When you’re neck-deep in credit card debt and have no way to pay, it’s easy to assume that you’re out of options. That’s not necessarily the case, however. While much depends on the amount you owe and how many days past due your account is, there are a few different strategies that you might want to pursue – including debt settlement.
Debt settlement is a way to satisfy your agreement with a credit card company by submitting a one-time payment for a portion of what you owe in return for them forgiving the rest. Don’t be mistaken, though: Debt settlement isn’t just a sneaky way to avoid paying your full balance despite having the financial resources to do so. Banks and debt collection agencies only consider debt settlement to be a “something is better than nothing” proposition and therefore won’t even entertain the idea unless you’re already in default.
You can learn more about your eligibility for debt settlement by checking out our Debt Settlement Guide, but if you’ve already determined that it’s an option you’d like to pursue, you’ll need to decide between embarking on a Do It Yourself (DIY) debt settlement and hiring a company to represent you in the negotiations.
The following information can help you make that decision as well as learn how to conduct a successful debt settlement negotiation if you ultimately choose to handle the process directly.
There are a few different types of companies that operate in the debt settlement space, including non-profit consumer advocacy groups, law firms, and a range of debt repair services. Not every company touting an ability to work wonders on your debt situation can actually follow through on that promise, however.
Predatory debt settlement companies have become a major issue in recent years, as their prevalence has grown in direct accordance with the rising number of severely indebted consumers looking for a way out. According to a report published on the Federal Trade Commission website, “The debt settlement industry has been hampered by an increasing number of fraudulent companies that have taken advantage of vulnerable consumers. Today, hundreds of debt settlement companies function in an under-regulated environment, leaving consumers prone to fraud and abuse.”
More specifically, debt settlement companies have become infamous for a variety of different unsavory practices, including:
- Focusing more on getting new customers to sign up and pay fees than actually helping existing customers.
- Failing to properly disclose account terms.
- Conflict of interest issues.
- Charging fees of around 30% of what’s owed before even beginning any work.
- Embezzling consumer payments that should be put in escrow until submitted to the creditor.
- Guiding customers to default and ruined credit without their knowledge or direct consent.
- Promising wildly unrealistic results.
What’s more, there’s typically very little that a debt settlement company can do to improve your financial situation that you can’t handle yourself.
Debt settlement companies can’t minimize the credit score damage resulting from past due debt; you have to be in default to be eligible for debt settlement, and the damage will already be done by that time. They likely won’t save you any money either; creditors won’t forgive more than a predetermined amount of debt, and most debt settlement companies charge for their services.
The only things that debt settlement companies may bring to the table are industry connections and objective negotiating skills. These potential positives typically won’t outweigh the disadvantages of hiring a debt settlement company, which is why many folks decide to handle debt settlement negotiations themselves.
While debt settlement companies understand the specific nature of the process by virtue of the fact that they’ve gone through it a number of times and are able to remain objective during negotiations since it’s not their money at stake, those are both hurdles that you can overcome when embarking upon the do it yourself debt settlement process. Extensive preparation is the key to putting yourself in the best possible situation to achieve a positive result.
- Research, Research, Research: As with any negotiation, a certain level of foundational knowledge is necessary to achieve a beneficial debt settlement. You’ll need to understand the options at your disposal, how debt settlement works, what your bank can and cannot realistically threaten during negotiations, and how different actions may impact your liability in order to negotiate confidently and ensure that you aren’t intimidated into a bad deal.
- Figure Out What You Can Afford to Pay: In addition to shoring up your credit card debt knowledge base, your pre-negotiation research must include a thorough audit of your financial situation. In other words, how much do you owe across all of your credit card and loan accounts, how far behind are you on payment, and how much disposable income do you have? You can then use this information to identify the maximum lump-sum payment that you can afford to make. This figure will be extremely important during your negotiations.
- Withhold Payments & Begin Saving: Continuing to make payments on already-defaulted debt is the last thing that you want to do when preparing for settlement negotiations. This will simply extend the statute of limitations on amounts owed as well as tell your creditor that you can still afford to pay – neither of which is good. Instead, you should place your would-be payments in a bank account in order to build-up a nice lump-sum amount that you can offer to your creditor as a potential settlement.
- Evaluate Alternatives: In order to maximize your debt settlement savings, you’ll need to have a few other backup plans that you can at least reference when dealing with a creditor. Being able to knowledgeably discuss the possibility and implications of bankruptcy, using your funds to pay off another debt obligation, etc., will hopefully scare the creditor enough to accept a decent offer. You may even want to schedule a free consultation with a bankruptcy attorney, as this will certainly beef up your knowledge base.
- Make a Plan: You should never enter any negotiation without a well-defined plan. When it comes to debt settlement discussions, you’ll need to determine an ideal settlement amount, the maximum settlement you can afford to make, how quickly you’ll be able to pay, and what assurances you’ll need from your creditor in order to finalize an agreement.
It’s best to compile your background information, financial records, and plan of attack in a folder that you can reference when dealing with your creditor. Armed with that information, you can begin the debt settlement process in earnest.
- Leave Emotion at the Door: Before calling your bank’s customer service department, take a second to collect your thoughts and remind yourself how important civility will be to achieving a positive result. Allowing your emotions to get the best of you (which is understandable in this type of situation) will only be counterproductive and may even lead your creditor to pursue legal options with additional gusto.
- Start Low, But Be Realistic: This is negotiating 101. Your starting bid shouldn’t be your final bid not only because your creditor will likely counter it, but also because you want to at least give yourself a shot at a more favorable deal. Your starting bid shouldn’t fall outside the realm of possibility either, as this may lead your creditor to dismiss your offer and end the negotiations right away.
- Leverage Alternative Options: If your creditor isn’t amenable to your initial offer, submit a counteroffer and make it clear that you are prepared to explore alternatives such as bankruptcy if you are unable to reach a settlement agreement.
- Don’t Exceed Your Maximum: It’s common for consumers who are seeking a DIY debt settlement agreement to succumb to pressure from their creditors and agree to make a lump-sum payment that they cannot afford. Failing to abide by the terms of a debt settlement will only anger your creditor and increase the odds of a lawsuit.
- Get an Agreement in Writing: When you ultimately agree to a debt settlement agreement in principle, it’s vital that you forgo submitting payment until your creditor sends you a signed debt settlement letter that clearly lays out the terms of your agreement. This letter should detail the amount you’ve agreed to pay, the date by which you are required to submit payment, and assurances that your creditor’s demands have been satisfied in full as long as you abide by the terms of your agreement.
After a signed debt settlement letter is in place, all that’s left is to uphold your end of the bargain by submitting full payment by the required due date. Once you’ve done that, be on the lookout for a letter from the IRS explaining your tax liability for amounts forgiven (it’s considered income) and then review your credit reports a few months later to make sure changes to your account are properly reflected.
“Inexperienced negotiators should inform themselves of their legal rights and the negotiating norms before plunging in solo. They can do this by consulting a lawyer. Or, some court/bar programs have free legal advice (and even representation) for debtors.”
– Lela Porter Love – Director, Cardozo Mediation Clinic, Benjamin N. Cardozo School of Law
Ultimately, do it yourself debt settlement is a popular option among indebted consumers, as there is very little unique benefit that a debt settlement company can garner. In most cases, you must already be in default for a creditor to even consider debt settlement, and certain parameters dictate the amount they’ll be able to forgive.
So, determine how much of your debt you can afford to pay in one lump-sum, negotiate with your creditor without exceeding your maximum payment amount, and strive for a deal that satisfies your debt while eliminating the threat of a lawsuit. If you can’t reach a mutually-beneficial agreement, it may be time to seriously consider bankruptcy or simply try to wait out the statute of limitations on your debt and hope you don’t get sued.