If you are accumulating enough debt to cause anxiety and sacrificing in order to make mounting monthly payments, try personal debt settlement.
What is Debt Settlement?
When individuals get into a situation of not being able to make their monthly debt obligations, there is stress, anxiety and depression. While there are many options for a debtor, to include debt consolidation and bankruptcy, it would be wise to consider personal debt settlement to fix your money woes. Basically, debt settlement involves negotiating with creditors of your unsecured debt (credit cards and revolving payments without collateral) for a lower total debt amount, and the reduction can be significant.
Debt settlement is not for the meek. You have to steal yourself to be strong in negotiation and to not take no for an answer. You cannot fold nor can you even hint to your creditors that you might be able to borrow money or somehow obtain the money to pay off any of the debt. This puts you in a position of weakness. The creditor needs to believe that you truly will not be paying this debt unless it can be reduced. Remember that you have what the creditor wants. You have the ability to pay at least something, and something is better than nothing. This puts you in a strong position.
Do Your Homework
Before you start the negotiation process, do some research on debt settlement. Any local nonprofit consumer credit counseling service can provide you with basic information, but you will need to go beyond that to discern the tactics used by creditors, collectors, and the tactics you can use effectively as well. The Internet provides lots of information, as do friends who may have had experience with the process as well.
Who Owns Your Debt?
This is the first step in the process. If you are 60-90 days late in payments, chances are you have been receiving calls and letters from the creditors telling you that your debt will be transferred to a collection firm if you do not pay. At this point, the creditors still have the debt, so get in touch with them immediately. Do not ever promise to pay to pay the debt in full or indicate that you may be able to pay a certain amount as soon as you go back to work, receive your tax refund, etc. The creditor must believe that you are truly in dire straits, or there is no reason to negotiate. At this point, the creditor may initially say “no” to amount reduction, but remain persistent. You can hint that you may have to declare bankruptcy, for this usually spurs a creditor to come to some arrangement. The general rule of thumb here is to try for 50% reduction in total debt amount. If you can get this, you have achieved what most settlement professionals can. Pat yourself on the back!
The Collection Firm
If your debt has been transferred or sold to a collection firm, you need to follow different procedures:
- Do not talk to collectors on the phone. Verbally inform them they are not to call you at work. Send a registered, return receipt requested, letter telling them not to call you at your home either. Now, they have to put everything in writing.
- Request a debt validation in writing (registered again, please). They will have to provide with the original agreement between you and the original creditor, any interest and fees that have been tacked onto the original debt amount, and information regarding whether the debt has been transferred or sold to them.
- If the debt has been transferred to the collector, the original creditor still owns the debt, but you will have to negotiate with the collector now. Again, all negotiations should occur in writing, and you will need to make certain that the collector believes you to be in dire straits. Indicate that you have no way to pay off this full amount and that you might have to declare bankruptcy. The collector is working on a percentage basis, so he will try to get as much as possible. You must convince him that 50% is as good as it gets.
- If the debt has been sold to a collector (and this is fast becoming the norm, because the creditor is able to take a tax loss on your bad debt), the collector has paid only pennies on the dollar for the debt. Knowing this enhances your bargaining position. Start at 25%. Anything the collector makes over what he paid for the debt is profit.
A Word About the IRS
If you settle for a significantly reduced amount, you will be liable for taxes on the amount forgiven. Anything over $600 of forgiveness on each debt is taxable as income and will have to be reported. If you are truly insolvent, however, and have no assets, you even get a break on that. Check the tax laws.
