What is a Debt Settlement Negotiation?
Debt settlement is the process of negotiating the debt you owe with your lenders. When successful, it can give you the chance to pay off a reduced amount. However, it requires expertise to negotiate with lenders effectively, which is why it can be beneficial to consult with a lawyer for assistance.
Read the rest of this article to learn about what debt settlement negotiation involves, how to go about the process, and how a lawyer can help you.
What are Common Debt Settlement Strategies?
There are two main methods of settling debts.
- Principal reduction. This is when creditors agree to accept a reduced amount for the balance that’s owing, which ensures they receive at least some of the payment required.
- Interest rate modification. This method is when the creditor and person in debt negotiate reduced interest rates or completely remove interest charges to make the debt payment more affordable.
How Do You Negotiate a Debt Settlement with Your Creditor?
There are important steps to follow when settling debt with a creditor.
Confirm How Much Debt You Owe
Before you start the process, you should get information about the debt, and creditors are required to send you this information in writing.
This confirms that you really owe the debt and it gives you the chance to dispute the debt if you’re not responsible for it or the amount is incorrect.
Set up a Repayment Plan
You can choose to pay the amount owing in full or ask for a payment plan. Calculate how much is realistic for you to pay, such as by considering your monthly expenses, so that you don’t commit to payments you can’t afford.
Be Wary of Debt-Settlement Companies
Some companies say that they will help you settle your debts, but they overpromise, which can cause you bigger problems. It’s also worth considering that some creditors don’t work with specific debt-settlement companies, so you have to be careful when choosing one.
Before you use a debt-settlement company’s services, check that they’re licensed, as some states require them to be. Another way of ensuring they’re valid is to check with your state attorney general’s office to find out if there is any information about the company, such as in the form of complaints from consumers.
Get the Payment Plan in Writing
When you discuss the payment plan you want to follow, and the creditor agrees on all terms, be sure to get everything down in writing. If you don’t, the creditor might send the balance owing to a collection agency, which could hamper your credit score.
Understand Your Rights
There are certain things debt collectors are, and aren’t, allowed to do when trying to get you to pay off the debt. For example, they are not allowed to bully or harass you. If this is happening to you during the process of debt settlement, you should report it to the Consumer Financial Protection Bureau (CFPB).
Consider the Timing of the Negotiations
For successful negotiations, the debt settlement needs to be favorable for the creditor, which is why timing is important. For example, they’ll likely be more open to helping you settle your debt if you’re about to file for bankruptcy, which would mean they wouldn’t be able to recover any of the debt.
What are Important Things to Know About Debt Settlement Negotiations?
Although settling your debt by negotiating a payment plan with your creditor can help you financially, there are some consequences to know about. These include the following:
- Tax consequences. The amount of money that is forgiven by the creditor will be taxed.
- Credit score consequences. Your debt settlement will stay on your credit report for seven years and it can affect your credit score.
- Debt settlement company costs. If you’re hiring a debt settlement company, you’ll have to pay to work with them on top of the amount of debt that you owe.
- Negotiation failure. Despite your best attempts at negotiating, it might not work.
What Mistakes Should You Avoid During Debt Settlement Negotiation?
To protect yourself and avoid further problems, such as not being able to afford the new debt payments, you should avoid these common mistakes during negotiations.
- You make financial promises you can’t keep. In the heat of the negotiation, you might agree to pay a certain amount of money even though you can’t realistically afford the payments. This is risky because it can cause settlement default, making the debt situation more serious.
- You ignore settlement agreements. As mentioned earlier, it’s highly risky to agree verbally on a debt settlement plan without getting everything in writing.
- You don’t verify the debt. You might take responsibility for the debt without verifying that it’s yours or confirming the amount.
Do You Need a Lawyer for a Debt Settlement Negotiation?
It can be advisable to hire a lawyer if you want to negotiate your debts. This will ensure that you know how to navigate the settlement negotiation in the best way.
Here are specific times when you can benefit from having a lawyer on your side:
- You’re dealing with a huge debt that’s complicated, such as if you’re dealing with more than one creditor.
- You’re dealing with aggressive creditors, such as those who are threatening you.
- You’re unsure of the debt settlement agreement. A lawyer should check it so that you don’t agree to unfair terms.
- You’ve tried to negotiate a debt settlement and it hasn’t been successful.
How a lawyer can help you with a debt settlement negotiation:
- They have the experience to know how and when to negotiate with creditors on your behalf.
- They can stop unfair creditors who harass you, such as by sending cease and desist letters.
- They can review or draft your settlement agreement so that it’s fair, transparent, and legally enforceable.
- They can help you prevent making any mistakes during the negotiation process that can weaken your position.
Do you need to hire a lawyer for a debt settlement negotiation?
Contact a lawyer on ContractsCounsel, an online legal marketplace that connects clients with lawyers who have been vetted on the platform. You’ll work with a skilled lawyer who has years of experience in assisting clients successfully negotiate their debts with creditors, helping to ease your financial burden and reduce your stress.
