Debt settlement

Debt settlement is the most common form of debt relief that borrowers seek, thinking it will reduce their stress just as it reduces the actual amount outstanding. However, things can appear to be entirely different when viewed deeply. Debt settlement will affect your credit score negatively, along with other consequences.

However, if you still want to go ahead with it, there are a few things that you should remember. Firstly, come prepared with a proper plan and be prepared for not being offered as expected. Most importantly, you should follow a specific guide for negotiation when you meet your creditors to ensure that the situation is okay.

Start confidently

Believe that everything in business is negotiable. Money lending is a business because the lenders earn business profits in the interest you pay on the loan you take out. Therefore, be confident even if you know that the terms and conditions and the price of your loan are set in stone.

Your confidence will play a significant role in negotiating with your creditors successfully.
  • You will find that getting a discount is easier than you may have thought.
  • All you have to do is know whom to ask for it and how to ask for it. Only then will you be able to cut your balances by 50 or even 70%.

The basics of debt settlement

Now that you are confident, you must know the negotiation process with your creditor, starting from the basics.

Ideally, debt settlement is the process of PA debt relief in which a large and usually a one-time payment are offered toward an existing debt balance. The amount reduced by the creditor is considered an act of forgiveness. The account is then erased from the records. However, this has some severe consequences.

The fact that a portion of your amount is forgiven by the creditor will be considered your income, and the IRS will have all the right to impose a tax on such an ‘income.’

Moreover, the fact that you settled your loan account for less will be reported by the creditor to the credit reporting companies and will remain in your credit history for as long as seven years.

Now you may wonder why in the name of God, a credit card company and any lender will willingly choose to relinquish a considerable portion of the balance that you owe to them. Well, this is usually because:

They are either strapped for cash themselves or are afraid that your inability to pay off the entire amount may result in a loss of the whole amount.

In both situations, the creditor will try to protect their financial bottom line, a critical factor you should remember when negotiating.

In addition, you must also remember that in the case of unsecured loans such as credit cards, there is no collateral, as these are all unsecured loans. That means the credit card company or the debt collector has nothing that belongs to you that they can hold back and make you repay the loan. It means you stand a higher chance to win and take the negotiation in the way you like.

Know the downsides

It may sound too good to settle your balance for a lower amount but it may not be possible sometimes.
  • Unsurprisingly, most lenders want to avoid settling or advertising debt settlement. It is actually a loss to their business.
  • Moreover, there are no definite and independent statistics that reveal its rate of success.
However, if you are severely behind on your loan payments and the interests and fees may spiral toward bankruptcy, chances are that your creditor will be interested in taking what it is getting. This will allow you to get your feet back on the ground.

A few other severe advantages of a debt settlement are:

  • It will shrink your current debt load
  • It will make things easier for you and
  • It will reduce the stress on you.
However, there are a few substantial shortfalls of debt settlement that you will need to consider before you start your negotiation. You must take these downsides into account to ensure the chances of success for your negotiation and make the situation more manageable.

In addition, you will also need to have a substantial amount of cash in your hand, as a debt settlement will generally require you to pay a large sum at once. This is the primary factor that makes debt settlement so attractive to your creditors if you are facing financial hardships to continue making monthly payments. They will get much more significant amounts now instead of you making minimum monthly payments for the next couple of years.

Lastly, you must leave behind the thought that you could have used this amount differently and more productively in your personal finance and make sure that making such a large payment will not go you in a tight spot for the next few months down the road. Also, be prepared, as your credit card account will be closed once the settlement is complete.

How to negotiate

If you are okay with these, then go ahead with the process. You can take the help of professional negotiators, provided the creditor is willing to do so.
  • While negotiating, start by projecting that you are in the wrong financial position. However, do not resort to anything untrue or misrepresent facts because the creditors are well aware of such tactics. They will compare your card statements for the last few months to find any extravagance and will summarily deny any settlement.
  • Make an offer of 30% of your outstanding balance and gradually increase as the creditor tends to come down from its original stance of 100% payment.
When you reach a final agreement, ensure you get everything in writing.