Debt Negotiation Information

Debt negotiation is also known as debt settlement or debt arbitration. This process begins after payments are missed and allows the lender and debt holder to re-negotiate the terms of the debt. Through mutual agreement, the amount due may be reduced, fees and penalties waived, payment time extended, or interest charges reduced. The debtor may deal directly with the lender or through a debt settlement agency or a lawyer. In cases where the debt is long past due, the lender may turn over negotiations to a credit collection agency. This process allows you to take stock of where you are financially and negotiate a clear path out of debt.

Identification

Negotiating directly with the lender is best if the consumer has one or two debts or the amount due is a few thousand, according reporter Tara Siegel Bernard of The New York Times. For more severe debt, a debt settlement agency can help by consolidating the debt and negotiating with all the companies. Since initial consultations are free, consumers with severe debt can also have their case reviewed by a bankruptcy lawyer.

Benefits

Good debt management plans are structured so consumers can continue working and living in their home. Reductions in the amount owed give consumers a chance to regain their financial health. Many creditors offer automatic deductions from checking accounts to help consumers maintain the payment schedule. Debt settlement agencies consolidate the debt so only one check has to be written each month. In some cases, bankruptcy may be the best way to protect your assets.

Effects

Debt negotiation has a negative impact on credit scores. For credit card debt, most banks' payment plans close the account. This closure is reported to credit reporting agencies and is damaging to your credit score. When the lender writes off part of the balance due, the report to the credit agency is a negative that the account was settled, versus a positive report that it was paid in full. In addition, the IRS counts the amount of the debt reduction as taxable income. Bankruptcies weigh the heaviest by remaining on a credit report for seven to 10 years.

Warnings

"The history of credit counseling agencies and debt settlement agencies is somewhat checkered," according to the Uniform Debt Management site. New York Times reporter Jane Birnbaum goes further, warning consumers about scams from both lawyers and debt settlement agencies. She quotes Elizabeth Warren, a law professor at Harvard and a bankruptcy expert: "Unscrupulous debt counselors have built their business models around taking advantage of desperate people."

Tips

Bernard recommends finding agencies through the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies (see Resources). She states, "Their fees should be reasonable (about $30 to $50 to set up, say, a debt management plan) and they should not turn you away if you cannot afford the nominal fee. They should also be willing to spend an hour with you, at the least."