- Understand the steps you need to take to negotiate debt settlement successfully.
- How to handle making the lump sum payment.
- What to do if the first debt settlement offer isn’t accepted.
Debt settlement can be a lifesaver for consumers that are deep in debt. Of all the debt relief strategies, debt settlement is the one you can most influence in your favor. It’s not the process or legal issues surrounding debt settlement that you can affect – those are very straightforward, and the documentation required is not complicated. You can, however, use preparation and negotiating skills to lower the amount you pay to settle the account, oftentimes substantially.
The focus here is on the steps you will have to take to settle debts, but from the perspective of maximizing the discount you are able to negotiate. To ensure you settle for the lowest lump sum payment possible, follow these steps in preparing for and negotiating a settlement offer.
Step 1: Prepare for Debt Settlement
In a battle to pay off one’s debts, there comes a time when the tables turn, and all that debt becomes your weapon, instead of your creditor’s weapon. When you have acknowledged that your credit score will most likely suffer damage and have accepted potential impending bankruptcy, power transfers to you as creditors fear that they’ll never see a dime from you. At that point, debt settlement can deliver huge returns; however, you have to prepare early.
You will need sufficient cash to fund a settlement offer. Depending on your total indebtedness and available assets, creditors may ask for 70% or more of the original balance to settle. Sources of cash include the sale of assets, such as jewelry, boats, and collectibles, and withdrawals from retirement accounts, or loans from friends or family.
Dispose of Non-Exempt Assets
You have to be prepared in case the creditors call your bankruptcy bluff and do not accept your settlement offer. If they instead file suit to collect, you have to be prepared to file bankruptcy, or defend their collection efforts by becoming “judgment proof.” The goal is to concentrate your remaining net worth into assets that are exempt under bankruptcy law from seizure by a creditor. Exempt assets can vary by state, but in general, include assets such as your home, work tools, a car for each working adult in the household, family heirlooms, and basic living necessities. Dispose of non-exempt assets so creditors will not be tempted to go for those assets in a civil lawsuit rather than accepting a reduced settlement offer.
Step 2: When You’re Ready for a Debt Settlement Program, Go for Broke
Creditors often prefer to restructure your debt agreement rather than accept less principal to settle. Until you convince them that you can’t make any payments, and that, in fact, you will likely declare Chapter 7 bankruptcy unless you can negotiate a debt settlement agreement, they will only consider the highest settlement offers.
Instead, you can go for broke. Quit paying all unsecured debts. When they call to collect, be polite and explain that you are having financial difficulties, but do not make any statement indicating a willingness or intent to make a payment of any amount. While a creditor has three years in most states to file suit, unless they see non-exempt assets that can be attached, most banks and credit card companies will write off bad accounts after six months and sell the debt at a loss to a collection agency. Making any commitment, even over the phone, to make any payment, restarts that clock – it’s called “re-aging” the loan. If you want the best settlement, don’t re-age the loan; time is on your side.
Step 3: Open Debt Settlement Negotiations
As you near the six-month mark since your last payment on an account, the creditor will become motivated to settle. Contact the company (or start answering their phone calls), ask to speak with a supervisor, and explain your financial predicament and willingness to make a settlement offer.
Your strategy is to make the discussion with your creditor about what is best for you. The issue for you should always whether it would be better to just file bankruptcy. It’s not about how much you could possibly pay them. You are willing to pay a small premium to do the more honorable thing, but the legal fees for a bankruptcy are only a few thousand dollars. Let the creditor make the first offer. Your offer should be very low. Again, during these discussions never pay, or make any commitment to pay, any amount of money, except a final lump sum payment.
Options After An Unsuccessful Debt Settlement
If creditors want more to settle than you are willing to pay, the ball is in their court. Many will take the tax write-off at six months and sell the debt. You can restart negotiations with the new owner of your debt; having bought the debt at a discount, they may be more willing to accept a low offer. Other creditors may choose to sue at some point. You could declare bankruptcy to forestall the suit, or ignore the lawsuit and rely on being judgment proof to frustrate their efforts to collect the damages awarded.
Step 4: Document the Debt Settlement Agreement
The final step is to document the agreement and transfer funds. The contract is very straightforward and surprisingly short. After acknowledging the debt and stating the terms of the agreement, the typical agreement simply includes clauses releasing each party of its rights and responsibilities under the original loan agreement as well as the general clauses found in all contracts regarding procedural and jurisdictional issues.
As you can see, debt settlement is possible but involves a lot of legalities and potential risk if not done correctly. There are many professionals that can help you through the process if you don’t feel confident that you’ll be able to negotiate with creditors or navigate through the legal documents.
If you’re having trouble paying your credit card bills and other unsecured debt find out how debt settlement can help you avoid bankruptcy and become debt free faster.