In order to understand how debt settlement works, it is important to know what categories of debt there are.
There are two types of debt to consider - secured and unsecured debts.
Secured debt involves property of some kind to be used as collateral. Should you (the debtor) fail to repay a loan, the property will be repossessed by the lending institution.
Unsecured debts don’t involve any collateral. They are simply based on the fact that a person has good credit. As such, a creditor does not have a guarantee that the funds you have borrowed will be paid back. This is why creditors sometimes agree to settlement negotiations, because they can at least get some of the funds that are due to them.
While lots of people have managed to personally negotiate debt settlements successfully, it is important to understand that the process has both positive and negative consequences. Because of this, you need to understand the details of the process before you get started.
First of all you have to realize that regardless of how much you know about debt settlement, it is mostly the people you deal with who’ll determine your success. You must be ready to persist – the process sometimes takes several months, because your creditor likely won't easily agree to write off the money you owe them.
You must be versatile in your approach to negotiation settlements when dealing with different creditors. Individual creditors work in different ways and have internal rules they must follow. Trying to apply similar approaches may work against you.
Creditors will sometimes threaten you with litigation. The general rule is that this will usually be a bluff – you can never be too sure. Make a careful investigation of the creditor, particular looking into their past performances, to get a clue of the litigation threat’s legitimacy.
Another important prerequisite is your ability to differentiate between good and bad settlement offers. This will help ou decide when to immediately agree with an offer or hold out for something better. You also must know when it is best to temporarily take no action at all in the course of negotiation. Every action you take could result in a more positive offer or an offer that is not as good.
Some of the other considerations that you must bear in mind include, determining whether it would be prudent to make direct negotiations with creditors or to deal with their collection agencies, what to do if another firm buys your debt, what to do if an account you own is forwarded to a law firm, and what is required of you when judgments or liens are involved.
Debt settlement has its consequences even when it is successful. One of the major realizations you have to acknowledge is that your credit score will severely be harmed.
For people who choose to proceed with debt settlement negotiations these are some tips that will come in help during the process:
1Use Your Natural Advantage
2Know What Amount to Offer Collection Agencies
The age and type of account in question are what determine the amounts that firms give for bad debts. Generally, the amounts are 6-7 cents per dollar for recently charged off debts, 1.5-2 cents per dollar for slightly older accounts which have been referred to one or two collection agencies, and a penny or less for accounts several years’ old or out-of-statute debts. Bearing in mind that it is the collection agencies who’ll get the money you are offering, it is advisable to begin your negotiations at a 25% rate or less.
3 Contacted Made By Multiple Agencies for the Same Debt
This usually means that your creditor and the first collection agency have given up and have allowed another collection agency to pursue the debt. This new firm has paid less for the same debt. This usually means they will most likely agree to a cheaper compromise than the first two parties.
4Let the Creditors do the Talking
You will get the best settlement when the creditor becomes more desperate to recoup their funds – never be in a hurry to settle.
To get the most out of the deal, you must turn down the first and even second offers, ensuring that they are the ones doing the pushing and not you.
However, you must also be sure there is a better deal available. With the elapsing of time, creditors tend to sideline some negotiations and this definitely betters your chances of getting more suitable settlement deals.
5Don’t be Fooled by Interest and Penalties Charged
These charges are usually fictitious and typically illegal since there are usury laws in every state determining the maximum interests that can be charged on these monies. Collection agencies will gladly receive the original debt owed without even questioning the penalties and interest fees.
6Keep Good Records
All the terms of your debt settlement negotiations should be made in writing, never verbally. It is best to negotiate using letters, and these should always be sent through registered mail. Be careful to always ask for the receipt of payment.
7When Dealing With Creditors and Collection Agencies by Phone
Ensure that all telephone correspondences are followed up with letters in the manner described above. Also ensure that you get the details of the particular person you dealt with as well as the firm’s name, physical address, direct line, and fax number as well.
