Debt Consolidation Blog

What is debt settlement / negotiation?
Debt settlement / negotiation is the process of negotiating with your creditor(s) to accept a partial balance of the total money you owe on your unsecured debts.

When is debt settlement the right choice?
Debt settlement is an option for someone who is more than 90 days delinquent (behind) with their payments and cannot afford to make their minimum payments on their own or through a Debt Management Program. Most creditors will sell off the debt to collection agencies (“charge off”) after 180 days for pennies on the dollar and write the debts off as losses for tax purposes. Credit card companies typically do not negotiate debt settlement when the debtor is current. Why would they? If you have been paying as agreed, in their eyes, you can afford the payments.
Five steps to settling unsecured debts on your own

Step One: Get organized. Write down a list of all of your creditors with the current amount owed on each account, as well as how far behind you are on payments. Order your credit reports to track possible forgotten debt.

Step Two: Start saving money. Set aside money each month and put it into your savings account. Creditors typically only negotiate if you are ready to pay today! So if you don’t have the money to settle, there’s no point starting the negotiations. Keep in mind that most creditors will settle for about 40 to60 percent of the current balance.

Step Three: Start negotiating. Once you have 40 percent of one of your balances saved, start the negotiation process. Start with a low offer – perhaps 30 percent (or less) of the balance. Low-ball offers will probably be rejected immediately, but it doesn’t hurt to ask. Be calm, clear, honest and convincing. Remember, they’re not required to negotiate with you, so crying, yelling or screaming will not motivate them to help you. In fact, it could make it harder on you. Don’t give up easily. If your creditor denies your request, explain to them why settling would be beneficial for them. Their priority is their bottom line and you must make it clear that the offer is in their best interest. If a suitable agreement has not been reached or your offer has been denied, hang up and call back in a week.

Step Four: Keep good records. It is very important to make sure you keep records of each interaction. Note the date and the details of every phone call. Copy and save any letters you receive or send out. Get the agreement in writing! The biggest mistake one can make is spending time and effort negotiating every little thing and then the company does not do what they agree to. So, once an agreement is reached, get it in writing. Do not pay anything until a written agreement is reached. Sign and date the agreement just as you would a contract. Always send by certified mail.

Step Five: Payment time. First things first… never give them your bank account information, routing numbers, checking numbers, debit card numbers, etc. Pay only with money order or cashier’s check and send by certified mail. Again, only once you have received your agreement in writing!
Understand your rights The more informed you are, the better you and your money will be protected. Contact the Federal Trade Commission, the National Consumer Law Center or your state’s attorney general for free information on what both debt collectors and debt settlement companies, if you choose to use one, can and can’t do in your area and situation. You can also review the Fair Debt Collection Practices Act.

How does a settlement affect a credit rating?
This depends on one’s individual situation or current credit rating. Debt settlement can have a negative impact on your credit in different ways. First is the reporting of late payments. In most cases, a creditor will not agree to settle an account for less than what is owed until they believe they are at risk of not receiving any of the balance. The most obvious indication of that risk is when you begin to miss payments. Missed payments are reported in increments of 30 days to as far as 180. Each 30-day increment further affects your credit score adversely.

The second is the reporting of the account as having been settled. While the account may be closed with no outstanding balance after having been settled, it still reports the fact that the account was settled for less than what was owed. The credit scoring models include this notation in their calculation, lowering your score further. The impact of debt settlement on your credit score is also largely dependent on the current makeup of your credit. Many consumers who move forward with debt settlement have already begun to miss payments, have maxed out many of their credit lines and have seen much of the damage already done. So moving forward with the settlement process would affect someone current with payments more than someone who is already behind with payments and other issues with their credit.

Negotiate your credit rating with the creditor
This is very important as a “paid” collection is as negative to your credit rating as an “unpaid collection.” All your negotiation efforts and cold hard cash will do nothing to rebuild your credit report if you neglect to negotiate your credit rating in the process. If the debt is with a collection agency, ask for it to be removed completely. If they won’t remove the account completely ask for “paid.” It still is a negative mark, because it is a collection account, but it is better than, “settled” or “paid charge-off.”
Beware of the tax man! After you have successfully settled your credit card debts, you and other consumers like you could receive* 1099-C “cancelation of debt” tax notices in the mail. Why? The U.S. Internal Revenue Service considers forgiven or canceled debt as income. Creditors and debt collectors who agree to accept at least $600 less than the original balance are required by law to file 1099-C forms with the IRS and to send debtors notices as well. Taxpayers must report that income on their federal income tax returns. Consumers who receive the 1099-C forms should immediately take them to a tax preparer or tax adviser.
*Source: Internal Revenue Service

Food for thought… Try negotiating at the end of the month. Because debt collectors’ commissions are based on their totals at the end of each month, you may be able to get them to agree to less when it’s close to deadline time.

Disclaimer:
The strategies outlined in this flier may not be suitable for every individual, and are not guaranteed or warranted to produce any particular results. No warranty is made with respect to the accuracy or completeness of the information contained herein, and DebtWave Credit Counseling specifically disclaim any responsibility for any liability, loss or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this flier.

DebtWave Credit Counseling, Inc.

Community Outreach Department
8665 Gibbs Drive #100
San Diego, CA 92123
Phone: (858) 751-2600 option 6
Toll Free: (888) 285-7624 option 6
Fax: (858) 751-2608
education@debtwave.com

Articles on this site have been acquired from a variety of sources. No content on this site should be considered financial or legal advice

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