Debt negotiation, sometimes called debt settlement, is the process whereby you settle your debts with your creditors for a percentage of what you owe. You avoid bankruptcy and your debt is settled generally for much less than is owed. It takes strong commitment and some perseverance to have the credit companies work with you, but it can be done.
Q1: Is debt negotiation the best alternative?
Ask yourself why you want to negotiate the debt with your creditors rather than enter into a liquidation bankruptcy or debt consolidation program. Can you obtain faster relief through debt negotiation? Do you only have one or two delinquent obligations? Is your credit already so bad that a bankruptcy on your credit report isn't going to do much more damage? Do you have the resources to offer a lump sum payment to rid yourself of the debt and make an immediate settlement to your creditors?
There are no guarantees with debt negotiation. Debt settlement can be risky. Unless your debts are already 90 days past due, most creditor would rather send your accounts to collection than work a deal with you. The longer the creditor holds onto the bad debt, the greater your chances of negotiation before the debt is sold. Creditors don't want to spend additional money chasing payment on bad debt. For example, the filing of a lawsuit for collection of debt requires a filing fee. The creditor would much rather negotiate a debt to conclusion with you than incur additional debt (a filing fee) in attempting to collect.
Q2: Do you have the money to settle?
This is the most difficult thing to assess. Most creditors will give you the largest discount if you have a lump-sum payment available, while others will accept a lump sum payment with a reduced balance on a payment plan. Deciding where to get the cash and is it worth it to spend the money are some of the most difficult questions to ask. We never recommend pulling from a 401k or other retirement account to pay debt. Speak to one of our attorneys before taking such an action.
Q3: Do you understand the tax ramifications of settlement?
Debt negotiation/debt settlement comes with some tax consequences. The IRS requires that for every debt that is cancelled in the sum of $600 or more, you will be taxed on that debt forgiveness as income. What? Put another way, if you negotiate a deal to pay $5,000 on $15,000 worth of outstanding debt, the $10,000 that is written off by the creditor will be income to you in the year written off. You will receive a 1099C to include in your taxes for that year. Is it still worth it to settle? Remember that bankruptcy has no tax ramifications for forgiveness of debt.
Q4: You can negotiate your own debt, but should you?
Creditors are very interested in your ability to pay. If you are confident in your skills as a negotiator, you can work with the creditors without the help of an attorney to negotiate your debt. If you are not prepared for the tough questions, “why can't you pay this in full today, what is your financial condition” you may want an attorney to negotiate on your behalf.
Debt collectors are skilled in collection – it is their livelihood. If you lack confidence to stand up to bullying or are unaware of your rights under the Fair Debt Collection Practices Act, you may be providing valuable information to the collectors unknowingly. Their jobs are to determine where you work, what you earn, where your bank account is located. This information makes it easier to garnish your pay should you be unable to reach agreement on settlement.
Attorney Laura Donaldson also offers debt negotiation for her clients as an alternative to bankruptcy. We are unable to guarantee any stated result. It is impossible to do so as each creditor is different, with varying requirements in their collection efforts. Before negotiating, we provide you with options in the event the creditor is unwilling to negotiate and discuss your next steps.
Q5: How does this help your credit?
In our experience, clients have more than one debt delinquent prior to negotiations. Multiple delinquent notations decrease your credit score.
Bankruptcy is a negative mark on your credit report. Debt negotiation can be a positive move towards rebuilding quickly without the negativity associated with a bankruptcy. Creditors don't care about your credit; they are more concerned about debt collection. Requiring that as part of the settlement your creditor mark the debt as “Paid As Agreed” helps to bolster your credit more quickly.
Q6: What do we consider the most important piece of debt negotiation?
Without a doubt, before making any payment to a creditor on a settled debt, get their agreement and the terms of settlement in writing. This allows you to hold the creditor accountable for their settlement with you. If they ever deny they agreed to the terms, your writing is evidence which can be used in Court to verify the terms of your agreement.
If you would like to discuss negotiation of debt or debt settlement with an attorney, please call our office today at 503-227-3004 to schedule an appointment.