What is Debt Negotiation
Debt negotiation is the process of reaching a settlement with creditors to pay off a balance of money owed at a percentage of the original amount. These credit balances can be from multiple sources including; medical bills, lawsuits, unsecured credit lines, liens, even utility bills. As a rule, secured debt cannot be negotiated. In cases of secured loans, the property used as collateral will be seized and negotiation will not be an available option for the borrower.
Why Creditors Choose to Negotiate
Be warned that debt negotiation companies offering to reduce your debt by 75% or eliminate your bills are typically scams. No legitimate debt negotiation agency would make improbable claims such as those. It is very true however, that creditors are willing to negotiate and settle debt for less than you may currently owe. This is based on simple mathematics and known potential losses. Of the 1.6 million bankruptcy filings nationwide in 2005, more than 30% of these were made on current debt. This means that the creditors in these cases were forced to write off the debt completely, and collect nothing. For this reason, creditors will work with borrowers in many circumstances when faced with the possibility of collecting nothing. Additionally, once a debt account is sent to collection, an automatic loss of typically 50% or more is made. The collection agencies buy bad debt accounts for a fraction of the price from the original creditor. They then attempt to collect on the account themselves. Bottom line is the creditor will lose some portion in negotiation directly with the debtor, potentially lose is all in a bankruptcy, or lose more than half when selling the debt off to a collection agency. It is in their best interest to negotiate.
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Going into Debt Negotiation
When you have decided to negotiate your debt, you should decide whether you feel like doing it alone or utilizing a credit counselor or debt negotiation specialist. There are plenty of companies online and in the phone book offering to perform this service for you. The truth is you can negotiate your debt on your own, one on one with your creditors. However, for many this can be an intimidating and time-consuming process. If you feel contacting your creditors and informing them of your desire to negotiate your debt will be a significantly uncomfortable situation, get help. Many people also seek out professional debt negotiators in an effort to simply save their own time. It also is probably true that due to their experience and insider knowledge, that they will often provide better results. Keep in mind that you will be paying for this service. Any money you pay will reduce your total amount saved, so decide if this is the best option for your situation.
Negotiating Debt Yourself
If you are ready to negotiate your debt yourself, follow these steps to make sure you are effective. Being prepared in this process will ensure you the highest amount of savings.
- Prioritize: Collect all your bills and prioritize them from the highest interest debt to lowest. The highest interest debt should be negotiated first, regardless of the amount actually owed. The interest is what is really costing you.
Contact Your Creditors: Using your billing information or by going online, contact your creditors via mail. Using telephones can be risky as there is nothing binding when spoken over the phone. Get all your negotiation and settlement agreements in writing. - Explain Your Situation: Briefly explain to your creditors why you are unable to fulfill your obligations regarding the debt in question. Let them know your desire to settle the account and not default on the balance completely. Always be polite and avoid outright threats of not paying anything or filing for bankruptcy.
- Settle the Amount: Decide your tipping point, meaning the point at which you feel you can afford to settle the debt and pay it off immediately. When you reach this amount with your creditor, agree, and request the offer in writing.
- Pay off the Account: Once you have settled, make payment immediately.
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Expectations When Negotiating Debt
On average consumers can expect to reduce their debt, either on their own or with professional help, by 15-40%. This amount will vary depending on amounts owed, length of account, your negotiation tactics, and also with whom you are negotiating. Some companies, such as Discover, are seen as less willing to compromise credit card debt, while others, like Capital One, are generally more amenable.
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