You should determine whether you owe the debt, determine a reasonable payment schedule, and present the debt collector with a repayment proposal before engaging in negotiations.
What is a fair debt settlement offer?
An offer for debt settlement that benefits the debtor and the creditor equally is considered fair. Both the creditor and the debtor should be able to recover a sizeable amount of the debt, and the debtor should be able to afford the settlement payment.
There is no one-size-fits-all answer to the question of what constitutes a fair debt settlement offer. The amount you can offer will depend on your individual circumstances, such as your income, expenses, and the amount of debt you owe.
However, there are some general guidelines you can follow to determine what a fair offer might be
How to determine a fair debt settlement offer
- Start by offering to pay 25% to 30% of your outstanding balance. This is a common starting point for debt settlement negotiations.
- Be prepared to negotiate. The creditor is likely to counter your initial offer, so be prepared to negotiate until you reach an agreement that works for both of you.
- Don’t settle for an offer that you can’t afford. It’s important to be realistic about what you can afford to pay. If you can’t afford the settlement payment, you’ll end up back in debt.
- Get everything in writing. Once you reach an agreement with the creditor, be sure to get it in writing. This will protect you in case there are any disputes later on.
How to negotiate a debt settlement
A few considerations should be made if you’re thinking about debt settlement.
- Do your research. There are a lot of debt settlement companies out there, so it’s important to do your research and choose a reputable company.
- Be prepared to pay upfront fees. Most debt settlement companies charge upfront fees. These fees can vary, so be sure to compare rates before you choose a company.
- Be patient. Debt settlement can take time. It’s important to be patient and work with your debt settlement company to reach a resolution.
The risks of debt settlement
For some people, debt settlement may be a good option, but before you decide to pursue it, you should be aware of the risks.
- It can hurt your credit score. Debt settlement will be reported on your credit report, and it can stay there for up to seven years. This can make it difficult to qualify for loans and other forms of credit in the future.
- You may have to pay taxes on the forgiven debt. If you settle your debt for less than the amount you owe, you may have to pay taxes on the forgiven debt.
- You could be sued by your creditors. If you don’t make your settlement payments, your creditors could sue you.
Alternatives to debt settlement
There are some other options you can think about if you’re not sure if debt settlement is the best option for you.
- Debt consolidation. Debt consolidation involves taking out a new loan to pay off your existing debts. This can lower your monthly payments and make it easier to manage your debt.
- Debt management plan. A debt management plan is a program that helps you pay off your debt over time. You make one monthly payment to the debt management company, which then distributes the money to your creditors.
- Bankruptcy. Bankruptcy is a legal proceeding that allows you to discharge your debts. This is a last resort option, but it can be a good option for people who are overwhelmed by debt.
Confirm that you owe the debt
Debt collectors have five days from the time they first get in touch with you to provide you with specific information regarding the debt they claim you owe. Generally, debt collectors must provide this information in writing, either in the mail or electronically.
If you’re not sure if you owe the debt, this validation information will help you determine that and will also tell you how to dispute it. You can ask the debt collector to provide more details about the debt if you’re not sure who you owe money to or how much you owe.
Calculate a realistic repayment plan
After you’ve established that you owe money, you can offer the debt collector a repayment schedule or make a full payment. Here are some questions to ask yourself if you want to offer to pay back this debt:
First, review your current financial obligations. Put your monthly expenses and take-home pay in writing, along with the amount you wish to repay each month. Try to allow some income left over to cover unexpected expenses and emergencies. Remember that even while you’re paying off this debt, you might still run into additional issues if you fall behind on other bills. If you’re struggling, a non-profit credit counselor can help you create a budget and work with the collectors.
This could be one payment or a series of smaller payments. Don’t pay more than you can afford. You can instruct a debt collector to apply your payments to a particular debt if you owe them money on more than one account. Debt collectors are not allowed to apply a single payment for multiple debts that you’re disputing.
Dealing with debt settlement companies can be risky. Some debt settlement companies promise more than they can deliver. Certain creditors may also refuse to work with the debt settlement company you choose. In many cases, the debt settlement company won’t be able to settle the debt for you anyway.
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How much do debt settlement companies charge?
Debt settlement companies typically charge a 15% to 25% fee to tackle your debt; this could be a percentage of the original amount of your debt or a percentage of the amount you’ve agreed to pay. Let’s say you have $10,000 in debt and settle for 50%, or $5,000.
What is a debt settlement company?
Debt settlement companies may also be known as “debt relief” or “debt adjusting” companies. The companies generally offer to contact your creditors on your behalf, so they can negotiate a better payment plan or settle or reduce your debt. They typically charge a fee, often a percentage of the amount you’d save on the settled debt.
When can a debt settlement company collect a fee?
Debt settlement companies can’t collect a fee until they’ve reached a settlement agreement, you’ve agreed to the settlement, and you’ve made at least one payment to the creditor or debt collector as a result of the agreement.
What is a do-it-yourself debt settlement?
With do-it-yourself debt settlement, you negotiate directly with your creditors in an effort to settle your debt for less than you originally owed. The strategy works best for debts that are already delinquent. Creditors, seeing missed payments stacking up, may be open to a settlement because partial payment is better than no payment at all.