If you were to believe all of the ads that you see on television for debt relief, you would think that there is only one method with which to settle unsecured accounts with creditors: a qualified debt settlement company or credit counseling firm. But that is not the case. You can successfully negotiate your own settlements; however, this is not for everyone. Although you may be a candidate for outside assistance if you have unsecured debt of more than $5,000, you can successfully negotiate smaller amounts yourself.
Gather Information
The first thing you must do is to obtain current statements of what you owe to each and every creditor. List them on a piece of paper or on a spreadsheet on your computer. This will be the page from which you will work with your creditors, so be sure to leave enough space to write down any calls made to the creditor or calls taken from them. Keep track of people you talked to, the phone numbers and a sentence or two about what you discussed.
Perform a thorough review of your finances. Find out if you have any excess money with which you can use to settle any of these debts. Keep paying the minimums if at all possible during this time. This will help you to keep the accounts from going delinquent and being turned over to collection agencies.
Even if that does happen, however, all is not lost; you can still negotiate with your creditors.
Creditors Prefer to Settle
The little secret about creditors is that they prefer to settle with you rather than keep dragging your debt on and on. After you have an amount of money set aside with which to settle accounts, look at your account balances. Choose the oldest accounts first and try to settle those right away. The strategy here is to get them closed so that you can avoid further adverse action by the creditors.
When you settle with these creditors, negotiate a final payment or payments. Determine how much of your settlement money to allocate to them. A good starting point is 50 percent of what you owe on the account. Some will want more, but others will gladly take half.
If you are nearing the end of a month, there might be a push by the creditors to get as much money as they can onto their books, so they might be more willing to accept a lower settlement amount.
Also, if your account is past due and you have made no payments or communications to the creditor, your account might have been turned over to a collection agency. These agencies act as intermediaries between you and your creditors. They will also negotiate a settlement amount on behalf of the creditor.
Pay It Off and Get It in Writing
Once you have agreed to a settlement amount on the phone, the creditor will want an immediate payment. Be ready to make one. Move the amount of money that you have for settlements into a separate checking account. The reason is that you do not want to give any creditor access to your primary checking and/or savings account.
After you have made the settlement payment, demand a letter showing the agreed-upon settlement amount and the payment you just made. You should be able to obtain that as a standard method of settling and closing an account. Unfortunately, you cannot obtain this up front with most creditors. They will only send it after you have made the payment. In a few days you should have a letter that states that you entered into a settlement agreement on your account and that you made a payment to satisfy that settlement. If there are multiple payments, then it will reflect that as well. Keep this paper so that you can prove that the account has been settled. Also, this statement should reflect that the credit bureaus will show the account as "settled with a balance." This is standard and means that you owed more than the amount that you settled the account with.
If the settlement amount is over $600.00, then the creditor is required to file a form with the IRS. This will show that you obtained a settlement in excess of $600.00; you will be have to pay taxes on the amount above $600.00 as taxable income.
Finally, your account will most likely remain open until your check has cleared the systems of your creditors. They will put a notation on your account and everything should be settled within 21 to 31 days of receipt of your payment. During this time, you might still receive phone calls and statements about your account balance. Do not be dismayed at these communications. If, however, you continue to be harassed by any of these creditors after about a month, then it is time to fight back with both the evidence of a closed account and with consumer protection laws, designed to protect you from harassment.
Keep in mind that most creditors are willing to work with you in obtaining a settlement on your account. You should find your communications with them to be cordial and respectful of your dignity. If not, then ask to speak with another representative or a supervisor.
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