Pros and Cons of Debt Negotiation

If you are struggling to repay debt and are tempted by the possibility of paying less than you owe, you should first consider the pros and cons of debt negotiation. The cons usually outweigh the pros, so it is important to see how the risks and rewards stack up given your own situation.

Advertisements from debt negotiation companies suggest that creditors and their collectors alike will accept a partial payment of 30-50% of the debt balance. Paying less than what you owe certainly sounds good, but is this realistic?

The Pros of Debt Negotiation

There is a primary benefit of credit card debt negotiation. Paying less than you are liable for is certainly beneficial for your bank account. Consider a collection account with a $5,000 balance. If you can settle it for $3,000, then you benefited by settling the debt for a lower amount. If you successfully negotiate a settlement with your creditor, you can reduce the total cost of getting out of debt.

Another benefit of negotiating a settlement is that you may be able to avoid legal action. When you complete the settlement, the creditor forgives the remaining debt and no longer will have a reason to sue. Avoiding judgments is a priority, since undesirable consequences can result. Depending on the laws in your state, you could also face liens, garnishment of wages and levies to your bank account.

The Cons of Debt Negotiation

The benefits of negotiating with your creditors can initially appear to be very attractive. Before you decide though, consider the collateral damage that can result from debt settlement.

Settlements of 30-50% of debt are not typical. Most creditors and debt collectors refuse to bargain below 50-60% of the debt. It is still a savings, but it is a much higher payoff than they used to allow.

You may be able to negotiate a payment plan with the collector. However, the account will continue to accrue interest charges. You will end up paying much more than you owe and it will keep the negative account on your credit report for 7 years following your final payment.

If you do negotiate a debt settlement, then a payment plan will not be acceptable. A settlement must be paid in a lump sum. While that might be fine if you have a piece of property to sell, most debtors are unable to raise large amounts of cash in such a short period of time.

To further add insult to injury, you may find yourself blindsided by Form 1099-C the following January. This is a formal notification by the Internal Revenue Service that they consider the debt forgiven by your creditor as a form of income. The IRS expects you to pay additional income taxes on that forgiven debt. Creditors are required to file Form 1099-C whenever at least $600 in debt is forgiven.

Finally, your credit report will reflect that you resolved the debt for less than the full amount owed. This delivers a substantial penalty to your credit scores for the next 7 years following the settlement. Since 35% of your credit scores are comprised of payment history details, this can easily reduce your credit scores 50-100 points. Settlements can also have far reaching effects, such as increased borrowing costs, higher insurance premiums and difficulties in passing credit checks of prospective landlords and employers.

Given all of these consequences, negotiating a settlement may be of marginal benefit. There is one additional con that can destroy any benefits of settling.

Debt negotiation companies promise to be able to facilitate this process, but only after their substantial fees adding up to thousands of dollars have been paid. Paying an additional 15-25% in fees on top of the 50-60% can eat up half of your savings. The increased tax burden can wipe out the rest.

All that you are left with is damaged credit, an empty bank account and no protection from legal action while you are enrolled in a debt settlement plan. Creditors are free to pursue any and all collection activities until the debt is resolved. Given the challenges and high costs involved, it is no wonder that over 89% of debt negotiation company clients fail1.

Clearly, the negative effects of settlement can easily offset the benefits in most situations. If you understand the consequences and still feel that negotiation might be worth the costs, consider negotiating your own settlement.


1 Burrill, Dwight and Long, Kenneth. “Review of Briesch Debt Settlement Study: Economic Factors and the Debt Settlement Industry.”

Kenneth Long
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Kenneth Long

President at Debtors Unite
Kenneth Long is President of Debtors Unite, Inc. as well as President and Vice Chairman for Vision Credit Education, Inc. He served as a regional coordinator for the North Carolina Saves campaign. Long co-founded the Wake EITC Coalition along with Family Resource Center of Raleigh.

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!

Favorite quote:

"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."

Thomas Jefferson
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