How Debt Negotiation Works
Yara Zakharia, Esq.
It is often said that in life, one should never settle for less. For borrowers confronted by an avalanche of consumer debt, however, the converse of this motto holds true. Stuck between a rock and a hard place, a significant number of fiscally-challenged Americans are capitalizing on the palatable offer of a debt settlement to achieve financial solvency and regain a debt free life. Also referred to as debt negotiation or debt arbitration, debt settlement enables borrowers to tackle their mounting bills and satisfactorily resolve their monetary concerns. With the exception of bankruptcy, this debt relief method allows consumers to save thousands of dollars in principal and interest payments and to climb out of debt in the shortest period of time. With the U.S. public debt topping $9 trillion, debt negotiation is a breath of fresh air to those in need of immediate relief in the pocketbook.
The debt settlement process involves negotiating a reduction of the outstanding balance due or a lump sum payoff of the latter with one’s unsecured creditors. Generally, ideal candidates for debt negotiation are individuals who are experiencing financial hardship due to a significant decline in income that has adversely impacted their ability to pay their bills in a timely manner and placed them at higher risk for bankruptcy. Debt settlement is appropriate for businesses or consumers faced with an unsecured debt that usually exceeds $10,000 and are struggling with paying the minimum amount due on their statements and/or whose account is in default. Credit card companies will usually accept less than the sum owed if the borrower has been delinquent in his or her payments over the last three months or is unable to satisfy the minimum amount due on a debt consolidation payment plan. Since the filing of bankruptcy completely wipes out unsecured loan debt, thus leaving the creditor with zero dollars, lenders opt for a debt settlement in order to recoup a significant chunk of the amount owed. Debt solutions such as debt negotiations are only applicable to unsecured debt, which include 1) credit cards, 2) bounced checks, 3) student loans, 4) personal loans, 5) store cards, and 6) medical bills.
When attempting a debt negotiation, a piecemeal approach generates more satisfying results and yields greater savings. The settlement offered by the creditor will hinge upon the borrower’s outstanding balance, history with the lending institution, and credit rating. It is recommended that consumers first tackle the debt with the highest rates of interest. Once this first debt is negotiated, it is removed from the borrower’s credit report, thus improving the latter’s credit score and enabling him or her to be in a more advantageous position to negotiate the second debt.
Both short and extended payment plans are available through the different creditors in the marketplace. For wiping out more substantial credit card debt, many lending institutions offer borrowers short payment plans which typically range from three to six months. Debt reduction or debt management companies and debt relief professionals such as bankruptcy lawyers usually set up debt settlement plans of longer duration- lasting anywhere from 12 to 48 months.
Debt negotiation offers borrowers numerous benefits, including the following:
- Reduction of credit card debt by 50% on average and up to 75% in some cases
- Significant reduction in interest charges (up to 90% in some cases)
- Single, convenient payment for all bills
- Avoidance of bankruptcy
- Cessation of collection calls and creditor harassment
- Improvement of debt to income ratio
- Debt elimination in 1 to 3 years or less
- Substantial diminishment of monthly payment
- Absence of notation in the public record (unlike bankruptcy)
Upon fulfillment of the debt obligation, the lender informs the credit reporting agencies that the debt was “Satisfied in Full”, “Fully Paid”, or “Settled for less than the full amount”. Although a debt negotiation may be undertaken by borrowers themselves, it is more beneficial for them to have a debt management professional negotiate on their behalf. Professional debt negotiation services are familiar with the types of arrangements that different creditors are willing to accept and have the expertise and resources to obtain the most favorable settlement for their clients. After a negotiated settlement is reached, the debt negotiation firm disburses the payments to the creditors. Borrowers should consider utilizing the services of a debt settlement service if 1) they have multiple lenders, 2) they owe a large amount of debt, and/or 3) their debt has tax consequences or is tax-related. To find a debt negotiation and arbitration professional, consumers may consult the following sources: 1) a credit counseling service, 2) the internet, and 3) attorneys or the local bar association.