From Entrepreneur.com: In general, the best choices for debt negotiation and settlement are unsecured loans and credit cards. Since there is no collateral that can be attached to satisfy the debt, creditors are more likely to negotiate to avoid writing off the entire debt.
The two most common approaches for debt negotiation are to pay a lump sum that is less than the total amount owed, or to restructure the payment schedule with lower monthly payments.
With the first option, you negotiate a reduced, upfront payment that permanently cancels the entire debt. Many creditors will only accept this approach because their goal is to erase the debt from their books without having to wait an extended period. If you are already struggling with your current debts, it may be difficult to raise the cash necessary to accomplish this. In which case, you might consider the second option to reduce the principal and possibly stretch out the payments.
Many companies specialize in debt negotiation and settlement assistance. While some of them are very reputable and do achieve results, with some advance planning and strategic thinking, you can do the negotiating for yourself.
Contact the creditor and ask to speak with a manager authorised to negotiate. Briefly explain your circumstances, and make an appointment for a personal meeting if geographically feasible. A face-to-face meeting demonstrates that you are serious about resolving your problem, and allows you the undivided attention of the person you are dealing with. It's also a good idea to take notes of all conversations. Sign and date all your notes.
Do not threaten to close your accounts if you are having trouble paying your bills. You will be perceived as someone who has shirked responsibilities and opted for the easy way out. Deal directly and openly with your creditors in order to find a mutually acceptable solution.
Your first offer should be less than you are willing to pay, to allow room to manoeuvre and counteroffer if necessary. With the prospect of rising defaults due to a faltering economy, creditors are more likely to deal.
Many creditors sell delinquent accounts to collection agencies, usually for a fraction of the account value. All the agency needs to do to turn a profit is to settle for something slightly above the amount they paid for your account. Be patient and firm, and resist the temptation to raise your offer during the negotiation process. You can ask that the collection be removed from your credit file as a condition of settlement, but that will not erase the detrimental impact of the original creditor.
Unsecured creditors face the risk of getting nothing if you decide to declare bankruptcy. While there is no way to predict what each creditor will accept in lieu of full payment, your target should be to pay one-third to two-thirds of the outstanding balance, depending on your particular circumstances. Many creditors will be very tempted to accept a 50-50 split as the final settlement, even if it takes a few counteroffers to arrive at that conclusion.
Settlement is a quick and efficient means of reducing your debt load by effectively eliminating a portion of your remaining principal. If you are making the minimum payments on a credit card, settlement also saves you the significant interest charges racked up every month and achieves finality without destroying your ability to secure new credit. Delinquencies on your accounts will damage your credit score, but they also increase your leverage to negotiate the best deal. The further behind you are in your payments, the greater the risk assumed by the creditor.
You can request your credit file be updated to reflect that the debt was settled in full once a settlement is achieved. Unlike a bankruptcy that stays on your file for 10 years, a settlement is viewed as a temporary condition designed to get you back on track with your finances. A bankruptcy makes it extremely difficult to get any new credit and the stress and social stigma can be lasting.
One disadvantage to settlement is the possibility of the canceled portion of your debt being reportable income for tax purposes. It's not worth negotiating a settlement unless the amount forgiven is more than enough to cover the additional tax. Consult your tax advisor regarding tax implications, and to determine if you qualify for the IRS insolvency rules.
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