Debt Settlement – When is it the Right Choice?
There are circumstances where pursuing debt settlement may be preferable to filing for bankruptcy or some alternative form of debt resolution. Debt settlement is when both parties, the creditor and the debtor, agree to payment terms or resolve a debt for a reduced amount.
As with any settlement agreement, it is recommended that you
- Get the agreement carefully documented in writing
- Include terms that the debt is considered “paid in full” after the settlement payments have been made.
- Any future collection efforts on the debt;
- The creditor selling the balance of the debt to a 3rd party collection agency;
- Continued negative reports to the credit bureaus.
Call us today at 866-261-8282 to get a free consultation on your debt settlement options. Debt resolution is our specialty and we look at every option to help you meet your long-term financial goals. We have found that calling creditors as attorneys that also practice bankruptcy can be also be an advantage. This causes creditors to become concerned that they will receive a lessor payment or perhaps nothing at all if the borrower decides to opt for bankruptcy. This tactic often motivates creditors to begin negotiating!
How Do I Know if Debt Settlement is Right for Me?
Since every person’s circumstances are unique, there is no cookie cutter answer to this question. But there are some general guidelines that we use to determine if debt settlement is the most appropriate solution. Some of those guidelines are:
- Is the total outstanding debt owed is under $10,000?
- Do you owe money to less than 10 total creditors?
- Is your income too high to qualify for debt elimination under a Chapter 7 bankruptcy?
- What are your short- and long-term financial goals (i.e. future home purchase)?
- Do you have cash savings available to make a settlement payment to the creditor with a lump sum?
- Will there be tax consequences as a result of partial debt forgiveness?
We offer free consultations to discuss all of your debt resolution options. At the appointment we will carefully review your finances, analyze your circumstances and provide detailed recommendations for optimal debt resolution. Call us today at 866-261-8282.
What Factors Affect My Chances of a Successful Debt Settlement?
Many factors affect the ultimate success of negotiating a debt settlement with a creditor. Some of the factors that will determine your chances of success are:
- Your income and ability to make payments under a debt repayment plan versus resources you may have to make a lump sum payment under a debt settlement plan.
- Source of income (full-time, part-time, contract, self-employed, retired, etc.) If you are entering a debt repayment plan, will you have the income (long term) to complete the payments?
- The age of the debt and length of time since you last paid on the debt. You may be able to negotiate better terms on older debt versus more recent debt.
- The total amount of the debt
- Has the creditor obtained a judgment? Once a judgment is in place, the creditor can continually renew the judgment virtually erasing a statute of limitations for debt collection. The judgment will shift to the new collector if the debt is sold.
- Has the creditor put a garnishment in place? If so, it makes debt settlement more difficult and debt consolidation more likely. With a garnishment in place, the creditor has an open path to payment through state tax levy, wages or a bank account balance and is less likely to negotiate to reduce the debt. With Chapter 13 debt consolidation, we can force a repayment structure with favorable terms. In addition, if the creditor has taken over $600 within 90 days of a bankruptcy filing, we can retrieve the money back for you.
- Who is currently trying to collect on the debt and who owns it:
- Original creditor?
- Has the creditor referred the matter to a collection agency?
- Junk Debt Buyers (has some third party purchased the debt at a discount from the original amount owed?)
Since there are so many variables, we will be able to better advise you on your potential for success after we meet for the initial free consultation. The purpose of this meeting is for our firm to look at the big picture of your finances and give you options and evaluate your chances of success before you make any decisions.
Debt Settlement Techniques
Most often, debt settlement involves offering a creditor a lump sum payment in exchange for legal forgiveness of the balance of the debt owed. Typical settlements range from 40% – 60% reduction in debt (sometimes paying even less).
As we stated in the opening, we have found that calling a bankruptcy attorney helps to motivate creditors to consider a settlement.
- If the client ultimately filed a Chapter 7 instead, the creditor (assuming it is an unsecured creditor) would get nothing.
- If a client opted for a Chapter 13 debt consolidation instead of settlement, the creditor would have to jump through additional hoops to get paid:
- File a proof of claim;
- Potentially hire an attorney;
- Consider the option to appear at the 341 hearing, etc.
- Receive 0% repayment on the debt.
Under a Chapter 13 plan, the creditor would most likely stand to get paid back at a reduced rate with a portion (potentially the majority!) of the debt eliminated with a court discharge at plan completion.
How will Debt Settlement Affect my Credit?
While the concept of reducing your debts is a positive step for your credit, you need to be sure that you are taking the legal steps necessary to protect yourself and your credit. Here are some considerations:
- Don’t fall behind on other bills (i.e. secured debts such as house payments or vehicle payments) to raise the money for a lump sum payment. This will only further compromise your budget and create future headaches, such as a home foreclosure or vehicle repossession.
- Be aware that if you stop making payments on a debt, it will reduce your credit score. This may be a short-term strategic choice, but it is important to consult with a professional to understand how this decision fits in to your long terms financial goals.
- Be sure that the agreement legally releases you from the balance of the debt. It is important to have a seasoned attorney reviewing the legal agreement to be sure that your creditor doesn’t reserve the right to sell the balance of the debt to a 3rd party debt collection agency.
- For debt settlement, it is important to negotiate how the settlement is reported on your credit report:
- Is it written off?
- Indicated as “Paid as Agreed”?
Our job is to ensure that the settlement helps your credit versus creating a further blemish.
Debt Resolution Experts
In short, it is important to work with a licensed professional to:
- Determine if debt settlement is the right choice for your circumstances.
- Approach debt settlement in the proper way to ensure an optimal outcome with improved credit standing.
- Explore alternatives to resolve debts.
We offer free consultations to review debt settlements and other debt resolution options. We understand the stress associated with unresolved debt issues and a budget that feels out of control. Our primary goal is to relieve that stress and develop an optimal plan to reach your long term financial and credit score goals. Call us today at 866-261-8282 to speak to one of licensed attorneys.