Debt Negotiation

You're in over your head. You can't pay your bills anymore, and your creditors are calling you non-stop. It's not the end of the world, but sometimes it sure feels like it. You know that your credit can't be very good, but at the same time you want to pay off your outstanding debt. You hate owing other people money. One option you have is to contact a debt negotiation company so that you can settle your debts.

When Paying Off Debt is Impossible

When you just can't repay all of your outstanding debts, it's time to consider debt settlement. Debt settlement allows you to pay less than what you actually owe and still clear out all of your debts. Normally, debt settlement is limited to unsecured loans like personal loans and credit card debt. Mortgages, car loans, and other secured loans typically do not qualify for settlement.

The is one caveat that you must understand before going this route. While your credit might already be dinged up a bit now, debt settlement is destroy your credit for many years. It's not as bad as bankruptcy, but it's pretty close. Forget about getting a loan of just about any kind after the settlement process is over. You will have to learn to like cash.

There's Light At the End of the Tunnel

Debt settlement companies have a set process they use to negotiate your debts:

  1. The settlement company gathers up your information
  2. You start a settlement fund
  3. They contact your creditors
  4. They cut a deal
  5. You pay the outstanding balance in one lump sum

The first step in the process is to see just how much debt you have to settle. Many companies require that you have at least $10,000 in debts before you attempt the settlement process. Some company only require you have $5,000. Why the minimum requirement? If you have less than $5,000, it's hard to sell your creditors on the idea that you're "in over your head." A small total debt size means you can still dig yourself out. It might be a bit painful, but it's still possible.

However, if you're buried in a mountain of debt - $100,000 or so - then the picture could be pretty bleak.

The second thing debt settlement companies do for you is help you set up a settlement fund. This is basically a savings you will use to pay off your debts in one lump sum. Often, the settlement amount is far below the original amount. However, creditors are typically reluctant to settle debts unless they think bankruptcy is imminent or they are convinced that you will never pay off the debts in full.

The next step is to contact your creditors. This really takes much of the burden off of your shoulders since talking to creditors can be intimidating. The settlement company acts sort of like a middleman or biased mediator. Typically, the creditor wants as much money from you as possible, and the debt settlement company wants to help you pay as little as possible. There's a crossover point where both you and the creditor will be satisfied with the payoff amount. Once that point has been reached, it's time to pay off the debt.

During the negotiation process, you are supposed to find or save up the money that will be used to pay off your creditors. Once a deal has been struck, the funds (which are usually held in escrow) are transferred to your creditors. You will receive a notification that all debts are settled and considered "paid." From that point on, you're finished. You'll never get another phone call or letter regarding your debts.

Rebuilding Your Credit After Settlement

After you're finished with the negotiation process, it's time to rebuild your credit. While it's not absolutely necessary, it's a good idea to take educational classes on budgeting and money management so that you never end up in the same position ever again. A credit counselor or professional financial planner who specializes in money management would be a good place to go for this type of help. Regardless of what you do, the important thing is that you move on from this experience a little wiser and with more confidence in your ability to stay in control of your finances.