List of Issues for Debt Negotiation

Credit card and other unsecured debt that has spiraled out of control could take years to repay---or even a lifetime if you owe a lot of money and can make only the minimum monthly payment. That's why many people turn to debt settlement to resolve their debt issues. Debt settlement allows you to pay off a credit account for less than the full amount owed.

Delinquency

Creditors generally will consider settlement offers only after your account has fallen behind by four or five months. Typically, after six months of missed payments creditors will close your account and sell it to a debt collection company. Before doing so the companies will often entertain settlement offers. The New York Times, in a 1999 story, said some credit card companies were offering to settle for as little as 20 percent of the balance, although settlements for 50 to 60 percent are more likely.

Process

Debt negotiations can be handled by mail or by telephone. Telephone negotiations can be conducted more quickly, but letters provide a paper trail and a clear record of the negotiations. For-profit debt settlement firms will handle the entire process for a fee, but it could take months or even years for them to negotiate agreements with all your creditors. You're required to make monthly payments to the debt settlement firms, which take their management fee off the top and use the rest to negotiate with your creditors. However, the debt collection companies often won't contact your creditors until you have enough money in your account to make a settlement offer. The Federal Trade Commission says that's one of many reasons that you should stay away from debt settlement firms and handle your own negotiations.

Offers

Debt negotiation works much the same as other transactions---one party starts at the low end of the scale while the other starts at the high end. For example, you may write a credit card company offering to settle a delinquent account for 20 percent of the balance and the card company may respond by asking for 90 percent. Both sides will have to compromise for an agreement to be reached.

Payment

Some card companies and debt collectors will accept only lump-sum payments to settle a debt, while others will offer a payment plan over several months.

Taxes

Debt settlement could lead to tax consequences. Any debt forgiven though your negotiations could be treated as income by the IRS, adding to your tax bill.

Credit Reports

Once you have settled, your credit reports will be updated to show that the account you paid was "settled for less than the full balance." The negative entry could remain on your credit reports for seven years.