How debt settlement works
Debt settlement is a means of reducing or eliminating debt by negotiating a change to the balance owed. This approach is usually only viable for debts that are not secured by collateral assets. Credit card debt is not secured by anything other than a promise to pay, so it is an excellent candidate for settlement. A settlement is accomplished by offering the creditor a fixed amount of cash as full payment with the agreement that they will permanently cancel the unpaid balance.
The motivation for creditors to settle your debt is that some money is better than no money. If your account is delinquent and it’s clear to them that you are unable to make the minimum payments, they may be willing to negotiate a deal with you. If you have some cash or liquid assets available to pay part of the total due, they may be thinking that it’s better to take that cash now and forgive the remaining balance that you owe. If they don’t, they run the risk of that cash disappearing entirely which might leave them with nothing if you become insolvent. Sometimes a bird in the hand is worth two in the bush.
Creditors also want to clear bad debts off their books. Partial payment would require a write-off for the amount forgiven, but it would close the book on your account once and for all. This also eliminates the time and expense involved for the creditor to pursue you for full payment. If that effort fails, they would most likely sell your account to a collection agency, sometimes for a small fraction of the total balance. It makes far more sense for the creditor to attempt a settlement with you for more than they would get if the account were sold.
Video: Debt Settlement
Negotiation Strategy
Your goal is to reduce your debt as much as possible and the creditor’s goal is to extract as much money from you as it possibly can. It’s not unusual to settle somewhere around the middle. However, that is not the place for you to start since the creditor will always assume that you can afford to pay more than what you are offering. Your goal should be to settle somewhere in the range of 35-65% of the amount due, so your first offer might be around 20-25%. If your financial situation is extremely dire, you could reduce that offer accordingly. There is no fixed rule on where you should start and where you will end negotiations. The important thing to remember is to give yourself room to move from your initial position in order to reach a compromise.
Before you enter negotiations, you need to determine what you can afford. You need to be able to raise enough cash to back up any settlement offer that you make. Possible sources include savings, stock sales, equity from your home, and asset sales. If your credit rating has not been damaged, you may be able to get a lower interest rate loan to pay off your credit cards. However, your credit card company will be reluctant to settle your debts if you still have that kind of borrowing power. They are inclined to settle only if they believe they will get less money if they don’t settle.
Nothing counts more during negotiations than patience. If you seem too eager to settle, the creditor is more likely to use that against you and drag out the process. You don’t want to give the other side any more leverage than they already have. Remember, they are in the driver’s seat since you owe them money, not the other way around. Be calm, deliberate, and unemotional in your demeanor at all times, and make your creditor believe that you mean everything you say. You don’t want to give anything away by telegraphing what you might do next. The secret to being a good negotiator is making the other side believe that your position is rock solid and that you are unlikely to move very far from it, regardless of what they do.
Video: How to Write a Debt Negotiation Letter
Closing the deal
You should only agree to a settlement if you believe it is to your benefit. While this is usually a better alternative than declaring bankruptcy, any agreement you make should be one that you can fulfill to completion. If the best settlement you can reach is to knock off 10% of your debt, that isn’t going to help you much in the long run, while bankruptcy would wipe the slate clean. One negotiation technique is to use the prospect of bankruptcy as a ploy to convince the creditor that he should do whatever is necessary to make a deal. Either way, your credit rating will take a hit since both settlements and bankruptcies are reported to the credit bureaus. However, repairing your credit is easier and faster after a settlement if you are able to start paying your bills on time from that point forward. A bankruptcy stays on your record for ten years.
Depending on your particular circumstances, you may want to seek professional help to negotiate with creditors. There is no reason you can’t do this on your own if you are confident and have some experience in similar business dealings. If the stakes are large, and your debt is spiraling out of control, it may be worth the expense of hiring an attorney who specializes in this field. They understand what it takes to close deals and are getting paid by you to produce favorable results. The tradeoff of paying an attorney can be more than offset by a substantial reduction in your total debt. Many attorneys have established reputations that they can use to their advantage in applying pressure and gaining significant leverage with creditors.
Debt Attorneys
Weintraub & Selth
Dan Weintraub
Los Angeles, CA
Phone: 866-435-2704
Law Office of Sheila Gropper Nelson
Sheila Nelson
San Francisco, CA
Phone: 415-362-2221
Perla & Associates
Henry Perla, Esq.
Orlando, FL
Phone: 866-309-4389
Law Offices of Joel A. Schechter
Joel A. Schechter
Chicago, IL
Phone: 866-741-4554
Chad Edward Cos, LLC
Chad Cos
Baltimore, MD
Phone: 866-775-6367
Law Office of Walter Metzen
Walter Mezten
Detroit, MI
Phone: 888-332-8466
Law Office of Gregory Messer
Gregory Messer
Brooklyn, NY
Phone: 866-738-5087
Zingarelli Law Office
Nicholas Zingarelli
Cincinnati, OH
Phone: 866-708-4375
Vanden Bos & Chapman, LLP
Bob Vanden Bos
Portland, OR
Phone: 866-798-2917
Cibik & Cataldo, P.C.
Michael Cibik
Philadelphia, PA
Phone: 866-745-6190
Michael S. Mitchell, PC
Michael Mitchell
Dallas, TX
Phone: 866-740-1998
Cooch & Lapham, PLLC.
Anthony Cooch
Fairfax, VA
Phone: 866-685-9485
Law Offices of David A. Kubat
David Kabut
Seattle, WA
Phone: 866-654-8160
Richard Mestone
Everett, MA
Phone: 866-800-1244
Charles Lilley & Associates, P.C.
Charles Lilley
Denver, CO
Phone: 866-725-0385