Debt Negotiation Secrets

Debt negotiation has become a popular solution for people who find themselves overwhelmed with credit card debt. The process is generally managed through a debt negotiation or debt settlement company. If you are thinking about negotiating credit card debt, there are several things you should know about the process.  (Find out more about Credit Card Debt Consolidation.)

With debt negotiation, the debtor and the creditor agree on an amount that is lower than the total debt (usually somewhere between 25 and 50% of the remaining balance), and that amount is paid in one lump sum. In most cases, a third party debt settlement company manages the process. Once the debtor has selected a company to use, he or she stops making all payments on the loans that will be included in the negotiation. With the help of a counselor from the organization, the debtor comes up with a reasonable budget that includes a manageable, set monthly total. This amount is paid into a trust account each month until a percentage of the loan amount has accumulated. Once the amount has reached between 25 and 50% of the original loan, the debt negotiation company begins negotiating with the creditors. A reputable company often has strong relationships with the major credit card companies and usually comes to a settlement quickly. Then the amount that has accumulated in the trust account is paid to the credit card company or other creditor and the debt is settled.

Find out more about Freedom Debt Management.

Debt negotiation services charge a percentage of the forgiven debt as a fee for their services, usually around 20%.  For example, if the total original balance was $10,000 and $6,000 of it was forgiven, the debt negotiator would receive about $1,200 in fees from the debtor.

This process is not without its consequences.  First of all, there can be significant damage to your credit.  Because you have to be at least three months behind on payments, that alone will negatively affect your credit report.  In addition, it usually takes 2-4 years to accumulate enough money to pay off a portion of your debt; in the meantime, your credit report continues to reflect your delinquency and thus your score continues to decrease.  Once your debt is paid, it is usually reflected on your credit report as “Paid as agreed” or “Settled”, both of which decrease your credit score.  Some collection agencies are willing to erase evidence of late or delinquent payments upon debt settlement, but this is only effective as long as the debt has been with the collection agency; any delinquency that occurred while the debt was with the original creditor will remain on the credit report. 

Second of all, creditors or collection agencies may still be able to sue you for the loan amount while you are working to accumulate funds. 

Finally, there are tax consequences to debt negotiation.  The IRS considers any forgiven debt of $600 or more to be taxable income.  Therefore, you will be expected to pay taxes on the forgiven debt. 

Despite these drawbacks, debt negotiation may still be a plausible answer for many people.  It is almost always a more favorable solution than bankruptcy, as your credit score will likely recover more quickly even with some delinquency and an account status of “settled” than it would with bankruptcy.  Once you have entered into a debt settlement program, the company you work with often takes calls from your creditors and collection agencies, freeing you from the stress of receiving those harassing phone calls.  And, after the process is complete, your creditors can no longer sue you. Finally, the settlement company may be able to get late fees and charges waived while you are in the negotiation program. 

You may be wondering why creditors ever agree to this process when they may only recover as little as 25% of the original balance.  Remember, however, that people who enter into debt negotiation are already late on their payments and possibly considering bankruptcy.  With bankruptcy, the creditors run the risk of losing all the remaining balance; therefore, when faced with the possibility of retaining at least some of the loan amount, they are often willing to make a settlement. 

If you are faced with overwhelming debt, are unable to use a debt consolidation program, and are considering bankruptcy as your only way out, then it is worth exploring the option of debt negotiation.