Debt negotiation involves making an arrangement or agreement with creditors to pay a debt for less than what it is owed. Debt settlement negotiation is often associated with reducing credit card debt, but it is also possible with mortgage debt when the borrower and the bank agree to do a "short sale" in which a house is sold and the proceeds, which are less than what is owed on the mortgage, go to the lender to satisfy the debt.
Stop Paying Your Debts
The first step to debt negotiation is usually to stop paying your debts. Most creditors will not reduce the amount you owe until your debt is nearing collections. While you can speak to your creditors and let them know you will be having problems making payments, and they may in some instances lower your monthly payment, that type of arrangement is not typically considered "debt settlement" because you are not reducing the amount of money you pay back, you are just stretching out the time it takes you to pay back the amount you owe, and often paying back more in the long run.
Debt settlement, on the other hand, is an option that creditors offer when they feel that they are unlikely to collect on the debt and that the debt may have to be sent to collections. Debts are usually sent (sold) to collection agencies after six months of nonpayment. So, once you have stopped making payments, creditors will usually be willing to begin negotiating a settlement sometime between 30 days and six months after your last payment, depending on the creditor.
Not paying your debts will have an adverse impact on your credit score, so you should be aware of this. During this time period, you should be saving the additional money that you are not sending to your creditors, so you can offer your creditors a lump sum payment. Many creditors are more willing to settle a debt if the payment comes in the form of a lump sum.
Negotiate a Settlement
Once you have fallen behind on your payments, creditors will begin to be willing to negotiate a settlement with you. This can be done via letter, or over the telephone with a supervisor. Usually negotiating a settlement over the phone is quicker and more effective, but some people prefer to communicate by mail. Ensure that you are speaking to someone in the collections department who has the authority to make decisions. Explain to them that you are unable to pay the amount owed, but that you are willing to offer a settlement. Understand upfront exactly how much you are willing to offer them. There usually will be some negotiation involved, so you may not want to start with your maximum offer. You can offer as a settlement either a lump sum payment or a series of monthly payments.
Typically, most credit card companies will settle for between 30 and 50 percent of the amount owed, but it depends on the creditor, how much you owe and how likely the creditor believes that the account will get sent to collections. When you make a settlement offer, the creditor will either accept it, deny it or make a counteroffer. Once you come to an agreement, make sure that the creditor and you both understand the full terms of how the settlement will be paid and how the settled debt will be reported on your credit report.
Get Everything in Writing
Whether you negotiate a settlement, it is essential that you get the complete terms of the settlement in writing. This written document should specify exactly what debts are being settled, exactly how much you will pay and exactly how you will pay it. There should be language in the letter that says something to the effect of, "This settlement is considered full payment on the debt."
The letter should be specific and list account number(s) as well as detailed information about how much you will pay. You should only send payment after you have a signed document from the creditor that contains all of this information. You should send payment in the form of a check or money order: Do not give creditors access to your bank account. Send the payment registered mail, accompanied by a note or letter stating that the check constitutes full payment or full satisfaction for the debt. You may be charged taxes on the amount of the forgiven debt (as this constitutes income) so be prepared to receive a 1099 form.
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