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If you’ve been in a financial hole, you may want to consider seeking help from a debt settlement company so you can say goodbye to your credit card bills or other debt.
However, consumer protection experts say asking a debt settlement company to negotiate your debt settlement can be risky. Unfortunately, some debt settlement companies can over-promise and under-deliver, possibly leaving you in the same financial hole you’re trying to escape.
As an alternative, you can settle the debt yourself. In fact, DIY debt settlement can work better than relying on a debt settlement company. Part of the reason is that professional debt settlement can be the most expensive and least effective way to clear debt.
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The basics of debt settlement
Debt settlement involves negotiating with creditors to drastically reduce the amount of money you owe. Unlike less dramatic forms of debt relief, like debt consolidation or a debt management plan, with debt settlement you only pay back a portion of the principal you owe.
Say, for example, you are behind on $ 5,000 that you owe to one credit card issuer and $ 5,000 that you owe to another credit card issuer. In order to get back at least some of their money, the card issuers then decide to accept a lump sum payment of 50% of what you owe. So instead of not receiving a dime from you, each creditor receives a lump sum payment of $ 2,500.
Benefits of DIY Debt Settlement
The main benefits of pursuing do-it-yourself debt settlement revolve around the cost. A DIY settlement avoids the fees you might pay to a professional debt settlement company.
A debt settlement company may charge a fee totaling 15-25% of the amount settled. So, if you pay off a debt of $ 10,000 for $ 5,000, you may have to pay fees of up to $ 1,250 or even more.
If you choose to negotiate a DIY debt settlement, you are not giving up your personal control over the timing of the process.
Disadvantages of DIY Debt Settlement
Whether you take on the task yourself or contact a debt settlement company, you could face a tax burden if you achieve a settlement. If a debt of at least $ 600 is forgiven, you will likely pay income tax on the canceled amount.
Another downside to personal or professional debt settlement is that your credit score will drop and the settlement will stay on your credit report for seven years.
And remember, if you decide to DIY, you’ll be on your own. In other words, you won’t have a debt settlement professional or someone else to negotiate on your behalf.
The negotiation process
Here are seven steps you can take as you get started on your debt settlement path.
1. Dig into your debt. Before you do anything else, assess your debts. How much do you owe? Who are the creditors? Is it possible to repay debts without entering into a settlement agreement? Or would it be impossible to erase debts without getting a break on the amount you owe?
2. Do your homework. Go online to find out how creditors (or debt collectors, if creditors no longer handle debt) handle debt settlement. If you can’t find the information online, call your creditors and ask them how they are handling debt settlement. Keep in mind that not all creditors will agree to a debt settlement.
3. Hide money. Telling creditors that you saved money to settle the debt can give you an advantage in negotiating with them. This is because most will want a lump sum payment, although some may be fine with dividing the dollar amount into monthly payments.
4. Prepare to negotiate. Once you’ve done your research and set aside some money, it’s time to figure out what your settlement offer will be. Typically, a creditor will agree to accept 40-50% of the debt you owe, although it can go up to 80%, depending on whether you are dealing with a debt collector or the original creditor. Either way, your first lump sum offer should be well below the 40% to 50% range to leave room for negotiation.
5. Contact the creditor. With your offer in hand, call the creditor. Ask for a manager or the creditor’s “financial aid” department. You may need to call a few times until you end up talking to someone who understands your situation.
6. Put it in writing. Once you and the creditor have agreed to a debt settlement, be sure to get the details in writing. This will help protect you in case any issues arise later.
7. Pay the money. Now that you have the agreement in writing, you need to stick to the agreement. It means making a timely payment (or timely payments if you’ve made a longer-term plan) and paying every penny you’ve agreed to pay.
How to negotiate with creditors
When negotiating with a creditor, try to settle your debt at 50% or less, which is a realistic goal based on the creditors’ debt settlement history. If you owe $ 3,000, aim for a settlement of up to $ 1,500. However, you will begin your negotiations by offering to pay an amount significantly less than 50%, in order to give you and the creditor some room to negotiate.
Be sure to let the creditor know that you have set aside money to make payments, whether it is a lump sum payment or a payment plan. This can give you an advantage in your negotiations. If you enter into a payment plan, ask if the creditor will lower the interest rate on the debt to ease your financial burden. During your negotiations, keep a written record of all your communications with a creditor. Finally, keep your cool and be honest. Being emotional and lying will not help your cause.
Keep in mind that most creditors won’t settle a debt unless you are seriously behind on your payments. Additionally, if you negotiate with the original creditor, they may insist that you pay up to 80% of your past due debt.
How to negotiate with debt collectors
In some cases, a creditor may have turned your debt over to a debt collector. Debt collectors earn money by collecting overdue debts from a creditor, such as a credit card company.
When dealing with debt collectors, be patient. It may take several attempts to get to the type of settlement you are comfortable with. Resist the pressure to agree to a settlement that is not in your best interests. Also ask if the debt collector is prepared to settle the debt through a payment plan rather than all at once, with a single lump sum payment.
Do-it-yourself debt settlement negotiations will almost certainly consume a good deal of your time and energy, and it could take some time to come to an agreement. Ultimately, however, all of your hard work may be worth it, especially if you are able to position yourself for a better financial future.
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Frequently Asked Questions
What percentage of a debt is generally accepted in a settlement?
A creditor can agree to accept between 40% and 50% of the debt you owe, but it can go up to 80%. The original creditor is likely to seek a higher percentage repayment. If you already have debt with a debt collector, they may be more willing to accept a lower amount.
How Does Debt Settlement Affect Your Credit?
Debt settlement can hurt your credit score by more than 100 points and the settlement will stay on your credit report for seven years. Add that to any past due debt you may already have, and your credit may take a long time to recover.
Why is debt settlement considered a last resort?
Debt settlement is considered a strategy of last resort because of the damage it causes to your credit. Other options that require you to pay off the full amount of the main debt – and therefore do not negatively affect your credit score – include debt consolidation and debt management plans.