Your Quick Guide To Debt Settlement Negotiation

While it might be difficult to talk about, debt is a common problem in many of our financial lives. You may have missed payments on your credit card or another loan, putting you and your credit score in a less-than-ideal situation. There are options for getting out of debt that can help get you back on your feet – debt settlement could be the right choice for you.

What Is Debt Settlement?

Debt settlement can be thought of as a form of negotiated debt relief. You don’t pay everything you owe, but instead some other amount that you can afford. You (or a third party) negotiate with your creditors or lenders. The idea here is to pay something back for the benefit of your long-term credit prospects while also making it more manageable and avoiding late payments.

If lenders and creditors agree to modified terms or amounts and you successfully pay, this shows up on your credit report as “paid as agreed.” While not as good for your credit as if you had paid your full past-due balance, it’s better than a complete default.

When it comes to debt settlement, you’ll have to contact each of your creditors or lenders. If you’re looking for federal student loan relief, you’ll have to work with the Department of Education.

How Debt Settlement Works

Debt settlement might be a good option when debt consolidation isn’t possible. Settlement also assumes that while you might not be able to pay the full balance, you can put something toward your debt.

Every creditor or lender is going to handle things a bit differently. A credit card company handling unsecured debt is going have a different approach than a lender who gave you a car loan.

In some cases, if you’re several payments behind, you may get referred to a debt collector rather than dealing with your original creditor. It’s best to get a settlement before it goes to collections because the collector has purchased the debt with the idea of getting as much money out of you as possible. They want a return on their investment.

Meanwhile, your original creditor may have more incentive to work with you because they would be selling the debt at a very discounted rate. It may make more sense to work with you, even if they can’t get the full balance. You can work with a debt settlement company or take a DIY approach to negotiating with your creditors.

Debt Settlement Pros And Cons

When it comes to debt settlement, there are benefits as well as disadvantages. We’ve put together a quick table to run through them.

It’s important to note that the impact of any negative credit event – like settling your debt rather than paying the full balance – is going to depend on what your credit score looked like prior to the event taking place.

Alternatives To Debt Settlement

Debt settlement is one option, but it may or may not be the best one available to you. Here are several alternatives:

• Seek credit counseling. Credit counseling goes over your finances and looks at helping you create a debt management plan. The credit counselor will work with you on a roadmap to help you pay off your debt over time. You may be able to work with a nonprofit credit counseling agency.
• Consider debt consolidation. In a debt consolidation, you make the choice to roll all or a large part of your outstanding debt into one larger loan, hopefully at a lower interest rate than you would otherwise get. The very lowest rates for debt consolidation are usually going to come from doing a cash-out refinance of your home, but personal loans are another option that doesn’t require collateral and will have lower rates than credit cards.
• Do a credit card balance transfer. One of the ways credit card companies often attract new customers is by offering to let them transfer the balance of an existing card to their service. During this time, they often offer 0% interest for a period on the transfer balance. This allows someone to pay off their debts during a brief window without incurring additional interest.
• File for bankruptcy. This should be considered a last resort because it has the biggest long-term negative impact on your credit. There are two types of bankruptcy that most people can use. A Chapter 13 bankruptcy creates a debt management plan, but it’s court mandated. You and your creditors have to abide by whatever the court decides. You make the payments over time and if you do everything right, the debt is discharged. A Chapter 7 bankruptcy wipes away all of your existing debt, but it has the biggest negative impact on long-term credit prospects. There are waiting periods to get things like cars and mortgages after bankruptcy discharge or dismissal, but it’ll be longer for Chapter 7 than Chapter 13.

DIY Vs. Professional Debt Negotiators

You can negotiate with your creditors yourself without involving a third party. The big advantage to this DIY debt settlement approach over a debt settlement company is that there are no fees. Depending on the service chosen, these could be as high as 25% of the debt you’re looking to settle.

Although this is no small amount, one thing to consider is that you’re likely under stress when contacting a creditor or lender. That can be a disadvantageous position to negotiate from. Professionals are more likely to look at the situation unemotionally, and may be able to work out a better settlement for you.

Second, working with a company may allow you to have one payment for your settled debt. You make the payment to them monthly, and they disburse it to your creditors. Of course, if you are looking at debt settlement companies, it’s important to do research. There are bad actors out there pulling scams on the vulnerable.

How To Negotiate A Debt Settlement In 6 Steps

There are several steps you can take to negotiate a debt settlement.

1. Decide Whether Debt Settlement Is A Good Option

The first thing to decide is whether debt settlement is the best option for you. Among other options, you could consider debt consolidation or a balance transfer that allows you to pay off the transferred balance with no interest for a period of time.

You should be aware that in making your decisions, you have rights under the Fair Debt Collection Practices Act (FDCPA). This law governs the behavior of debt collectors after they take on the debt from the original creditor. They aren’t allowed to engage in certain abusive practices. The FTC has more information.

2. Determine Terms That Fit Your Budget

The next step is to work out some idea of a plan that fits your budget. While this will be less than the full amount, it’s important to consider the form of repayment you can make. Will this be monthly or will you be doing a lump-sum payment? How will this decision impact your credit in the long term? Can you settle all your credit card debt?

Having an idea of what you might be willing to accept in advance will help you evaluate any settlement offer that comes in.

3. Contact Your Creditors

The next step is to contact your creditors. In most cases, you or a debt settlement professional can do this at a phone number on the bill.

Your lender or creditor will likely want to know something about the nature of your debt struggles before moving forward with negotiating a debt settlement. You may be asked to share bank account information as well as information on your monthly expenses.

Assuming they are willing to work with you, they’ll make a debt settlement offer. You’ll have the opportunity to make a counteroffer and it will proceed like any other negotiation.

4. Get The Deal In Writing

Whether you’re working with your original creditor or a debt collection agency, it’s extremely important to get whatever you agreed to in writing. This includes the settlement amount, but also how they plan to handle reporting it on your credit if you hold up your end of the bargain. This will protect you in the event of any later disputes.

5. Start Making Payments

Once you have a written agreement in place, it’s time to start making payments toward your settlement. The key here is to make sure you keep your budget in shape to be able to keep up with them. Depending on the way your settlement was negotiated, this could be one monthly payment or it could be several.

6. Check In With Credit Bureaus

Once you’ve been making payments for a while, you’ll want to make sure the creditors are holding up their end of the bargain. The way to do that is to make sure that your credit reports match up with what was in your written agreement.

For proactive monitoring, Rocket Money^SM allows you to view your free VantageScore^® 3.0 credit score and report from Experian™ once a month. Of course, there are three credit rating agencies. You can view your other reports at AnnualCreditReport.com.

Debt Settlement Negotiation FAQs

Now that we touched on all the basics, we can address a few other questions you may have around debt settlement negotiation.

What percentage should I offer to settle debt?

This really depends on your financial situation, so there’s not a specific number. However, have an idea of the amount you can afford in your monthly budget – this will hopefully allow you to pay off and stay out of debt in the future. But also remember this is a negotiation. Give yourself room to go up rather than starting at the very top end of your comfort zone.

Can I negotiate with creditors for debt settlement?

You can usually negotiate with creditors on your own for debt settlement. There are also professional debt settlement negotiation companies that you can hire, although they’ll take a fee that’s usually a percentage of your debt.

Is it good to take a settlement offer from a creditor?

Again, whether you should accept any particular settlement is ultimately going to come down to your financial situation. You may or may not get a better deal by going back and forth with offers and counteroffers.

The Bottom Line: Debt Negotiation Can Help, But It Has Caveats

Debt settlement negotiations involve working with your creditors or lenders to pay something less than what you owe, but that you can afford. Although it still hurts your credit in comparison to paying off the full balance, it’s less so than if you completely ignore your debt. There are alternatives to consider like balance transfers and debt consolidation.

You can do the negotiation yourself or pay a company to do it for a percentage of the debt you owe. However, in any case, you should make sure the terms fit your budget, get deals in writing and keep an eye on your credit report throughout.

Looking for more room in your budget? You’re not alone. Sign up for Rocket Money and see how you can use it to negotiate lower payments for various bills and subscriptions.