Debt negotiation is a bankruptcy alternative that could help you settle your debts for less than you owe. This process is not a shortcut for consumers who don’t want to pay all their credit card bills. It is a serious solution to consider if you’re overwhelmed by high balances and unmanageable monthly payments.
What Is Debt Negotiation?
Maybe you have seen ads for companies that promise to slash your debts and give you relief from overwhelming bills. Attorneys and for-profit organizations offer debt settlement services. The process is also called debt negotiation or credit arbitration, but the goals are the same. Debt settlement can reduce the amount that you owe your creditors. Alternatively, your attorney or representative can establish a more favorable and manageable repayment plan. There are several advantages and drawbacks.
Debt Settlement Advantages
- Your debts could be settled for less than you owe.
- Debt settlement can help you avoid bankruptcy.
- The settlement does not require court approval.
- The process is faster and more flexible when compared to bankruptcy.
- You can include one account or all of your unsecured debts.
- You’ll get relief from burdensome monthly payments.
Debt Settlement Disadvantages
- You must repay the portion of your debts that wasn’t forgiven.
- If creditors forgive more than $600 of debt, the amount is taxed as income.
- Some debts, such as student loans and mortgages, can’t be settled this way.
- A lump-sum payment might be required.
- You must pay for the debt settlement services.
- Charge-offs remain on your credit report for seven years.
With debt negotiation, you can include one or more accounts. The process is more flexible than bankruptcy, but it only applies to your unsecured debts. You can settle credit card balances, medical bills and other debts that aren’t secured by collateral. If you’re behind on your car payments, a debt negotiation attorney can contact the lender to work out a repayment plan so that you can possibly keep your car.
Lump-sum Settlements and Repayment Plans
Lenders generally prefer lump-sum offers over lengthy repayment plans. For you, a lump-sum strategy means that a larger portion of your debt will be forgiven, and the seven-year reporting limit will begin counting down immediately. The main obstacle is saving enough money to make a substantial payment when you’re stretched to your financial limits. That’s why some debt-relief organizations tell clients to stop making payments for several months. Unfortunately, this increases the amount that you owe and damages your credit.
Some debt consolidation companies make false promises and use deceptive advertising techniques. Consumer protection agencies warn about debt-relief scams that leave customers with even more debt. Meet with an experienced attorney face to face so that you receive personalized advice. A reputable debt settlement lawyer will explain all of your options and review each account to determine what’s best for you. Plus, an attorney can protect you if your creditors sue or if collection agencies use illegal practices to recover debts.
What’s In It For Creditors?
Creditors don’t like settlement offers, but they’re willing to negotiate because they want a customer to repay part of the debt rather than nothing. A sizeable lump-sum payment makes your offer more attractive. Experienced attorneys know what offers creditors will accept, so they can reduce your debts by the greatest amount and help you avoid overpaying.
Because lenders take a dim view of charge-offs, the record will remain on your credit report for seven years. This is the same reporting limit that applies to Chapter 13 bankruptcy, which also requires you to repay a portion of your balances. Debt settlement affects your ability to establish new accounts, and it may lower your credit score. However, if you have multiple-past due balances, the damage is probably done.
Finding the Right Solution
It’s always worth considering debt settlement as a bankruptcy alternative if you need relief from unmanageable payments. Contact an experienced debt settlement attorney who can protect you from aggressive creditors and help you take control of your finances. Don’t wait for the situation to escalate. If you’re struggling to make your monthly payments or have fallen behind, act quickly so that you have more options.