Debt Negotiation

About debt settlement.

With debt settlement, you pay less than what you currently owe, with the promise that you will complete payment of the settled amount.

Sometimes, debt settlement can cause more financial damage than good, as it may cause less financial relief than you expected. Sometimes it can be handled by a third-party company, although you could do it yourself.

A debt negotiation aims to reach a mutually agreed-upon settlement with a creditor on a current debt that a borrower holds. To avoid bankruptcy and its serious financial consequences, it is a common strategy used by borrowers who cannot pay off their debts.

Debt negotiation process.

An individual or a company that works on their behalf proposes how debt will be dealt with to the creditor in the debt negotiation process. When the creditor receives and considers the proposal, they will accept, reject or compromise it.

There can be a lot of correspondence between the borrower and the creditor during debt negotiation, as all parties must agree on the same terms. Depending on the circumstances, borrowers and creditors may agree to reduce or eliminate debt or establish a new payment arrangement.

What are the benefits of debt negotiation?

Debt negotiation has some benefits, even though being overburdened is never a good idea. These benefits apply especially to borrowers struggling with their credit card repayments, loan payments, and other financial obligations. For borrowers, debt negotiation has the following major advantages:

• Bankruptcy prevention
• Relieving overwhelming debts
• Debt settlement
• Stress reduction in general‍

A debt negotiation process can benefit creditors as well as borrowers. For creditors, debt negotiation offers some benefits, such as:

• Repaying an unrecoverable debt
• Recovering some of the initial loan amounts
• Establishing a repayment plan with the borrower‍

Risks associated with debt settlement.

There are many risks associated with debt settlement, but it is a convenient option. You must find a legitimate debt settlement company and wait several years to negotiate your debts. If you do it yourself, you may have to pay fees or damage your credit score.

Risks associated with debt settlement.

Debt settlement professionals charge you a lot.

Generally, debt settlement fees vary depending on local and state laws. You’ll pay a fee based on the amount of the debt you want to settle, not on the final negotiated repayment amount, if you seek to settle $50,000 in debt.

Nevertheless, debt negotiation companies are permitted to charge fees only after resolving the client’s debt, according to rules enacted by the Federal Trade Commission (FTC) in 2010.

Working with a debt settlement company or attorney that charges you before your debt settles is not a good idea. Instead, locate a reputable debt settlement professional that complies with regulations.

It may harm your credit score.

You will likely harm your credit score if you settle your debt and resolve it using this procedure. You may have to stop paying on your credit card during negotiations if a debt settlement company asks you to do so.

Consumers still making monthly payments on their bills are less likely to negotiate with lenders and creditors. Your credit, of course, is damaged if you fail to pay your bills.

Most creditors require an account to be delinquent in settling. As the accounts are in negotiation, an individual’s credit score will likely take a hit. This may also result in a lawsuit. A “settled” mark on your credit report may also negatively impact your credit score.

A debt settlement process can take longer than you think.

A debt settlement process can take up to four years to complete. Your attorney or debt settlement company must negotiate with your creditors over time. As your creditors accumulate, it will take longer to repay your debts. Additionally, you will need time to accumulate the funds to settle your debts in a lump sum.

Consider alternatives to debt settlement if you need relief from your debt sooner than you would like. Debt settlement takes time, whether you do it yourself or with the help of a third party. Be patient.

Debts forgiven are taxable.

Having your debt settled may be a relief, but if you owe more than $600 in debt forgiven, you may owe taxes on the $3,000 your creditor forgives you. For example, if your creditor forgives $10,000 worth of debt for $7,000, you will owe taxes on the $3,000.

It is ideally necessary to pay enough money to your debt settlement company to cover applicable taxes. Check the fine print of any agreement you sign to ensure you get everything.

You will only pay taxes in the settlement company’s fee if you pay the remaining debt, the settlement company’s fee, and taxes.

The amount of debt you owe may be higher than when you started.

You may need to stop paying your debt when you begin the settlement process. Interest will still accrue on your debt until the process is complete. It may also result in you accruing late fees and other charges, which could increase your debt.

There may be a problem settling.

Even though some companies agree to settle your outstanding debt, some don’t work with debt settlement companies. You may have difficulty negotiating with your creditor if you’ve agreed to follow the debt settlement company’s terms and have yet to keep up with your payments.

As a result, you may incur more costs and harm your credit further if your creditor pursues legal action.

Are you capable of negotiating your debt settlement?

The process of negotiating a debt settlement on your own can be a time-consuming and difficult one. The more departments you talk to and the more paperwork you have to fill out, the more time you might need to spend on the phone.

A professional debt negotiator can help you negotiate a debt settlement if you need more time. Especially if your financial situation is particularly complex, having an expert on your side can be helpful.

The cost of employing debt negotiation services can be high, and the process is only sometimes guaranteed to result in a better outcome than negotiating on your own.

Bottom line

Despite how appealing debt settlement sounds, there are better options to manage your debt. Settling multiple types of debt could take years, even if they do. Imagine the damage waiting would cause your credit if you had to wait so long.

Debt consolidation, debt management plans, balance transfers, and bankruptcy are other options. Evaluate all your options before deciding, and don’t hesitate to change course if it isn’t working out.