When it comes to reducing the amount of debt you have, there are two ways that you can approach the issue. You can either discuss your situation with a debt settlement company, or you can negotiate an informal debt agreement on your own. Although the outcome is never guaranteed, the main advantages with a DIY debt settlement is that you could save a considerable amount on fees and get a better grasp on how debt truly works. According to the Center for Responsible Lending, the fees that these companies charge could be as much as 25% of the total that you owe once you negotiate a settlement amount.
Debt Negotiation Strategies
If your creditor is calling you for the pending debt balance and you are not able to pay it off completely, you might be avoiding the calls. However, they might be wiling to negotiate with you. When you start negotiating with creditors or debt collectors, you should consider using one of the following debt negotiation strategies:
Mention that you’ve been considering bankruptcy – regardless of whether you’re actually thinking about filing bankruptcy, the mere mention of this may just make most creditors and debt collectors think about lowering your settlement amount. In Chapter 7 or 13 bankruptcies, the entire unsecured debt is usually discharged. This means that credit card companies and other unsecured creditors will get nothing. Consequently, most of them might agree for a settlement of pennies on the dollar. In a way, it helps the debtor.
Negotiate a settlement of 50% or less – while you may have a lot of “back-and-forth” to deal with, many unsecured creditors will agree to a settlement of as little as 30% to 50%. As a suggestion, start with a smaller amount, such as 15% or 20%, and go from there. Just be aware that there could be potential tax consequences, depending on the amount that is discharged. In some cases, when the debt is canceled, discharged, or forgiven, that amount is taxable. If the amount is $600 or more, the IRS will deem it as taxable and increase your liability, depending on the amount and your tax bracket.
Start making payments as soon as possible – if you can start making payments right away, there’s a greater likelihood that creditors will be willing to settle for the amount you’ve offered. However, if you have the money to back up your offer (pay the amount in full), there’s an even greater chance that they will settle for the amount you offered rather than waiting for several months to get the entire amount.
Remember, experts will help you with debt management tips so your goal should be to eliminate all the debt that you owe. If that isn’t possible, try to eliminate enough of the debt so you can pay the remainder off in a reasonable amount of time. It helps to talk with an expert to find the right ways to eliminate debt and build your credit score over time.