Wednesday, January 14, 2015

Debt Settlement: 9 Ways to Use It Effectively

Approximately 43 million Americans have at least one account that is 90 days or more late. Some method should be used to pay off old debts to prevent legal action.  There are several methods that can be used to pay off a debt such as paying in installments, paying the debt in full or negotiating with the creditor or collection agency to offer a debt settlement.  The best use of a debt settlement is if an account is more than 90 days late. Debt settlements are less effective on active accounts however; the strategy may still be used. 

Debt settlement is a payment method that is best used for unsecured debt such as: credit cards, medical bills, department store cards, student loans, personal loans or other small debt that have been reported to a collection agency.  Debt settlement generally cannot be used for secured debt (property associated with the debt) such as: car loans and home loans. However some companies may allow a consumer to use debt settlement as a method of payment.

Debt settlement can consist of offering a one-time payment or installment payment that is less than the full amount owed for an account that is 90 days or more past due. The remaining debt owed is forgiven. Many creditors and collection agencies accept debt settlement as a method of payment because they have had difficulty either locating the debtor or getting the debtor to pay the debt. They are more interested in making at least some profit and are willing to hear what the debtor has to offer instead of reporting the account as a loss.

The advantages of a debt settlement are: puts you back in good standing with the company, it eliminates a monthly payment, and reduces the total amount of debt you owe, helps boost your credit score and helps you look more favorable to potential creditors and lenders.

The disadvantages of a debt settlement are: it may take months before an actual payment is applied to your debt, you may be subjected to legal action while waiting for a payment to be made on your account(s),  if you decide to use a debt settlement company using their service may be reported on your credit report which lowers your credit score and remains on your credit report for up to seven years, you will be required to participate in a payment plan for 3-5 years and will be required to pay a monthly fee plus setup or other fees. Here are 9 effective ways to negotiate a debt settlement.

  1. Contact information. Prior to negotiating ask for the person’s name, direct number, email address, the mailing address of the company, the name of the company, and the fax number.  Never disclose where you work or bank. Avoid providing your home or work phone number. 
  2. Negotiation type. You can negotiate either over the phone or in writing. If you negotiate over the phone negotiation it may last for up to a month or more.  Remember the company is trying to get as much money as they can from you.  It will also require you to keep accurate notes of everything the person says on the phone and everything you say. If you are not skilled in negotiation and do not know your rights I would recommend negotiating in writing which takes less time.
  3. Negotiate. Start the process by offering 30% of your outstanding balance. The company will probably counteroffer with a higher balance.  Don’t offer to pay more than 50% of the outstanding balance. Make sure the offer is something you know you can afford. Don’t agree to something just because the company is threatening you. Know your rights by using the FCA and FDCPA laws when negotiating.  You don’t have to agree to the first offer accepted. If necessary, call back and ask to speak to a supervisor. If that supervisor is unwilling to work with you call back at a different time of day and ask to speak to a different supervisor.
  4. Documentation. The company may ask for proof of income and assets or other debt owed to determine if you can pay the full amount owed.  Block out your bank account numbers, SSN, DOB, phone numbers and any other account numbers or personal information when submitting documentation.
  5. Proof. If they have informed you they are recording your conversation, you can record the conversation and inform them you are doing so. Get the debt settlement agreement in writing. If the company refuses to send you a letter, send a letter to the company certified mail with a return receipt identifying the terms of the debt settlement (how much you will pay, how you will pay, when payments will be sent, agreement that the remaining balance owed is waived requiring no further payment, who you spoke with to setup the payment arrangement, date/time you spoke to them and how you want the account reported on your credit reports (Equifax, Experian or TransUnion
  6. Don’t accept no. If your debt settlement offer is rejected consider asking the company to lower your interest rate, lower your monthly payment, waive any late fees or other fees or offer you an alternative payment plan.
  7. Payment. Offer to pay by money order or cashier’s check which is the safest method. You can also make payments over the phone but if someone forgets to process your payment on time you may suffer late charges. Call your bank the next day to ensure your payment was processed on time and for the correct amount.  Notify your bank of the payment arrangement to prevent any unauthorized transactions.  Avoid paying by personal check. 
  8. Credit report. Ask the company to report the account as “paid”, “paid in full” or “paid as agreed”. Ask the company to remove any other previous negative wording listed for the account such as “charge-off”, “write-off”, “repossession”, “collection”, etc.  Ensure the balance is reported as “zero”.
  9. Taxable. If you offer a debt settlement for an account that has been charged-off (more than 180 days or six month late) and the company forgives more than $600, that money is taxable according to the IRS.  The company must provide you with a 1099-C tax form. However, if a taxpayer is insolvent (the amount of total debt owed is greater than his/her assets) the amount if not taxable.

1 comment:

Anonymous said...

Great post, very informative and accurate, although one thing that I think was left out is debt settlement companies. I'm currently in the process of settling my student credit card debt through this company called I'd like to see more info related to this kind of servide. Are these types of companies reliable, or dependable, or is the practice even legal?