If you’ve fallen behind in your bill paying we don’t have to tell you how stressful this can be. You’re probably receiving calls from your creditors or even debt collectors. The last thing you might want to do is talk with your creditors but you could negotiate with them, as well as with debt collectors, to improve your situation. Here are the best tips for doing this.

#1. Don’t be a drama king or queen

No matter how annoyed or angry you might be with the person on the other end of the line you need to stay calm. Losing your temper will get you nowhere. If you find you’re on the verge of losing it, tell the customer representative that you need to talk with him or her later and then hang up. If that person is not treating you considerately tell them when you call back you’ll be recording the conversation. This generally works to keep those people on good behavior.

#2. Don’t be afraid to ask questions

If you’re talking with a debt collector who says that you will be sued or that they’ll garnish your checking account if you don’t pay up, ask for specifics. “Just when can I expect to be notified of the lawsuit?” Or “when will you be able to withdraw the money from my bank account?” There’s a good chance that some of the threats the debt collector is making are illegal so the more information you have from him or her, the better.

#3. Have your story ready and stick to it

That customer service representative on the other end of the phone doesn’t want to hear a 30-minute long story with all the details of why you can’t make your payments. However, you do need to advise her or him of your hardship situation and that you’re trying to get caught up. It can be helpful to work out your story before you make that first phone call. It should be no more than a few sentences long. For example you could say, “I’ve had to take a significant cut in pay and can no longer make my payments but I do want to get square with you,” or “my wife lost her job so we have only half as much income. I do want to work something out” or “my interest rates have gone up so dramatically I just can’t keep up any longer but I hope we can work something out.” The important thing is to be truthful and tell all of your lenders the same story. As a very wise person once said it’s hard to remember lies but easy to remember the truth.

#4. Always take notes

Before you pick up the phone make sure you have a pen and paper ready so that you can take written notes when you talk with a customer service representative or collector. Write down that person’s name, when you had your conversation and what it was you discussed. This will both help take the emotion out of the phone call and provide you with a record if there’s ever a dispute about what was discussed.

#5. Decide what you can afford

Again before you make that first call sit down and go over your finances very carefully to determine what you can afford and only agree to realistic amounts. You won’t gain anything if you agree to payments you really can’t afford. It’s usually possible to settle a debt if you can come up with the cash to resolve it. But make sure it’s an amount you can afford. If you agree to a payment plan be sure to understand your monthly payments and the total amount you’ll pay over time.

#6. Keep your bills from going to collection

If you have missed payments or if you’ve been late you may be able to work out an agreement with your creditor before it’s sent to a collection agency. A late or missed payment will damage your credit score but if the account goes to a collection it will result in even more damage. There is a prevalent myth that so long as you’re paying something towards a debt – even as little as $5 or $10 – it can’t be turned over to a collection agency. That’s just not true. And once a debt goes to a collection agency you have no option. You must deal with a debt collector.

#7. Get it in writing

If you are able to get to a payment arrangement or a settlement agreement be sure to get everything in writing before you pay that creditor a single cent. If not, the terms could change and it would be your word against the customer service rep or the debt collector. There have been numerous cases where people have been hounded over balances they believed they had paid off years ago.

#8. Put it behind you

If you pay off an account that’s gone to a debt collector or catch up on an account this will do nothing to improve your credit unless you can get your creditor to agree to remove the late or missed payments from your credit reports. If this is not possible you need to just put the past behind you and start work on rebuilding your credit.

#9. Get some help

If you simply can’t work up the courage necessary to negotiate with your creditors or if you are not able to come up with repayment plans that work for you, you might want to contact a credit-counseling agency for help. These agencies have a lot of experience working with creditors and could help you work out a debt management plan (DMP) that would put you back on track. The best ones of these are nonprofits and charge little or nothing for their services. In fact, your first session with one of these agencies will probably be free.

We probably don’t have to tell you how awful it feels to be seriously in debt. It can not only take a toll on your finances and emotions but also hurt you physically. The stress related to being deeply in debt can actually cause heart disease, diabetes, and asthma and even shorten your life.

What you can do

There are several things you could do to achieve debt relief and one of the most popular ones is debt negotiation. But be forewarned that debt negotiation doesn’t necessarily equal debt relief.

What would debt relief look like to you?

The term debt relief can mean different things to different people. Does debt relief mean becoming completely debt-free? Or does it mean getting your debts under control so that you would not feel so stressed out? It’s important how you define debt relief because this has a very important effect on how you approach debt negotiation.

If your goal is to get your debts under control

There are four principal things that can be negotiated with lenders where you have unsecured debts. These are, of course, debts where you were not required to put up any collateral to secure them and typically include credit card debts, medical debts, and personal loans. When your goal is debt management – to get your debts under control – there are three things you could try to negotiate. The first is a reduction in your interest rates. This can be particularly helpful if you have high interest credit card debts. If you were able to negotiate interest rates of 15%, 19% or even higher down to, say, 12% this would certainly make it easier for you to make your payments.

Second, you might be able to negotiate a sort of timeout during which your payments would be waived for several months. You could use this timeout to get your debts organized and even to catch up on some of your late payments or those you missed.

The third thing you could negotiate is to have your credit card debts converted into payment plans. The advantage of this is that you would then have fixed payments for fixed periods of time after which you would have your debts completely paid off. This would not only help you better manage your unsecured debts but would ultimately lead to debt relief. However, you will most likely have to give up your credit cards, which could seriously impact your financial life.

The best way to debt relief – debt settlement

The fourth option in debt negotiation is debt settlement, which most experts say is the best way to achieve real debt relief. In fact, it could be said that if you choose this option then debt negotiation does equal debt relief.

Lenders will agree to debt settlements only if …

What debt settlement basically means is offering lump sum payments to pay off debts for much less than their balances. As an example of this if you owed $10,000 on a credit card you might offer a lump sum payment of $5000 to settle it. So why, you might ask, would a lender ever agree to this? The answer to this is fairly simple. You must be able to convince your lenders that if they refuse your settlement offers, you will be forced to file for bankruptcy. While lenders such as the credit card issuers never really want to settle debts they do understand that getting 40% or 50% of what you owe is better than getting nothing, which is what they would get if you were to file for bankruptcy.

The best option — hire a debt settlement company

If you believe your best option would be debt settlement you should really hire a debt settlement company. There are several reasons for this not the least of which is that this would get all your creditors and any debt collectors off your back. In addition, your debts will be consolidated, as you will no longer be required to pay your creditors. Instead, you would pay the debt settlement company each month. The check you send the settlement company will likely be a lot less than the sum of the payments you are currently trying to make. You would know precisely when you would be debt-free because your payment plan would have a fixed end date. You would eliminate all the stress in your life associated with your debt problems because they would’ve gone away. Your only obligation would be to make that one payment a month to the debt settlement company and it would assume all the responsibility for interacting with all your creditors. In short, you will have achieved debt relief.

In summary

The net/net is that the answer to the question does debt negotiation always equal debt relief is “no”. It’s possible to negotiate with creditors to get your interest rates reduced or your payments waived. But if your definition of debt relief is to get totally rid of your unsecured debts there is really only one way to achieve this and that’s through debt settlement.

There’s no question about the fact that debt settlement through debt negotiation can be a great way to get debts under control and ultimately paid off. If you’re not familiar with debt settlement it’s where you settle debts by offering lump sum payments for less than their balances. If you’re buried under a big pile of debt then debt settlement could seem like a heaven sent solution. And it can be. But before you rush off to either start negotiating with your creditors or to hire a debt settlement company, it’s important to know the FAQs.

Can all debts be settled?

Debt settlement can’t settle all of your debts. It can be used to settle unsecured debts like medical debts, credit card debts and personal lines of credit. However, it can’t do anything about secured debts such as a mortgage and auto loans as well as certain types of unsecured debts including student loan debts and child support.

How does debt settlement work?

Whether you choose DIY debt settlement or to hire a debt settlement company it works about the same. You or the settlement company contacts your creditors and offers lump sum payments to clear your debts but for less than their balances. Lenders that agree to these settlements will treat them as if you had paid them in full.

Will all my lenders agree to settlements?

The simple answer to this is, no. Not all lenders will agree to settlements. This makes it important that you discuss this with any debt settlement company you’re thinking of using. You need to have a clear understanding as to whether or not all of your unsecured creditors are ones that have a track record for agreeing to negotiate debts.

Would I be a good candidate for debt negotiation?

To be a good candidate for debt negotiation and debt settlement you should owe more than $7500 and be at least several months behind on your bills. You’ll also need to have the money you’ll be required to send the debt settlement company each month per your debt settlement program.

How long does debt settlement take?

It generally takes at least two years to complete a debt settlement program and could take as many as four. Of course, this will depend on the amount of your debt, i.e., the more you owe, and the longer it will take.

How much do debt settlement companies charge?

Some settlement companies will take a percentage of the money they save you. However, the reputable ones charge a flat fee that can be as little as 15% or as much as 25% of your total debt – again depending on how much you owe.

Could I settle my debts myself?

Yes, you could settle your own debts. However, to do this you would need to have the cash available to pay any settlements you are able to negotiate. Lenders such as the credit card issuers are never anxious to settle debts for less than you owe – unless you can convince them that this is their best option. This means you need to be fairly skilled at negotiating.

Will debt settlement have an effect on my credit score?

While no one knows this for sure it is thought that debt settlement will reduce your credit score by around 80 points. This is due mostly to the fact that your debts will not be reported to the three credit bureaus as “paid in full.” Instead, they will be reported as “settled” or maybe “settled for less than full amount” and will stay in your credit report for seven years. However, if you’re so much in debt that you’ve turned to debt settlement your credit has probably already been trashed so the 80-point hit to your score might not be that big a deal.

Is debt settlement better than bankruptcy?

Debt settlement is much better than filing for bankruptcy. For one thing, it shows potential lenders that you did what you could to pay back your debts instead of just walking away from them. Second, debt settlement won’t have as much of an impact on your credit score as a bankruptcy. People who are experts in this area say that a chapter 7 bankruptcy will drop your credit score by anywhere from 200 to 250 points. This would leave you with a score that would make it very difficult for you to get any new credit for two or three years. It could cause your insurance premiums to go up and might make it tough for you to rent an apartment or house. A bankruptcy will stay in your credit files for 10 years during which time it could be very difficult if not impossible for you to buy a house.

Will debt settlement affect my income taxes?

Technically speaking, yes it could have an effect on your income taxes. The IRS says that any settlement that saves you $500 or more must be reported by the creditor as income to you and taxed accordingly. However, many lenders never report settlements to the IRS. Plus, your finances are probably in such bad shape you wouldn’t be paying any income taxes anyway.

Struggling to keep up with your bills? Feel like you’re hip deep in debt and still sinking? This can be very stressful and stress can cause physical problems such as heart disease, arthritis, bladder infections, fibromyalgia and even asthma. That’s right. The stress you’re feeling regarding your debts could even be causing you to suffer from asthma or diarrhea.

One good solution

There are some different options for getting debts under control and paid off. One of the best of these is called debt negotiation. It’s where you contact each of your lenders and attempt to negotiate concessions that would make it easier for you to pay off your debts. But – spoiler alert – the critical word here is negotiate, as you need to be a pretty good negotiator to make any of this work.

Getting started

Debt negotiation is definitely an area where you don’t want to put the cart before the horse. This is a simplified way of saying that you don’t want to start contacting your creditors until you’ve done your homework. What this means is you need to get all of your ducks in a line by assembling all the information regarding your financial situation including your income, debts and assets. You will need to have documentation as to how much you owe to each of your lenders, your balances, due dates and the last time you were able to make payments on any of your debts. The reason for this is that you won’t be able to wring any concessions out of any of your lenders unless you can prove that you’re truly having a serious financial hardship. What negotiation really gets down to for your creditors is losing money and no creditor will be willing to do this unless you can prove beyond a shadow of a doubt that you really do need help.

What can be negotiated

As a general rule you should be able to negotiate on all or virtually all of your unsecured debts but not your secured debts, These are debts such as an auto loan or mortgage where you were required to provide some asset to secure it. Unsecured debts that typically can be negotiated include credit card debts, medical debts, cell phone debts from providers you’re no longer using and past-due utility bills. Collection agency accounts,, past-due rent and even civil court judgments can also be negotiated.

Once you get all of your documents together proving that you are truly having a financial hardship you need to make a list of all of those lenders with whom you believe you could negotiate. You might want to prioritize this list by focusing first on your biggest debt. Next, you need to determine an objective or the concession you want out of each of your lenders. The four most common concessions are:

  • Interest rate reduction
    Waiver of payments
    Conversion of debts into repayment plans
    Debt settlement.

The first of these – getting a reduction in your interest rates – is pretty self-explanatory. The second, a waiver of payments, means negotiating for a sort of timeout of two or three months during which you would not make any payments on the debt. The idea behind this is that this would give you time to get your debts in order and even possibly catch up on some of your payments.

A third concession would be to have your debts – especially your revolving debts such as credit card debts – converted into a repayment plan. This would most likely mean giving up your credit cards but the upside is that you would have both fixed payments and fixed terms so that you would know just when you would have those debts paid off.

However, the fourth option – debt settlement – is by far the most popular. What this amounts to is negotiating a debt down to a lesser amount and then paying it off in a lump sum. The reason why it’s popular is because of just this – that you’re paying off the debt for less than you owe. For example, if you are a very good negotiator you might be able to negotiate a $5000 credit card debt down to $2500 or even less.

The effects of debt negotiation on your credit

Of the four options discussed above there are three that would have virtually no effect on your credit reports or credit score. They are getting your interest rates reduced, converting your revolving debts into a payment plan and getting a few months of your payments waived. However, debt settlement will definitely have an adverse affect on your credit score. While no one with the possible exception of FICO (the credit score reporting company that most lenders use) knows how much it would drop your credit score it’s thought it would reduce it by roughly 80 points. In addition, the fact that you settled those debts instead of paying them off in full will be on your credit reports and will stay there for seven years.

When most people use the term debt negotiation what they really mean is debt settlement. There are other concessions that can be negotiated especially with credit card companies including reductions in your interest rates, timeouts of two or three months during which you would not be required to make your payments and the option to convert the debt into a repayment plan. However, people rarely try to negotiate for these concessions. What they almost always want to do is settle their debts and for less than they actually owe. If you owe more than $10,000 and can’t see any way to get it paid off within two or three years then you could be a good candidate for debt settlement. But if so there are myths about debt settlement you need to understand that might actually shock you.

1. I need to pay someone to settle my credit card debts

This is a myth because you could settle your credit card debts yourself. In fact, you could settle most of your unsecured debts. There’s no reason why you couldn’t contact your lenders and offer to settle your debts by making lump sum payments for less than you owe. However, to do this you will need to be able to prove to your lenders that you have a true financial hardship. This means having documentation showing how much you owe to each of your lenders, the last time you were able to make payments to them, your earnings and budget and your assets. You’ll also need to be a good negotiator and have the cash in hand to pay any settlements you are able to negotiate. Of course, if the idea of trying to negotiate settlements yourself or if you don’t have the cash in hand that would be required to pay for them then having a debt settlement company on your side could be your best option.

2. Anybody can get their credit card balances cut by 50%

The truth here is that credit card companies and even debt settlement companies insist that you have a true financial hardship before they will discuss settlement. If you owe just $4000 or $5000 and are only a month or two behind on your payments, you’re not going to be able to settle your credit card debts for 50% of what you owe nor will any legitimate debt settlement company take your case. Where settlement can be most successful is if you’re temporarily unemployed, have gotten divorced or experienced a severe medical issue. You should also probably owe more than $10,000 and be three or more months behind on your payments.

3. Using a debt settlement company doesn’t cost much

There may be some debt settlement companies that would like you to believe this but it is simply a myth. There are two ways that debt settlement companies charge for their services. The first is by taking a percentage of the money they are able to save you. The second is a flat fee, which can be as much as 25% depending on how much you owe. The better debt settlement companies usually charge a flat fee. This can be better for you because it allows you to know exactly how much its services will cost you before you sign on the dotted line. If you owed, say, $25,000 and the company’s fee was 25%, its services would cost you $6200. That base seem like a great deal of money but if it was able to get that $25,000 reduced to $12,500, you would still come out $6300 ahead. Plus you would be completely debt free.

4. My credit score won’t be damaged by debt settlement

This is actually true in a sense. Debt settlement by itself won’t damage your credit score severely. What will hurt it is all those months you were unable to make your payments. Every time you miss a payment to one of your credit card companies it will report this to the three credit bureaus and will definitely ding your credit score. Beyond this your debts will be reported to the credit bureaus as “settled,” “settlement” or “settled for less than owed” and this will also effect your credit score.

5. Bankruptcy or debt settlement are my only options when I can’t pay

There are actually other options available depending on how much you owe.
If you owe $10,000 or less then consumer credit counseling might be a good solution. Whether you go to a local credit-counseling agency or use one online the result is about the same. You will be given help in creating a budget that would allow you to repay your credit card debts. Or you might be offered a debt management plan (DMP) where your lenders would agree to let you make payments you can afford. Again depending on how much you owe and your credit worthiness you might be able to get a debt consolidation loan. The benefits of this is that you would have two make only one payment a month and it’s almost certain to be less than the total amount of the payments you’re currently making.

6. If I can’t settle my debts they will stay there forever

This is also a myth because there is a statute of limitations on collecting a debt much as there is on most crimes. This varies from state to state but has one thing in common. If you have not made a payment on a debt for some period of time then no one including a. debt collector can attempt to collect on the debt.

7. I’ll be completely out of debt when all the negotiations have been completed

This would be great if it were true but it’s not. There are debts such as student loans, some types of tax debts, judgments, child support, alimony and spousal support that cannot be settled. It’s also not possible to settle secured debts like your mortgage and auto loan.

Are you sick and tired of struggling to pay off your debts? Do you feel as if you were on a gerbil wheel and that no matter how fast you run you’re only able to stay in one place? You could get off that wheel using a strategy called debt negotiation. It’s a way to get debts under control and in some cases even completely paid off. Wouldn’t it feel better if you were in control of your debts instead of your debts being in control of you? To understand debt settlement and how you could use it effectively, it’s important to know these dos and don’ts.

Do understand what debt negotiation is

Debt negotiation is where you contact your lenders and try to negotiate concessions such as a reduction in your interest rates.

Don’t think you can negotiate all debts

Unfortunately not all debts can be negotiated. You can’t negotiate mortgage and automobile loans nor can you negotiate student loans. It’s also not possible to negotiate alimony, child support, spousal support, judgments and some types of tax debts.

Do understand which debts can be negotiated

Debts that can be negotiated include standard credit card debts, personal loans and medical debts. There are other types of revolving lines of credit such as store credit card debts that can usually be negotiated.

Don’t contact one of your lenders unless you have an objective

It’s just not smart to contact one of your lenders unless you have an objective. If you were to call and just plead for help it’s unlikely that you’ll get it. You undoubtedly have different amounts of debt with different lenders. Before you begin contacting them you need to have an objective for each and it may vary from lender to lender depending on how much you owe each of them.

Do understand what can be negotiated

If you have high interest debt, you may be able to negotiate a reduction in your interest rate. For example, if you have a credit card at 19% you might be able to successfully negotiate it down to 12%, which would certainly lead to lower monthly payments. It’s possible to sometimes negotiate a timeout or period of two or three months during which you would not be required to make your payments. This would give you time to develop a plan for repaying them. Third, you could ask that your credit card debt be converted into a payment program. The advantage of this is that you would then have a fixed payment and a fixed term so that you would know when you would have it paid off. Last but not least you might be able to settle the debt, which means paying it off in one lump sum for less than you owe.

Don’t come unprepared

No lender is going to agree to any concession just because you asked politely. You need to have documentation ready proving that you have a serious financial hardship and need help. This means you should have a complete list of your debts with the amount of each, its due date, the last time you were able to make a payment on it, and a list of your earnings and your assets. If when you gather all of this information you find that you can’t prove a serious financial hardship there is probably no reason to try to negotiate with any of your lenders.

Do be persistent

The first time you call one of your lenders you’ll likely end up with a customer service representative whose job isn’t to negotiate with you. You will need to get the name and direct phone number of that person’s supervisor or manager or whoever it is that would have the authority to negotiate with you. This may require several phone calls and a lot of patience.

Don’t try to settle a debt unless you have the cash

Debt settlement can be a great way to get a debt paid off and for less than its face value. For example, in many cases you might be able to settle a debt for 50% of what you owe. But don’t try to settle a debt unless you have the cash in hand to make a loan sum payment. Very few if any lenders will agree to settle a debt unless you can pay it off immediately. In fact, this is one of the best bargaining chips – “settle this debt with me today and you’ll have your payment tomorrow.”

Do understand that not every lender will negotiate

Many of your creditors will negotiate with you. This is usually true of credit card companies, hospitals, clinics and other healthcare providers. However, be prepared to get turned down as some creditors will simply refuse to negotiate. Their goal is to get the full amount you owe, regardless of what it takes. If you find that a number of your creditors refuse to negotiate you may need to look at some alternative ways to pay them off such as a debt consolidation loan, consumer credit counseling or hiring a debt settlement company. These companies have experienced debt counselors with long-standing relationships with almost all lenders and debt collectors. A good one can often get lenders to negotiate that have refused to work with you. Plus, when you use a debt settlement company it eliminates the need to have the money in hand to pay for your settlements, which can be a real godsend.

 

Why has a debt collector contacted you? The reason is simple. You got so far behind on one of your bills that your lender sold your debt to a debt collection agency. This typically happens if you haven’t made a payment for six months or more. And of course the bill in question is probably a credit card debt because that’s where most people get into trouble. The fact is that it’s just much easier to engage in impulse buying with a credit card then when you have to put down cold, hard cash.

The secret that debt collection agencies don’t want you to know

What debt collection agencies don’t want you to know is that when they purchased your debt they paid much, much less than its face value. The way it works is that lenders such as the credit card companies bundle up debts on which they’ve been unable to collect and sell them to collection agencies for pennies on the dollar. You’re $700 debt might have cost the debt collection agency less than $1.00.

Why debt collectors will negotiate

Given the fact that debt collection agencies pay so much less for your debt than its face value you can see how this would give you room to negotiate. In fact, this is why many debt collectors will agree to settle meaning yo will pay less than the total amount that you owe on the debt. If you are able to negotiate a settlement, this will appear on your credit report as negative information but at least it proves that you took responsibility for paying as much on your debt as you could. It will show on your credit report as settled and no longer as outstanding.

How to negotiate with a debt collector

The way that you approach negotiating a settlement with a debt collector is to first determine what you can actually afford to pay. Review your budget very carefully. Never offer to pay more than you can afford. Once you determine how much you can afford to pay then you can begin your negotiations by offering less. Whatever you do, do not give a debt collector any of your bank account numbers, information about where you work or any references.

Once you’ve reached agreement

When you reach agreement on a settlement be sure to ask the collector to remove all negative information from your credit records related to the debt since he received it. While he can’t do anything about any negative information that had been added to your credit file before it was turned over to him he could remove whatever negative information he has added regarding the settlement.
Note: Be sure to wait a month or so and then check your credit reports to make sure that he did remove the negative information.

Put it all in writing

Before you give the collector any money, get the details of the settlement in writing. If there’s big money involved you might want to go so far as hiring an attorney to review the agreement. However, at the minimum your agreement should clearly state how much you have agreed to pay and whether you will pay in a lump sum or over some period of time. It should include when the payments or lump sum is due and how your payments will be made such as with a cashier’ check or an electronic bank transfer. Do not give the debt collector one of your personal checks.

The agreement should also clearly state what concessions the debt collector has said he would make, the conditions that would breach your agreement and what would be the consequences of a breach. Finally, your agreement should include the fact that the collector will report your debt as “paid in full” to the credit bureaus when he receives the settlement money.

When to sign

Carefully review what you’ve agreed to and then sign the agreement. Do not sign it before this. Also, do not sign it unless you understand everything in the agreement. Be sure to make a copy of the agreement for yourself and file it away in a safe place. In some cases the debt collector may refuse to put your agreement in writing. If this happens, you’ll need to prepare the agreement yourself then sign it and send it to the collector’s agency via certified mail with return receipt requested.

If the collector refuses to negotiate

In the event that the debt collector refuses to negotiate with you, you will need to contact the lender that sold your debt to the debt collection agency. Discuss settlement with the creditor and you may be able to work out a decent compromise.

If you don’t feel confident

If you don’t feel good about trying to negotiate with a debt collector you have several options. You could hire a consumer law attorney to handle the negotiations for you – especially if it’s a very large debt. Second, you could hire a debt settlement company. These companies have experienced debt counselors that have good working relationships with all the lenders and debt collection agencies. They are usually able to negotiate better settlements than people can themselves. Of course, their services will cost you something but the money it saves you will cover its fees and you will still save money.

If you haven’t heard of debt negotiation here’s what it amounts to. You contact each of your lenders and offer to make a lump sum payment of, say, 50% of what you owe to settle the debt.

It sounds too good to be true

This is what many people say when they first learn about debt settlement. It’s that “if it seems too good to be true, it probably is.” I mean, how could you ever settle debts for fifty cents on the dollar? Trust us. It’s true. The overwhelming majority of lenders are willing to negotiate.

No lender would agree to this

A second misgiving about debt settlement is why in the world would a lender ever agree to this? Lenders such as the credit card companies are not in business to give away money so why in the world would they agree to settle a debt for 50% of what’s owed?

The answer to this one is a bit more complicated. First no lender will negotiate unless you’re five or more months behind in your payments. Let’s face it. If you’re only a month or two behind there’s no incentive for them to settle with you. They would rather help you get caught up. However, if you’re way behind in your payments this serves as a great motivator for them to settle. Hand in hand with this you need to be able to convince your lenders that if they fail to settle with you, your only option is to file for bankruptcy. And while credit card companies are definitely not in business to give away money they are usually willing to settle for half a loaf.

I could never negotiate with my creditors

The fact is that you could definitely negotiate with your creditors. What you will need to do is get all of your ducks in a line, which means having documentation as to your debts, when you were last able to make payments on them, your budget and assets. If this information “proves” that you have a serious financial hardship then negotiating with your creditors should be a walk in the park. All you will need to do is share this information with them and show them why it’s just not possible for you to continue paying on your debts.

I don’t have the funds necessary to pay off any settlements

We understand that this is a legitimate concern. If you owe, say, $20,000 and could settle those debts for $10,000, you would need to have $10,000 available to pay for the settlements … and if you’re having a big problem with your debts it’s very unlikely you would have this much cash just sitting around.

Fortunately, you don’t need to have the cash available to pay for your settlements. You could hire a debt settlement company to negotiate for you. Professional debt settlement companies have experienced debt counselors that have good working relationships with all the lenders and collection agencies and are almost always able to settle debts for less than people can do on their own. When you choose to use a debt settlement company you’ll send it every month the money you would have used to pay your creditors. As this money accumulates in your account the debt settlement company will use it to pay for the settlements it’s able to negotiate. If when all of your debts have been settled there is not enough money in your account to pay for all of them, you will be offered a payment plan. Assuming you accept this plan you should be debt-free in anywhere from 24 to 40 months – and without ever having to make a lump sum payment to any lender.

Won’t debt settlement damage my credit score?

Debt settlement will damage your credit score though not as much as if you had filed for bankruptcy. However, if you’ve missed payments on your bills for four months or more, your credit has already been trashed so you really have nothing to lose by using a debt settlement company.

Does it cost to use a debt settlement company?

There’s that old saying “there’s no such thing as a free lunch.” And using a debt settlement company isn’t free. Your debt settlement company will charge you a fee but it should pay for itself in the money it saves you. Also, it’s very likely that its fee will be much less than if you were to pay the interest on your credit cards. For example, if you owed $10,000 at 18% and made a monthly payment of $350 it would take you 40 months to clear the debt and would cost you $3,360.44 just in interest. In comparison, if you used a debt settlement company that charged 25% of the $10,000 for its services, it would cost you just $2500 — a savings of more than $1100 versus paying off the credit card debt. While the settlement company’s fee will be added to your monthly payments, it won’t actually take the money until it has settled all your debts to your satisfaction. Hiring a debt settlement company can cost less in the long run than a debt consolidation loan and will get your debts paid off faster than consumer credit counseling.

Being seriously in debt can put a cloud over your entire life. The stress of dealing with creditors and collection agencies can actually cause serious physical problems including heart disease and even obesity. It can literally tear families apart. It can be even worse when people refuse to recognize that they’re in trouble with debt. The old saying is true that denial is not just a river in Egypt.

If you find you’re facing a serious problem with debt one good option for getting it under control and eventually paid off is debt negotiation – or negotiating with your creditors to get concessions that would make it easier for you to repay your debts.

Anyone can do it

The first fundamental to understand about debt negotiation is that anyone can do it. All that’s necessary is to pick up the phone and call your creditors. Most lenders are more than willing to work with people that have a true financial hardship and are trying to do something about it.

Write down your objective

The second fundamental thing about debt negotiation is that before you pick up the phone you need to write out your objective or what you want from each of your creditors. There are four different things you could ask for depending on how much you owe each of them. The first is to ask for a reduction in your interest rate. This can be especially helpful when you have a large amount of debt with one creditor at an interest rate of 17%, 19% or even higher. Get that reduced to, say, 12% and you could find it much easier to make your payments.

A second objective might be to get your creditor to let you skip your payments for two or three months. If it agrees to do this you would then have time to develop a budget and a debt management plan and to save whatever amount of money you would need to catch up on your payments.

Third, you might ask to have your monthly payments converted into a debt payment plan. The downside of this is that your credit card company would likely close your account. However, you would now have a fixed payment at a fixed interest rate for a fixed period of time. You could relax knowing exactly when you would have that credit card debt paid off.

Finally, you could try to negotiate debt settlement, which is where you make a lump sum payment for less than you owe to settle the debt. This could be 50% or even 40% of what you owe. If your creditor agrees to this it would then treat your debt as if it had been paid in full. This is really the only way to get debts reduced as other options such as a debt consolidation loan or consumer credit counseling can’t do anything about the amount you owe. All they can do is help you better manage your debts.

What it takes to settle a debt

A third fundamental in debt settlement is you must be able to prove to your creditor that you have a true financial hardship. This means you must be able to show that you owe a lot more then you could realistically expect to repay in two or three years. You will need a list of how much you owe, the last time you were able to make a payment on your debts, your earnings and assets. You must also be able to convince your lender that if it fails to settle you will be required to file for bankruptcy. And while this might seem contrary to having a serious financial problem you do need to have enough money to pay off the settlement.

Debt settlement and your credit score

Another fundamental about debt settlement is that it will damage your credit score. The damage will not be as severe as if you filed for bankruptcy but it will definitely have a negative effect. No one except FICO, the credit score service that most lenders use, knows exactly how much damage it will do but it has been estimated that debt settlement could drop your score by anywhere from 80 to 100 points. What this translates into is that if you had a good credit score you could end up with a poor score, which would make it more difficult for you to get new credit in the future. And if you were able to get new credit it would likely be low-credit, high-interest debt.

Why debt settlement damages your credit score

The major reason why your credit score would take a hit isn’t due to debt settlement. It’s the fact that you probably missed a number of payments on your debts before choosing debt settlement. The other reason is that while your creditor might treat your debt as paid in full so far as you’re concerned that’s not how it will be reported to the credit bureaus. It will be reported as “settlement,” “settled” or “settled for less than full amount.” This will stay in your credit reports for seven years although its importance will decrease as the years go by – assuming you catch up on your payments and continue to make them on time.