In a Nutshell: Debt negotiation is a practice that allows a person to pay a lump sum that is typically less than the amount they owe to resolve, or “settle,” a debt. It’s a program that’s usually offered by third-party companies, like Golden Financial Services and also debt settlement lawyers. Debt negotiators can reduce a person’s debt by negotiating a settlement with their creditors. Paying off a debt for less than what a person owes may sound great at first, but debt settlement can be risky, potentially impacting a person’s credit scores or even costing them more money.
Are you struggling to pay off a high amount of unsecured debt? If so, it may be tempting to turn to a debt negotiation service in hopes of reducing the amount you owe, but before you make this rash choice consider all of your options. Debt negotiation services can result in an adverse effect on credit, potential tax consequences, and potentially a person could be left with even more debt in the end.
The following page will help you get a clear understanding of debt negotiation and see the answers to the Most Frequently Asked Questions (FAQs). We will also explain debt validation, potentially a less expensive and faster method of dealing with unsecured debt, medical bills, a repossession, and credit card collection accounts.
How does debt negotiation/settlement work?
The credit card settlement process reduces a person’s debt, by negotiating with the creditor to lower the debt in exchange for a one-time lump-sum payment. The debtor and creditor agree on a reduced balance that will be regarded as “payment in full”.
Debt settlement programs provide clients with a single payment every month. That payment does not get disbursed to the creditors every month but instead goes directly into a “special purpose savings account.”
The consumer has full control over this savings account, but the settlement company can also monitor it. One by one, each debt gets negotiated down and settled for a fraction of the balance. When it’s time to pay the creditor a lump sum payoff (i.e., the settlement amount), the client must agree to the settlement first. After the client agrees, the funds are released from the client’s special purpose savings account and paid directly to the creditor.
On average, within 24-48 months, all debts will get settled and resolved through this type of debt resolution program. Also included in the special purpose savings account are the company’s fees. The debt settlement company earns their fee after each debt gets settled.
Pro-tip to improve credit scores when settling debt:
When negotiating a debt, include in negotiations that the debt needs to get removed from all credit reports as part of the deal.
Is Debt Settlement a Good Idea?
Debt settlement is a good idea ONLY IF:
- it’s a person’s last resort to avoid bankruptcy
- a person can’t qualify for consumer credit counseling or debt validation
- it’s with a reputable debt settlement program that offers lawsuit defense, charges fees only after a debt is settled, explains the plan correctly to consumers, and the company has an “A+” Better Business Bureau Rating and IAPDA certified counselors
- the consumer truly understands the entire process of having their debt settled, including the potential downsides
Should I hire a lawyer for debt settlement?
Certain creditors are more prone to issuing a lawsuit. Like for example, Discover is a creditor that is likely to issue a person a summons to go to court rather than writing the debt off and selling it to a collection agency. Therefore, Discover credit card debt should get settled through a law firm that offers legal protection, rather than put in a validation program.
A debt settlement lawyer knows how to respond to a credit card summons and can often get the debt settled and resolved prior to court. An experienced debt counselor, like the ones at Golden Financial Services, can help you find the right program to ensure you’re successful in eliminating all of your debt through the plan.
Golden Financial Services knows the best-rated debt settlement lawyers in most states (not all) and can help you find the best-rated program based on your specific financial situation and goals. Give us a call for a Free Consultation Today Toll-Free (866) 376-9846.
We make getting out of debt, easy to accomplish and affordable. Debt solutions including settlement, consolidation, validation and credit counseling are a quick phone call away.
Check out this next page: The 10 Best Ways to Quickly Clear Credit Card Debt
How much does debt settlement affect your credit score?
How does settling a debt affect a person’s credit? Settlement programs can result in credit scores going down by up to 100-200 points, but in other cases, credit scores may not be negatively affected at all.
If a person’s accounts have already been sent to a collection agency, in this case, their credit score has already taken a hit and probably won’t go down much more. As each debt gets settled one by one, a person’s credit score could start to improve, but there’s no guarantee on that.
If your number-one concern is to maintain a high credit score, don’t use debt settlement. Consumer credit counseling and debt consolidation are two debt relief options that could improve a person’s credit score.
Does debt settlement really hurt your credit score, compared to paying minimum payments on maxed-out credit cards?
If you have maxed out credit cards and a credit score of 700 or higher, you don’t necessarily have excellent credit. Maxed out credit card debt results in a high credit utilization ratio and that negatively affects a person’s creditworthiness and ability to borrow.
Credit score algorithms base a person’s creditworthiness and ability to borrow on multiple factors, not just your “FICO scores”. If you have a high debt to income ratio, your ability to borrow will be negatively affected by this high debt to income ratio.
In some cases, people are better off taking a temporary hit on their credit score in order to reduce their debt and resolve it quickly with debt settlement. You can reach the finish line a lot faster, meaning, debt freedom, by settling your debt for a much lower amount. After becoming debt-free, you can then start on the path to rebuilding your credit score. Look at the big picture… debt-free in 3-4 years, then rebuilding your credit score within a few years after that.
To qualify for debt settlement accounts must go to third-party collection status, so you will have late and collection marks inflicted on your credit report. Scores can drop significantly, but as each debt is settled and paid, you can gradually begin improving scores. Get a secured credit card and start paying that every month in full! Pay your car or mortgage payment every month on time, and scores will rise. You can recover!
What you don’t want to do is resort to paying only minimum payments for the rest of your life on maxed-out credit card debts, remaining a victim to your creditors. Don’t be a slave to your lenders, as you have the power to make a choice. You can choose a lower payment and a different path than continuing to pay minimum payments for the rest of your life. Debt settlement may be that right path, but this decision is for you to decide. We can only empower you with the knowledge needed to make the most informed choice and accurately compare the pros and cons of each option.
How long does it take to rebuild credit after debt settlement?
Depending on what a person is doing outside the settlement program will affect their credit score. Like for example, are they making current payments on a mortgage or car loan? If a person is making monthly payments on a car loan or mortgage payment while simultaneously completing a debt settlement program, they will end up with a higher credit score faster than someone that’s not making any other “current payments” outside the plan.
Will negotiating credit card debt hurt credit? The answer is “NO”.
The actual “debt settlement program” will not affect a person’s credit score, it’s the adverse payment history that hurts a person’s credit. The fact that you need to fall behind on payments, letting accounts go to third-party collection status, that’s the part that hurts a person’s credit score because of the late marks and collection accounts that get inflicted on credit reports.
There is no specific time frame illustrating how long it takes to rebuild credit scores after debt settlement. Here’s an article that shows you how to raise your credit score quickly.
Just remember, a person must stop making monthly payments on all of the creditors included in a debt settlement program after joining. The reason is that for debt to be able to get settled at a small amount, the original creditor needs first to write the debt off. Creditors “write off” debt to get reimbursed on the debt through tax credits and banking insurance, plus they make additional profit by selling the debt to a collection agency after it gets written off.
What is the best alternative to debt settlement?
Before resorting to debt settlement, consider a debt validation program. Debt validation challenges the validity of a debt. Debt collection agencies often can’t prove a debt is valid, resulting in the debt becoming “legally uncollectible”.
A legally uncollectible debt is one that does not have to get paid, nor can it legally remain on a person’s credit report. A debt can easily get removed from a person’s credit report by disputing it after the debt becomes invalidated.
If a collection agency can prove the debt is valid, which rarely occurs in our experience, in that case, the debt could get settled through a reputable debt settlement lawyer or negotiation program.
For more information on debt relief programs, talk with an IAPDA Certified Debt Counselor FOR FREE at (866) 376-9846.
Here’s a summary of all debt relief programs, including the pros and cons of each.
Other names for debt negotiation
Debt negotiation companies and programs also go by:
- “debt settlement companies.”
- “debt adjusting companies.”
- “debt modification companies.”
- “debt reduction companies.”
- “debt forgiveness program”
Just be aware of the fact that all of these names are the same.
How much does debt negotiation cost?
Debt negotiation companies typically charge a percentage of the amount a person will save on the settled debt, or the fees could be based on the total debt enrolled.
Example of fees based on savings:
$100,000 in credit card debt
Settled at: $40,000
Total fees are 25% (average) of the savings: $15,000
Example of fees based on total debt enrolled:
$100,000 in credit card debt
Settled at: $40,000
Total fees are 15% (average) of the total debt enrolled: $15,000
State laws control how debt settlement fees are charged. Pennsylvania and New Mexico debt settlement companies can only charge a fee based on the savings, while the debt relief laws in New York are completely different. No matter what state a person resides in, federal laws restrict debt relief companies from charging any type of up-front fee. Fees can only get charged after a debt is settled and paid off, and at least one payment has been made to the creditor.
Negotiating with debt collectors (see script)
Negotiating with debt collectors can be stressful. If you plan to negotiate with a collection agency on your own just make sure to take “emotions” out of the picture. Collection agencies are trained to exploit certain emotional triggers in order to scare a consumer into paying.
Pretend that you are negotiating with the collector about someone else’s debt.
Let’s suppose that you owe $4,000 on a debt collection account.
Let the collection agency know upfront, “I intend on filing for Chapter 7 bankruptcy, but I figured before pulling the trigger on BK, I’d make a quick call to see if you’d be willing to settle the debt for an amount that I can afford to pay. See, I’ve recently lost my job and don’t see any chance of getting a new job in the near future, so my income is completely gone at this point. I have $1,200 in savings, and I’d be willing to pay most of this to your firm if you’d be willing to accept this as payment in full“. There is no other money, that’s it, no matter what they say in response (just get that in your head!).
“The bankruptcy attorney has already agreed to reduce his fee for filing BK to $1,100, so if you don’t have the power to accept the deal that I am going to offer you, I totally understand and appreciate your honesty in the matter. Just please let me know so that I can proceed in one direction or the other. Do you have the power to get me the settlement offer accepted at $1,150? If you agree to the settlement at $1,150, that would leave me with $50 in savings, in case some other emergency in my life arises. I could pay this money to you immediately after you put the deal in writing if you agree?”
It is also important to know how much the debt collection agency paid for the debt. Although not all collection agencies will pay exactly the same price, next we will share some averages with you.
How much do collection agencies pay to purchase a credit card debt?
Debt buyers (i.e., collection agencies) purchase debts for an average of 4 cents for every $1 of debt face value. A debt collection agency might pay $80 to purchase a delinquent account where the balance owed is $2,000. Debt collection companies are able to buy debt for such a cheap price by purchasing a package of debts, not just one debt at a time.
Also, the older the debt, the cheaper collection agencies can get it for. That is why with debt settlement, by being patient and not rushing a settlement you can get a better deal.
Debt collection companies purchase these packages without verifying accurate and complete records. Consequently, debt can get disputed and easily proven to be legally uncollectible, where the consumer no longer has to pay it. That’s why before using a debt settlement program, apply for validation.
What percentage of a debt is typically accepted in a settlement?
Since collection agencies pay such a small price for debts, they agree to settle with the consumer for around 40% on average.
Consumers end up paying 70%-75% of their total debt (including settlement company fees) with a debt settlement program. Debt settlement fees average at around 25% of the savings or 15%-25% of the total debt enrolled.
Pros and Cons of each debt relief program
Debt negotiation pros and cons
Next, let’s specifically look at the pros and cons of debt settlement.
What are the pros of debt negotiation?
Settling debt through a debt negotiation company could result in…
- Becoming Debt-free in 36-42 months
- Avoiding bankruptcy
- Stopping collection and creditor harassment
- Simplifying the billing paying process, through flexible payment options
- A single monthly payment
What are the cons of debt negotiation?
1. There is no guarantee a creditor will agree to settle at a certain amount
Not only is there no guarantee that the debt negotiation company will be able to reach a settlement for all debts successfully, but some creditors also won’t negotiate with debt settlement companies at all.
Debt settlement program quotes are based on average settlements that the company has successfully obtained in the past.
2. A person could end up with more debt
Late fees and interest accrue when a person stops making payments on their accounts in order to join a debt settlement program. Consequently, balances will increase over the first year of the program. In the end, late fees and interest get mitigated into the settlement, but if a person cancels the program before completing the settlement process, they could end up with more debt than what they started with.
Also, after a company negotiates a successful settlement, the portion of debt that “gets forgiven” could be considered taxable income.
How to eliminate owing taxes on a settled debt?
IRS Form #982 can help eliminate taxes owed on a settled debt.
“After forgiving a debt, the lender sends the debtor a Form 1099-C indicating cancellation of debt and the amount forgiven. The creditor sends the same form to the IRS at the end of the year. The form reports the amount of debt forgiven as income, which requires you to report the amount as income when you file your tax returns.
Forgiven debt once reported to the IRS is taken as income, and thus it is subject to taxation. Lenders are required to send you the Form 1099-C.
Once Form 1099-C is filed with the IRS, you will have to file the forgiven debt as income which will be taxed when filing your returns at the end of the year. If for instance, you owed $10,000 and your creditor forgives $5,000 then the remaining $5,000 forgone by the creditor will be treated as income and it is taxable.
How you may qualify to be exempt
The Internal Revenue Code gives room for several exceptions where the amount of debt forgiven is not subject to income tax. If you were insolvent before the lender forgives your debt then even if they issue Form 1099-C, you will not be required to pay income tax on the amount forgiven. If your debts are more than your assets, then you are considered insolvent.
What does it mean to be insolvent?
For instance, if you have assets worth $100,000 and debt of $120,000, then you are considered insolvent by $20,000. Therefore if a $30,000 debt is forgiven, which is more than the amount that you are bankrupt you will only be required to pay income tax for $20,000 while the $10,000 is exempted. If the amount of debt forgiven is less than the amount that you are insolvent, then that amount will not be subject to taxable income and you don’t have to report the same as income. ”
3. Debt settlement companies that charge fees and don’t perform
Debt settlement companies can’t legally collect a fee until after a debt gets settled and at least one payment is made on the settlement. However, there are many companies out there that do charge fees before settling debt for their clients. Be careful and only choose a debt settlement company that charges fees after a debt gets settled, to avoid losing money.
4. It could negatively impact credit scores
As we explained above, to use a debt settlement program, a person must decide to stop paying their creditors every month. Consequently, late payments and collection accounts will get reported on a person’s credit report. Even worse, if a credit card summons gets ignored, a person could end up with a judgment hurting their credit score even more.
5. You could end up getting your wages garnished while on a settlement program
“For this to happen, a collection agency must take the debtor to court before the statute of limitations runs out and win a judgment against them. This judgment allows a collector to begin garnishing wages and bank accounts, but the collector must still contact the debtor’s employer and bank to request the money.” Source: Investopedia
As long as you don’t skip court after receiving a summons or fail to respond to the summons, it’s highly unlikely for your wages to get garnished. If you enroll in a reputable credit card settlement program, the plan comes with “lawsuit defense”. An attorney will respond to the summons, helping you get the debt arbitrated and resolved prior to court.
What are the best alternatives to debt settlement?
You can do the following options on your own, before resorting to any program:
Your best alternatives to debt settlement are the debt snowball and avalanche method, two options that can help improve credit scores. You can also pay off your high-interest debt with a balance transfer card or home equity line of credit, eliminating high-interest accounts. Lastly, before using any debt relief program, try negotiating directly with your creditors using the script provided below. If you can’t get out of debt on your own and need a plan, here are your best options to avoid debt settlement.
These are debt relief programs:
As we mentioned above, use debt validation before debt settlement. If your goal is to stay current on monthly payments and avoid any reduction in credit scores, the only program that could help you accomplish this goal is consumer credit counseling.
Your 10 Best Debt Negotiation Alternatives & Ways to Get Out Of Debt
Can you negotiate student loan balance?
Federal student loan debt cannot get settled for less than the full balance. However, federal programs are available (click here to see a federal student loan relief guide). Income-Driven Repayment Plans, like the Pay As You Earn and Income-Based Repayment Plan, could get your student loan monthly payments down to as low as zero dollars per month.
If you’re interested in getting assistance with federal student loan debt, start with this online application.
Private student loans can get settled for less than the full balance owed.
Debt negotiation companies may be able to reduce your debt amount with creditors, but there are no guarantees.
Before you enroll in any debt negotiation program, the Consumer Financial Protection Bureau recommends contacting your state attorney general and local consumer protection agency to check whether there are any complaints on file. The state attorney general’s office can also check if the company is required to be licensed and whether it meets your state’s requirements.
Ultimately, you may find that it’s a better bet to work on your own or with a company that is A+Better Business Bureau (BBB) rated like Golden Financial Services. The first place consumers visit to make a complaint about a debt negotiation company is the BBB. Therefore, if a company has zero complaints in the last year and has been in business for a long time, that’s most likely a reputable debt negotiation company.
How do you qualify for debt settlement?
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