Debt Negotiation: De-Mystifying Debt Negotiation and Debt Settlement
Debt negotiation is not new; it has been practiced for thousands of years as a means of obtaining debt relief. But as the United States consumer debt has proliferated, the formalization of debt negotiation and debt settlement as an industry has moved closer and closer to the forefront of consumer awareness as a very practical alternative to bankruptcy. Simply stated, debt negotiation / settlement is the practice of negotiating the total money owed on any debt to an amount that is acceptable and affordable to the debtor (consumer) and the party to whom the debt is owed (card issuer). On average, a consumer can expect to reduce the amount of a given debt by 50%, and dependent on the circumstances, be debt free in as little as 12 to 36 months. However, it is not free, and it is important to realize that there are repercussions.
In order to effectively engage in settlement negotiations with a creditor, a debtor must adopt a strategy that will motivate the creditor to reduce the balance on a debt. This means turning “good debt” into “bad debt”. The most effective method is to voluntarily fall behind on payments to creditors. No, you did not misread that. And we realize that in addition to the financial stress already experienced by the average consumer, the prospect of losing hard earned points on one’s credit score voluntarily is not desirable and in most cases outright feared. But there is a very real strategy behind this plan which will work if one is committed, because while making payments on time is important to a credit score, it is not the most paramount.
The single greatest factor affecting a credit score is the balance owed against the credit limit on the charge card or account over time. If a consumer were to make minimum payments on his or her charge card, while maintaining a balance in which the credit available is less than 70% of the maximum allowed, his or her credit score will gradually fall. In other words, if your charge card has a limit of $1,000.00 and you owe more than $400.00 on the card continuously, your credit score is gradually dropping. If you are like most Americans and you are continuously at the maximum limit or close to it, your score falls faster. If you have over the limit fees, you are producing an effect that is nearly as bad as not paying at all.
Therefore, if the consumer is truly committed to eliminating debt as quickly as possible with hope of reducing the balance due, terminating the payments to creditors is a very effective strategy, as long as one has a plan to pay off the negotiated balance, and the funds necessary to do so at the time the debt is negotiated.
Why Program Length is Important to You
In any debtor-creditor scenario, a creditor is reserved the right to sue a debtor in court if they are not paying according to the terms stipulated. Legal action is always a last resort, and creditors prefer to settle because most statistics show that this is the most profitable way to deal with a past due account anyway. On the other hand, when a creditor feels that they've exhausted every collection method possible, they're left with limited choices:
- Pursue the debt in court. This will usually happen if the amount owed is well beyond $10,000.00 and the attorney handling the case is doing so on contingency (a percentage of the amount owed). The average attorney charges over $150.00 per hour and cannot make any money if the debt is lower. The creditor will not pay an hourly legal fee due to the prohibitive cost and the geographical nightmare that would result from pursuing all past due customers. Therefore, unless the total amount owed is higher than average, and attractive enough to pursue by an attorney, this scenario is unlikely, although possible.
- The creditor can sell your debt to a collection company for a fraction of the debt and take a write off on their taxes. This is the most likely scenario and this is where credit damage really begins.
The longer you take to settle a debt, the greater the damage to your long term credit scores and the worse your credit becomes, the more interest you will be charged on any loan. This makes the attainment of any kind of future lifestyle difficult as the interest makes the purchase of automobiles, homes, etc. out of reach. It is far more prudent to engage in a debt settlement strategy as quickly as possible to eliminate debt and high interest. Generally, a debt settlement / negotiation plan of no longer than three (3) years is not advisable, although circumstances on an individual basis may dictate otherwise.
The Importance of your Creditors in Debt Negotiation
The level of difficulty in a debt negotiation plan is directly correlated to whom the debt is owed. Three of the most difficult companies to negotiate with are Citibank, Discover, and MBNA. This does not necessarily mean that these creditors will not settle. It only means that the settlement may not be as favorable as other companies.
These creditors are historically prone to pursuing legal action to collect a debt. However, it is far more likely that the company will eventually “charge-off” the debt than to file a suit, especially if the amount owed is $5,000.00 or less. If a debt falls into this category, it is far more likely to be charged off and pursued through collection. This is a matter of simple math and a business decision.
A corporation cannot bring a small claims action against an individual. On average in the United States, the maximum dollar amount allowed in small claims court is about $5,000.00 per claim. If you are in Kentucky, the maximum amount allowed in court is $1,500.00, but that is an anomaly. A creditor holding unsecured consumer debt is highly unlikely to pursue a civil proceeding to court because the costs far exceed the benefits. The average cost of a lawsuit is about $15,000.00 for the plaintiff. Even if there is a special retainer for a firm handling cases on a statewide basis, the average cost makes the pursuit of a credit card debt prohibitive.
It is easier and far more financially practical to “charge-off” the debt from the corporate financial statement and sell your debt to a collection company at a steeply discounted cost. The inflow of dollars from the sale of the debt hedges the overall loss to the company and the rest is taken as a corporate tax write-off. The losses are further mitigated by the 6% to 15% handling fee that is taken right off of the top of the total cost of each of your purchases from the retailer or entity who sold you your products and services. Yes, that is correct; the credit card companies get paid on both ends of the purchase, and then on the interest too. Is it any wonder that they want you in debt with high interest?
Hardship
Hardships are real. Life happens to everyone and sometimes the turn of events in life force us to make very difficult choices financially. As a person or a family spirals further down the ladder of Maslow’s hierarchy of needs and events force one to choose between groceries and credit card bills, there is no surprise as to what choice must be made. If we can document the reason for your hardship (the loss of a job, medical expenses, accident, injury, divorce, etc.), it is much easier to negotiate a favorable settlement with anyone.