Debt settlement companies paint a rosy picture for helping you settle your debts. They might provide some assistance, but only after you pay them a quarter of what you owe as a fee! What they don’t tell you is how to negotiate debt settlement offers directly and spare yourself thousands of dollars in fees.
When is debt settlement appropriate? When your accounts are charged off and turned over to outside debt collectors, the damage to your credit has been done. There is very little advantage to making payments on charged off debt. Instead, you may be better served by increasing your savings so that you can be prepared for accelerations in the debt collection process, namely judgments.
When judgment day comes, you are at a big disadvantage if you legitimately owe the debt or are unable to prove otherwise. Of course, you may be able to avoid going to court at all if you have saved enough money to negotiate an alternative arrangement with the debt collector. There are some steps that you can follow to negotiate your own settlements.
- Increase your savings. You can negotiate all you want, but if you cannot put your money where your mouth is you are wasting your time. When a debt collectors is talking with you, they have a Jerry Maguire “show me the money” mindset. They are provided excuses all day long that they refuse to listen to. By having cash reserves to tap into, you gain leverage in negotiations.
- Prioritize debts. Most people mistakenly choose to pay the smallest and oldest debts first. This is a mistake. The largest and most recent defaulted debts are the most likely candidates for legal action. Any debt that is no longer within the statute of limitations should be ignored until all of your major recent debts have been resolved.
- Send a letter. Debt collectors may argue with you but they cannot argue with a letter. All they can do is respond either favorably or unfavorably. Make sure that your debt settlement letter includes the appropriate hardship information as well as an offer that you are prepared to accept. Lowballing the offer is advisable, since negotiations usually end up somewhere in the middle.
- Respond to their offer. If the debt collector agrees to your offer in writing, send them payment within 30 days that is clearly marked with a notation such as “cashing this check constitutes payment in full.” Creditors may have additional rights allowing them to cross out the notation and continue to pursue the unpaid balance, so it is important to make sure that you have a signed agreement from the debt collectors that specifically limits your ongoing liability. For debts of more than $10,000 it may be advisable to seek legal advice to make sure that you resolve the situation properly. A local attorney that does not engage in debt settlement plans is probably the best option, since the entire debt settlement industry is marred by fraud, deceptive practices and inflated fees.
- Send a counteroffer. A collector that refuses your offer may request a different amount up to the full amount currently owed. If you have the means to increase your offer, send a revised letter that notifies the collector that your situation has changed and allows for a slightly higher payoff than you previously were able to do. While lowballing should generally start around 20-30% of the debt balance, you should expect for most settlement offers to be in the 45-65% range.
While there are various approaches to negotiating settlement offers with debt collectors, there is one universal truth that you should adhere to. Never acknowledge that you owe the debt. In several states, simply stating that you owe a debt either orally or in writing can reset the statute of limitations on the debt. Instead, focus on language such as “in the interests of resolving this debt…”
The advantage to negotiating your own debt settlement offers is that you can avoid paying a credit card debt negotiation company thousands of dollars in upfront fees. Those companies have poor reputations and leave you exposed to legal action while you struggle to build a balance in their plans.
Once you understand the process, you can draft your own settlement offer letters and respond directly to your creditors. Even if you want help in the process, you can pay an attorney $100 to help you with the letter rather than paying a debt settlement company $2,000 for doing nothing!
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."