Debt settlement is a way of negotiating with creditors to settle debts for less than what you owe, saving both time and money by avoiding negative credit reports. To maximize savings and protect your score, try negotiating directly with the original creditor rather than going through debt collection agencies.
Explaining your financial hardship is vital to making any debt settlement successful, but keep in mind that any forgiven amount may incur taxes upon its release.
Lenders
Lenders make money through charging interest, so they are typically keen to collect at least some of what is owed them from reliable borrowers in need of debt relief. You can negotiate on behalf of yourself to reduce interest rates or create repayment plans with creditors/lenders directly; or use third-party services that specialize in this. It is always prudent when dealing with third-party services – be wary when dealing with them directly and always get any agreements in writing.
Before approaching lenders, gather all relevant documents to help explain your situation clearly and calmly. An abundance of documentation about your financial hardship may convince creditors of its severity. Be prepared to offer a lump sum payment for part of your outstanding balance in exchange for forgiving the rest. Remember that debt settlement may damage your credit rating in future and make financing harder to come by.
Creditors
Creditors are individuals or businesses who lend funds to another company and therefore owe money. Creditors provide companies with financial resources they don’t immediately have access to – providing opportunities to invest and operate even without immediate cash resources. Creditors usually set the terms of debt repayment including repayment periods and interest rates as well as any collateral requirements to secure that debt will be paid back in full.
Debt settlement companies are for-profit businesses that specialize in negotiating debt settlement for clients. Debt settlement companies generally advise their clients to stop making payments on their debt and instead deposit it in a special account until they save enough to pay a lump sum settlement, which could take months or years depending on when creditors charge interest and late fees.
Debtors in debt can seek bankruptcy protection under Chapter 11 of the US Bankruptcy Code in addition to negotiating with their creditors. This option enables debtors to create a reorganization plan which will enable them to pay their creditors on time while protecting assets and preserving operations.
Collection agencies
Debt collection agencies can only collect on outstanding debts with permission from creditors. When lenders believe borrowers lack the means or are unlikely to repay, they typically sell uncollected debt to collections agencies for collection. Borrowers who reach out to a nonprofit credit counseling agency before sending debts into collections may be able to negotiate directly with original creditors before selling unpaid balances into collections agencies; counseling also can assist borrowers in creating budgets and understanding debt relief options like debt management plans or settlement agreements.
Contrary to popular belief, most creditors and debt collectors are open to discussing repayment plans with financially struggling consumers. This is because their motivation lies in fear that original creditor will write off debt as total losses; consumers with disposable savings or willingness to sacrifice other financial goals might even be able to negotiate for a debt settlement amount much lower than their outstanding balances.
Self-negotiation
Self-negotiation involves approaching creditors directly and persuading them to settle your debt for less than it owes. Before initiating negotiations, it is wise to review your finances and ascertain how much disposable income there is after paying essential living expenses. A skilled negotiator should also understand local laws and creditor practices in order to gain leverage during discussions; regardless of your negotiating style- self or professional- the principle of treating others as you would like others to treat you should guide their approach.
Politeness and respect should always be the hallmark of your conversations with creditors, particularly when explaining your financial hardship. Lenders often seek settlement deals that reduce losses for them. If a lump-sum payment is out of the question for you, set aside money in an escrow account as soon as possible to make debt settlement payments. Jackie Veling covers personal loans and debt for NerdWallet; her work has been featured by The Associated Press, Los Angeles Times and Yahoo Finance among other outlets. Jackie earned her BA degree in journalism at Indiana University.
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