Debt settlement is a financial tool where the debtor and creditor agree on a reduced amount as full settlement of a remaining debt. Usually, a debt settlement request is made to a creditor if the debtor is at a point of filing for bankruptcy and wants to avoid it.
Debt settlement loans usually have a negative impact on the debtors credit score but they are often a better option to filing for bankruptcy, which would have a more detrimental outcome towards the debtor’s credit score than debt settlement.
In order to get a debt settlement accepted by a creditor and save some money in the process, you need to ensure that you do the following.
- Research and Gather Relevant Information
It is important that you first gather all the relevant information with regards to the debt you intend to settle including:
- How much you have paid so far
- What is the remaining balance
- What is the remaining repayment period for the loan in question
You will also need to gather or calculate any information with regard to your financial position including:
- Your discretionary income and debt
- The value of your assets and other financial resources
- Convince your Creditor that is the Best Option
After you have gathered your data, you should contact your creditor and convince them of 3 facts:
- That you are not able to make full payment for what you owe now or in the near future.
- That you don’t have enough income to pay a credit card debt if they choose to reorganize your debt in a chapter 13 bankruptcy arrangement.
- That you have nothing of value to your creditor, such as a house or a car, that can be used to quickly offset the debt.
- Negotiate with your Credit Card Company
As you negotiate, you will need to ensure that you can agree on settling for a monthly payment that you can afford and still be able to pay for your basic household requirements.
Your creditor will try and gauge your capacity to pay more than you initially offer as a settlement, so make your best attempt to justify why it will not be in their interest that you pay more at that point.
In the event that debt settlement is a viable option, most astute creditors will seek to get a maximum of 70% and a minimum of 30% depending on how you present your situation based on the facts at hand.
In fact, if you can manage to pay more than the 70% your creditor will most likely not agree to debt settlement and will instead seek full payment or bankruptcy proceedings.
- Negotiate a Flexible Repayment Period but Pay Back the New Balance as Quickly as Possible
If you want to save money, you should try as much as possible to settle your debt within a year. The reason for this is that the interest rate on debt settlements is usually very steep, so if you pay monthly payments for an extended period of time you will be paying more than you need to.
If you manage to negotiate hard and with your facts right, you stand to save some money in your debt settlement.