. The money that accumulates in the account will be used by your debt settlement firm to negotiate with your creditors.
- Once you have a sufficient amount of money built up in the account, your debt settlement company will begin the negotiation process.
- When your creditors agree on the proposed settlement, your debt settlement company will transfer the funds from your account to your creditors and your creditors will close your outstanding debt account.
This process does not happen overnight. On average, it may take 2 to 4 years for your debts to be settled. However, compared to how long it would take you to pay off the full amount you owe on credit cards by only making minimum payments, 2 to 4 years is a small amount of time.
What are the drawbacks of debt settlement?
Not everything about debt settlement programs is rosy. There are a few disadvantages to this approach. First, your creditors are under no obligation to settle with you for less than the full amount you owe. So, there is a chance that your debt settlement program will not handle all your unsecured debt.
Additionally, debt settlement programs do not handle any type of debt secured by collateral, meaning that you will still owe the full amount for any secured loans. Even when successful, debt settlement hurts your credit because it impacts your payment history adversely. Since your debt settlement company will advise you to stop making payments while they negotiate with your creditors, you will be racking up late fees and penalties, which have a negative effect on your credit.
You may still receive some unwanted calls from collections agencies or creditors until a settlement has been reached. Your creditors may also initiate garnishments to collect amounts due. Lastly, once a settlement is reached, you may be taxed on the amount of your debt that is written off by your creditors. Depending on what that amount is, your tax liability could be significant.
How is your debt settlement amount determined?
Since a debt settlement is negotiated between you or your debt settlement company and your creditors, there are no rules set in stone regarding how much of a settlement you may be able to negotiate. The final amount of your debt settlement is decided between you and your creditors.
Historically, most unsecured creditors will settle for around 30 to 50 percent of the debt. (source) It is important to know this going into your negotiations since you do not want to offer more than actually needed to satisfy your creditor.
How Much Debt is Required to Qualify?
The minimum debt owed to use a debt settlement company varies by company. Some companies require as much as $7,500 to $10,000 in debt, but there are companies that will work with consumers that have less debt. The only issue is that the debt reduction a debt relief company can provide on smaller debts may not justify the fees. Reputable companies will often suggest alternatives, such as debt consolidation and consumer credit counseling for smaller amounts.
Examples of Debt Settlement Agreements
Mary owes $14,000 on her credit card. She is four months behind on payments, which has already affected her credit rating. If she filed for bankruptcy, her score would plummet, but if she only paid minimum monthly payments, it would take more than 10 years to pay off her debt at a total cost of more than $20,000. Mary is able to negotiate a debt settlement agreement for a lump sum payment of $10,000, saving a significant amount of money over the long-term.
John owes $30,000 on a credit card that he would like to settle. He hires a debt settlement company to assist with the negotiations. John follows the company’s instructions, and the debt is eventually settled for $15,000. John then pays an agreed-upon fee (15% to 25%)to the debt settlement company for a total saving of 25% to 35% of the original debt.
How can you negotiate with your creditors for a lower debt settlement?
When you decide to negotiate a debt settlement, there are some general rules of negotiation to remember.
First, you must remember that the process takes time and effort. It would be a rare occurrence to come to an agreement on your first try. Creditors are in no hurry to accept less than the full amount for your account, so you will have to be assertive if you choose to negotiate on your own. While you do not want to be rude, you do want to be firm when discussing your circumstances. Even though you are distressed by your financial situation, try to avoid being overly emotional when you talk with your creditors.
Before you make contact with your creditors, have all your facts straight. Review your monthly expenses and income. Based on that, figure out how much you can reasonably afford to pay your creditors. During the negotiation process, remember that it is your job to get the best possible settlement for you. Conversely, it is the job of your creditors to get the best possible settlement for them. Likely both parties will have to give a little. The trick is to make sure that you give the right amount for your best interests.
What creditors fear the most
The thing your creditors most fear is that you will file for bankruptcy. Thus, it is a good idea to use that knowledge to your advantage. Hinting at the possibility of bankruptcy as a solution to your financial hardship will likely make your creditors pay a little more attention to your offer. The more convincing you can be about the financial hardship you are experiencing, the more likely your creditors are to work with you to find a solution.
Since the average debt settlement ends up at anywhere from 30 to 50 percent, you will want to make your first offer on the low side to give yourself some wiggle room. For instance, if you owe $10,000, you might offer $2000 as a starting point. Your creditor will likely refuse your offer, but you can always work your way up as you make counteroffers. It never hurts to start small.
Can you negotiate a settlement with a debt collector?
Yes, absolutely. You may even have more room to negotiate with a debt collector than you did with the original lender or creditor. It can also help to work through a credit counseling agency, an attorney, or a debt settlement firm. However, you can also do it on your own. If you do, make sure you record your agreement, so the plan and the debt collector’s promises are in writing.
What can you do to settle your debt and save money on your debt management plan?
If you do not have the time, patience, or skill set for negotiating with creditors, you can always negotiate through a debt settlement firm. or a credit counselor. There are significant advantages to doing so.
- Debt settlement companies employ professional negotiators who have experience in negotiating a settlement in challenging circumstances.
- They do not be intimidated by your creditors.
- Debt professionals will not respond emotionally to the situation.
- They will focus on saving you the most amount of money and will bring all their expertise to bear on your behalf.
- If they have been in the industry for more than just a short while, they most likely will already have relationships with major credit card companies and other major creditors.
- They understand fully how the negotiating process works for each creditor.
Once an agreement is made, your debt settlement firm will also ensure that it is put in writing and properly signed and executed by both you and your creditors. This eliminates any legal problems down the road and provides you with added peace of mind.