Debt NegotiationPosted on September 11th, 2010 William No comments
Everybody loves to negotiate, don't they? Well, no..most people seem to hate it. However, if you've reached the point where you simply can't pay your bills, debt negotiation (also known as debt settlement) might be the answer. Debt negotiation is when you negotiate with your creditors to reduce your outstanding debt; in some cases, credits will accept a smaller amount rather than chase you into bankruptcy.
You can generally try to negotiate any debt that is unsecured and is not insured by the government. Obviously, a creditor holding a secured loan has no reason to negotiate! However, this is a way to possibly reduce the amount you owe on credit cards, store cards, bounced checks, personal loans, and unpaid medical bills.
Do you qualify for debt reduction? Debt negotiation is a possibility when you're in a position where you're not going to be able to make your full payments for the foreseeable future, possibly due to a hardship such as losing your job, and seem to have no other options besides declaring bankruptcy. Creditors may see making a deal with you as a way to get more money than they would otherwise.
In some cases, you may wish to use a settlement company that will negotiate with creditors on your behalf, in exchange for a fee. If you do so, check them out carefully; the last thing you want is to send your money to a shady company and have them run off with it, leaving you without your savings and still owing the full amount to your creditors! The settlement company will offer debt counseling and help you set up a budget, then create a trust account for you to pay in to. They will then negotiate with your creditors or collection agencies; if an agreement can be made that is acceptable to both you and the creditor, they will pay off the creditor with the funds in your trust account.
Tip: How a negotiated payoff is reported to the credit agencies has a huge impact on your credit rating! As part of the negotiation, insist that your account is reported to be "paid as agreed" or similar, rather than charged off. Since if you're in negotiation you probably haven't been paying your creditors, your credit is probably already trashed; however, you may be able to repair it somewhat if the negotiation brings your accounts current and they are reported as being paid in full.
Tax effect: When debt is forgiven, the IRS considers that to be taxable income, so if you do get your debt reduced, remember that this will have an effect on your taxes due for the year and plan accordingly.
If your creditors offer you a deal, make sure you have a record! This should be a written agreement, if possible; if it is agreed verbally, you should record the phone conversation (you may need to inform the creditor that the conversation is being recorded - laws vary by state). You don't want to pay off the amount you agreed to and then have the creditor deny ever making the agreement!
If you're lucky, you may be able to have your debt reduced by half; while it's likely to result in a hit to your credit, you may be able to get out of debt as a result. Just take advantage of your good fortune by refusing to ever to into debt again!