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Debt Negotiation and Settlement: Secrets of Success

Updated on March 17, 2013
"Sometimes I feel like a pelican - whichever way I turn I still have an enormous bill in front of me." . - Edmund Blackadder
"Sometimes I feel like a pelican - whichever way I turn I still have an enormous bill in front of me." . - Edmund Blackadder | Source

What You Need to Know About Debt Negotiation and Settlement

Let me just say at the outset that I am not an attorney, however, I do have substantial experience in dealing with just about all kinds of consumer and business debt. I have successfully negotiated debt amounts to just pennies on the dollar without the aid of an attorney, accountant or my huge, intimidating cousin Guido.

Also - you should pay your bills if you are able. The negotiation techniques in this article are intended for those who cannot afford to pay and need to settle debt in order to avoid bankruptcy or other financial disaster.

As always, check with your local state, region or country for specific laws regarding debt collection. For the purposes of this article, the information in this article applies to U.S. citizens or those residing in the U.S.

It's also important to understand that changes may occur in this area of the law. This information is not intended to replace the work of an attorney or serve as legal advice regarding your particular problem.


What is Debt Negotiation?

Simply, debt negotiation is an agreement made with a debt collector or creditor to pay less than the actual amount of money owed on a bill or debt. Yes, you can pay less than you owe if you know how to negotiate a settlement or make a deal with your creditors.

The good news about negotiating a settlement is that this particular debt will not show up on your credit report as outstanding once the settlement amount is paid off. The credit reporting agencies look at this favorably because you took responsibility to at least settle your debt.


The Down Side of Debt Negotiation

While negotiating a settlement for a particular debt may allow you to pay less, the entire amount forgiven is also reported as income to the Internal Revenue Service (IRS) in the U.S. or other taxing authority if you're not a U.S. citizen. The settlement may also show up as a negative mark on your credit report.



You Can Do This Without an Attorney or Debt Settlement Company

OK, let's say you have run up some medical bills, a credit card or accrued some sort of debt. Anyone to whom you owe money is going to insist that you pay the entire debt owed plus any late fees, penalties and even interest - and maybe they are right.

When they come after their money, you should expect a full frontal assault from these people. They want their money, they are entitled to it and want it now. They will be insistent, pushy, overly-excited and even become angry so prepare for the absolute worst. They may try to push you around verbally and intimidate you.

The pressure and stress resulting from speaking with a threatening bill collector is the main reason people will not negotiate to settle their own debt.

While they may throw everything at you and try to purposely upset you, they are actually restricted by law in the ways they can collect money. Basically, they can ask you to pay, even strongly insist - and that's about it. You have rights. All you need to do is make yourself aware of these rights and know them before you accept another call from a creditor or collection agency.


There is a code of ethical behavior for these debt collectors and most of them in my experience follow these rules.

Some, however, do not follow any rules of conduct and may insult or threaten you with certain things like wage garnishment, contacting your employer, threaten criminal punishment or call you everyday until the debt is paid.

For more information on restricted fraudulent behavior of debt collectors, click here.

The fact is, most creditors and debt collectors will work with you to reach a settlement.


5 Top Tips For Negotiating a Debt Settlement

  • NEVER give your bank account numbers, employment information or any type reference information to a creditor or collector. They typically already have all the information they need.
  • Make your first offer for a bit less than you can actually afford. For example, if you can afford to pay 75%, offer 60%. remember, this is a back-and-forth negotiation.
  • Get all the details of the settlement deal in writing. Have them fax or email a copy before you agree to any settlement. Check with an attorney if you are confused by the details.
  • If a debt collector will not negotiate, contact the original creditor and make an offer to them.
  • Don't manipulate or threaten. For example, don't threaten bankruptcy unless you are seriously considering it as an option.

Step 1 - Make an Overall Assessment of Your Current and Future Financial Situation

Sounds easy enough, right? Get a pen and paper and write down everything you owe, monthly payments, bills, expected ecpenses, taxes, etc. You can't make a settlement to pay off a debt unless you first know how much you can afford to pay. Never make an offer or agree to a settlement you cannot pay. Tell the creditor or collector how much you can afford and don't settle for anything less. Most creditors in my experience will make some sort of an offer before you even ask.


One tool that is very helpful in calculating what you can afford to pay is a debt repayment calculator - Click Here


Step 2 - Make Sure Bad Information Gets Removed

Once you have made contact with the creditor or collector and reached a settlement, you'll want to make sure any and all negative information added to your file by this creditor or collector has been removed form your credit records. Get this in writing as part of your overall agreement. After your final payment, go back and monitor your credit history to be certain the negative info has been removed and the debt is reported as "paid in full."


Step 3 - Carefully Consider the Details of Any Agreement

Make sure the agreed upon amount of your settlement matches what is presented in the agreement documents. Check and double check to make certain all details, terms and amounts are acceptable before signing or agreeing to anything.


Step 4 - Spell Out Specific Payment Details

Make sure the written agreement outlines the amounts to be paid and on what dates, whether a lump sum is to be paid all at once or if payments are to be made over a period of time. You will also want to include details about the form of payments - electronic fund transfer or cashier's check. Do not offer a personal check as payment.


Step 5 - Determine What Constitutes a Breach of Agreement

Determine what conditions will breach the agreement and what the consequences of a breach will be. These terms are for the protection of you and the creditor or collector.


Step 6 - Finally, Make an Offer

After you have all the details in place and you're satisfied, make an offer to pay a percentage of the debt. Most creditors or collectors will accept less than the full amount and are pre-authorized to make such offers. If they come back with an amount that does not work within your pre-determined payment budget, make a counter offer. Continue until you both settle on an agreed upon amount.


Some Final Words on Debt Negotiation and Settlement

I would seriously question any creditor or debt collector who will not put an agreement in writing. If you do run into one of them, simply offer to send a document yourself that outlines all the details of the agreement. It also wouldn't hurt to record any and all telephone, web or email conversations and let them know you are doing so.

This is something you can do yourself if you just get educated on your rights and let the creditor or collector know this. Also, stress to them that this is a business transaction and not personal. You have the upper hand in this negotiation - let them know you will deal with them on your terms, not theirs. Above all, pay any and all debt in full if you are able.

Good Luck!

This information is not intended to replace the work of an attorney or serve as legal advice regarding your particular problem or situation. It may be best to consult a professional.


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