Is Debt Settlement Right for You?

by | Sep 26, 2016 | Debt Help, Industry News | 0 comments

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What is debt settlement exactly?  

Debt settlement or debt negotiation is when a consumer arranges with the collector to pay less than what is owed and the debt is then forgiven. (Sort of forgiven, and we’ll explain that later).

While it is usually not possible to settle a debt for less than is owed with the original creditor, negotiating with the subsequent 3rd party collection agency is possible.

The 3rd party companies buy your debt for about 4 cents on the dollar, so they can afford to reduce the amount owed through a negotiation process and still enjoy a hefty profit.  When a successful settlement happens it is usually with these companies.

Not for the faint of heart.

Long before a settlement will be considered, a number of things have to take place, and none of it is fun.  Let’s look at the flow of the debt/collection process to better understand:

When a consumer can no longer pay a debt, the original creditor, (banks, credit-card companies, or lenders) will begin a 90 day collection process.  After the 90 days they are mandated by federal law to write the debt off.  In most cases they will no longer have an interest in the debt unless they use an in-house collection agency to take over the debt.  In either case, they will place a “charge off” status on your credit report.

If not an in-house collection agency, more likely the debt will be sold off and will go to a 3rd party collection agency.  These are the companies that buy the debt for next to nothing and will be in a position to negotiate with you, as mentioned earlier.

However, at this point you are still not in a position to settle the debt.  More has to happen first.  The collector desires to get as much money as possible and so this is when the collection letters and phone calls begin.  They will blow up your phone and call neighbors, family and friends.

They will also place themselves onto your credit report.  Now the debt is being reported twice; once as a charge off by the original creditor and now as a derogatory entry by the collection agency.  Your credit profile is in trouble and your score will suck.

If it is determined that you can be sued, that process will begin next in many cases.  Got that sickening feeling yet?  They are hoping you do.  If so, to eliminate the stress, you will start coming up with some money to pay the debt off with, and the entire amount.

If they know where you work and it is not a job that is transient, there is a good chance you will be sued.

If they know where you bank (and they probably do) there is a good chance you will be sued.

If you own a home with equity, there is a good chance you will be sued.  

This is because after a suit, assuming they prevail (and usually they do because most people don’t try to defend themselves, resulting in a default judgment), the collection efforts resume but now they have a little more punch.  With the default judgment, they can garnish a wage, seize a bank account and or put a lien on real property.

If any of these scenarios exist in your situation, a successful negotiation is probably not going to take place; at least not yet.

All of this is daunting and stressful.  You’ll want to pay if you have the means, and they will use your fear, concern and aguish against you on the negotiating table.  If any one of these three possibilities exists however, there probably won’t be any negotiating; they don’t have to, all the money can be had through any of the three avenues.  So there is no need for them to reduce the debt amount for you.

However, in some instances, a large lump sum will get them to capitulate but the dollar amount settled on will be close to the original amount anyway.

If there is no law suit or if they can’t collect in the three ways outlined, then you probably could negotiate with them for a dollar amount that is less than the amount owed.  After all, it is highly unlikely they will get any money if the suit didn’t work in their favor so they will be more than happy to separate you from your money in a manner other than the bank lien, wage garnish or property lien, knowing they are not going to get anything unless you volunteer it (via negotiation), even if it is a lessor amount.

To sum up, it is possible to negotiate or settle a debt for less than is owed, but it is a harrowing adventure as it usually can only take place after there has been an assault on your credit profile, your dignity and financial wellbeing.

What kind of discount is typical?  45% is the average, and if you use a company to assist in the negotiation, you can probably tack on another 15% or so.  That means on a $10,000 debt you could end up saving $4,000.  

However, 3-4 years have probably passed by now and you will be close to the Statute of Limitations, and your credit will be jacked (even after paying the negotiated amount)

So debt settlement is possible, but clearly is wrought with danger.  Could there be a better way to tackle debt?  Our next blog will discuss some possibilities.