Debt Negotiation

Debt negotiation is when a consumer, credit counseling agency, attorney or a company specializing in debt negotiation, contacts creditors in order to settle an unpaid debt for less than the amount owed. The amount a creditor will settle for can vary greatly. The settlements usually range from 40% to 70% of the balance, but there are no absolutes.

Pros

  • The debt is paid at a significant savings and the creditor will not pursue further action.

Cons

  • Debt settlement requires lump sum payment rather than payment over time. Therefore, if you cannot readily access a significant amount of money it will not be an option for you.
  • Most creditors will not consider settling a debt unless it is seriously delinquent (behind).
  • At best, creditors will list the debt as 'settled' on the credit report.
  • Some debt settlement companies charge high fees and give poor advice.
  • If there are several creditors, they may require more money than the consumer has available.

What to Avoid

  • Avoid any company that claims to 'eliminate' debt without bankruptcy.
  • Debt settlement companies are for profit businesses, so be sure you know exactly what you will be charged. Some companies have you sign a contract to pay them a percentage of what they 'save' you, which can be a huge amount.
  • Avoid any company charging high fees, you can negotiate your own debt settlement and do not have to pay for this service.
  • Avoid any plan that will not solve all of your debt problems.
  • Avoid sending money until you have everything in writing from the lender.
  • Avoid companies that tell you to stop paying debts so they can be negotiated at a future time.

What to Look for

  • Get everything in writing.
  • If you're not negotiating yourself, ask for all fees in writing.
  • Investigate any agency or company before you sign anything.
  • Look for a plan that will solve your whole situation not just satisfy one or two creditors.