Debt Settlement Negotiations: A Do-It-Yourself Guide
You negotiate directly with your creditors in order to settle your debt for less than you owe using do-it-yourself debt settlement.
The method is most effective for loans that are already past due. When creditors see a pattern of late payments, they may be willing to negotiate a settlement because a partial payment is preferable to no payment at all.
Debt settlement is an option if you’re at least 90 days behind on your payments, but it’s more possible if you’re five months or more behind. However, because you must continue to miss payments while negotiating, your credit may suffer, and there is no assurance that you will reach an agreement.
There are more effective strategies to manage your debt than debt settlement on your own. If you decide to proceed, you may find that handling debt settlement negotiations yourself is a better option than using a debt settlement business, which can be costly and useless.
Here’s how DIY debt settlement stacks up against hiring a debt settlement firm, as well as how to negotiate with creditors on your own.
DIY debt settlement vs. debt settlement companies
The primary differences between debt settlement through a corporation and debt settlement done on your own are time and expense.
Advertisements for debt settlement organizations promise that they can help customers lower their debt by up to 50% and get them out of debt in as little as 36 months.
With DIY debt settlement, you might be able to receive faster results. According to debt settlement coach Michael Bovee, while completing a plan through a company can take two and a half years or more, you may be able to settle your debts on your own within six months of becoming late.
According to the Center for Responsible Lending, once you agree to a negotiated settlement and make at least one payment to the creditor from an account set up for this reason, you’ll likely pay a fee of 20% to 25% of the enrolled amount to a debt settlement company.
You’ll almost certainly have to pay setup and monthly costs for the payment account as well. On top of the cost taken for each resolved debt, you might pay upwards of $330 over 36 months if you pay $9 a month to administer the account plus a $9 setup fee.
Debt settlement firms might also have varying success rates. Since 2014, the Consumer Financial Protection Bureau has received over 330 complaints about debt settlement companies.
Fraud and exorbitant fees were two of the most common problems. The Consumer Financial Protection Bureau (CFPB) filed a lawsuit against one company, American Debt Settlement Solutions, in 2013, alleging that it failed to settle any debt for 89 percent of its clients. According to a court ruling, the Florida-based corporation decided to effectively shut down its activities.
While there are no guarantees with debt settlement, whether done through a company or on your own, you will save time and money if you do it yourself.
How to do a DIY debt settlement: Step by step
If you opt to negotiate with a creditor on your own, you’ll need some intelligence and tenacity to get through the process. Here’s how to accomplish it step by step.
Step 1: Determine if you’re a good candidate
To determine whether DIY debt settlement is a viable option, answer the following questions:
Have you thought about declaring bankruptcy or seeking credit counseling? Both can help you get out of debt faster, with less risk, and with more consistent results than debt settlement.
Are you already behind on your payments? Many creditors will not entertain a settlement until your obligations have been past due for at least 90 days.
According to Bovee, a debt settlement coach, you’ll have a greater chance of settling a debt with the original creditor if it’s roughly five months past due, which is when many creditors sell debts to third-party debt collectors.
Do you have the funds to make a payment? Some creditors will need a single payment, while others will allow installments. Whatever the case may be, you must have sufficient funds to back up any settlement agreement.
Do you have confidence in your negotiating skills? When it comes to debt settlement on your own, confidence is crucial. You can probably do it if you believe you can. DIY debt settlement may not be the greatest option for you if your confidence is shaky, according to Bovee.
Step 2: Know your terms
You must agree on two things: the amount you can pay and how it will appear on your credit reports.
According to Bovee, you might be able to settle your debts for 40 percent to 50 percent of what you owe.
While you’re theoretically attempting to settle your debt as a proportion of what you owe, you should also consider how much you can pay in cash.
Look over your budget to see what that number is. If the amount forgiven is $600 or more, you may have to pay taxes on the forgiven portion of the debt.
By the time you’re eligible to settle, your credit has most likely been ruined by delinquent marks from missing payments. However, you might be able to save face by clarifying how the resolved debt appears on your credit reports.
Settled debts are usually reported as “Settled” or “Paid Settled” on credit reports, which doesn’t seem good. Instead, you’ll want to have your creditor designate the resolved account as “Paid as Agreed” to lessen the impact.
Step 3: Make the call
Persistence and persuasion will be required while dealing with your creditor. This is a critical juncture in the negotiation process.
You may be able to reach an arrangement with your creditor in one call, or you may need to make several calls to reach an agreement that works for both you and your creditor.
If you don’t get through with one representative, call again to speak with someone who is more accommodating. If you’re having trouble getting through to the frontline phone representatives, ask for a manager.
Prepare a coherent story for the call. The creditor may be more sympathetic to your case if you present the financial hardship that caused you to be unable to pay your payments succinctly.
Don’t lose sight of the amount you’ll be able to afford. Begin by offering a lowball offer and work your way up to a medium ground. If you know you’ll only be able to pay 50% of your initial debt, make a 30% offer. Don’t promise to pay a sum you can’t afford.
Depending on the creditor, success may vary. Some people are willing to settle, while others are not. If you’re not making any progress, it’s time to think about other debt relief choices, such as Chapter 7 bankruptcy or a debt management plan.
Step 4: Finalize the deal
Get the terms of the settlement and credit reporting in writing from your creditor before making any payments.
Both parties are held accountable by a written agreement. They must uphold the arrangement, but if you skip a payment, the creditor may revoke the settlement agreement, putting you back in the same situation as before.
“It’s all about dedication when it comes to debt settlement. It’s over if you skip a payment, according to Bovee. “Pretend you’ve agreed to a 12-month settlement.
You pay for the first six months, but if you don’t pay for month seven, they take the previous six months’ payments and apply them to your entire balance.”