It’s a good idea to consider debt settlement when you have debts that you are unable to repay in full. An offer to settle your account with your creditors for less than what you owe is known as a debt settlement. Here are some things to consider before offering a creditor or debt collector a percentage of your debt settlement.
Are you struggling with overwhelming debt? Feeling the pressure of relentless collection calls and mounting interest? You’re not alone. Millions of Americans find themselves in this situation, wondering how to escape the clutches of debt and achieve financial freedom.
One potential solution is debt settlement, a process where you negotiate with creditors to pay off your debt for a reduced amount. But how much of a reduction can you realistically expect? What percentage of debt will creditors accept?
This comprehensive guide will answer all your questions about debt settlement including:
- How much debt can you settle for?
- Factors affecting debt settlement percentages
- Negotiating with original creditors vs. collection agencies
- Making an effective settlement offer
- The pros and cons of debt settlement
- Alternatives to debt settlement
By the end of this guide, you’ll be equipped with the knowledge and tools to determine if debt settlement is the right choice for you and, if so, how to maximize your chances of success
How Much Debt Can You Settle For?
The percentage of debt that creditors will accept varies depending on several factors, including:
- The age of the debt: Older debts are generally easier to settle for a lower percentage.
- The amount of debt you owe: Smaller debts are typically easier to settle than larger ones.
- Your financial situation: Creditors are more likely to accept a lower offer if you’re experiencing financial hardship.
- The type of creditor: Original creditors may be less willing to negotiate than collection agencies.
Here’s a general guideline:
- Original creditors: 40% to 50% of the debt
- Collection agencies: 20% to 30% of the debt
- Debt buyers: 10% to 20% of the debt
Remember: These are just averages. The actual percentage you can settle for will depend on your specific circumstances.
Factors Affecting Debt Settlement Percentages
Several factors can influence the percentage of debt that creditors will accept, including:
- The statute of limitations: This is the time limit within which creditors can sue you to collect a debt. Once the statute of limitations expires, creditors are less likely to pursue legal action and may be more willing to settle for a lower amount.
- Your credit score: A higher credit score indicates that you’re a lower risk borrower, which may make creditors more willing to negotiate with you.
- Your negotiation skills: The more effectively you can negotiate, the better your chances of getting a favorable settlement.
Negotiating with Original Creditors vs. Collection Agencies
Negotiating with original creditors can be more challenging than negotiating with collection agencies. Original creditors may be less willing to accept a lower offer, especially if the debt is relatively new.
Collection agencies, on the other hand, are more likely to settle for a lower amount because they purchased the debt for a fraction of its original value. They are also more likely to be flexible with payment terms.
Making an Effective Settlement Offer
When making a settlement offer, it’s important to:
- Start low: Aim for a settlement amount that is significantly lower than the total debt amount.
- Be prepared to negotiate: Creditors will likely counter your offer, so be prepared to negotiate and find a middle ground.
- Get everything in writing: Once you reach an agreement with a creditor, make sure to get it in writing. This will protect you in case there are any disputes later on.
The Pros and Cons of Debt Settlement
Pros:
- Can significantly reduce your debt
- Can stop collection calls and lawsuits
- Can improve your credit score over time
Cons:
- Can damage your credit score in the short term
- Can take several years to complete
- May not be available for all types of debt
Alternatives to Debt Settlement
If debt settlement isn’t the right choice for you, there are other options available, such as:
- Debt consolidation: This involves taking out a new loan to pay off your existing debts, which can result in lower interest rates and a single monthly payment.
- Debt management plan: This involves working with a credit counseling agency to create a plan to repay your debts over time.
- Bankruptcy: This is a last resort option that should only be considered if you are unable to repay your debts.
Debt settlement can be a viable option for individuals struggling with overwhelming debt. However, it’s important to understand the process, the factors that affect settlement percentages, and the potential risks involved. By carefully considering your options and working with a qualified professional, you can increase your chances of successfully settling your debt and achieving financial freedom.
Dealing with a collection agency
A collection agency, operating on behalf of a creditor, might be open to accepting as much as 2050% of the debt as a settlement offer.
Collection agencies keep their business with various creditor clients by obtaining higher repayment settlements, in addition to earning a commission on the amount offered. Some creditors set limits on the reduction percentage a collection agency is authorized to approve.
The percentage that a debt collector will take depends on your level of financial difficulty, the amount of debt you owe, and the length of time the debt has been outstanding.
Here are some factors a debt collector will consider before they accept or decline your offer.
- What is your income? A debt collector might accept less if you don’t have a lot of money or if it’s not enough. However, the collector will have less motivation to accept a less favorable settlement if you have income that is subject to garnishment. Use this information, if appropriate, when negotiating because some income, such as pension and ODSP income, cannot be garnished.
- What is the total amount of debt you owe? If it’s not much, a creditor is probably going to be more amenable to negotiations because it would be too expensive for them to sue you in court. Negotiating a settlement will become more difficult the more debt you owe because a creditor or debt collector will be more inclined to go to court to obtain a judgment and a garnishment order.
- How much debt do you have? If it’s more than a year old, creditors are more likely to want between 70 and 80 percent of the debt paid back. But for older debt, a collection agent will typically take less. In the event that the debt exceeds the statute of limitation, the debt collector may agree to reduce the outstanding balance by 20% or more.
- What kind of debt do you owe? Certain debts, such as money owed to the Canada Revenue Agency for tax debts and Canada student loans, can only be compromised in a consumer proposal. The CRA will not directly settle any outstanding taxes with you. They might consent to a one- or two-year payment plan and waive some penalties and interest, but using a Licensed Insolvency Trustee is the only way to pay off tax debt.
- Assets you own. The creditor will be less inclined to negotiate a settlement if they know you own property or other assets because they will want you to use those assets to pay off your debts. If you owe money on secured debts, such as a car loan, your lender may take possession of these items in order to collect the outstanding balance.
- Active garnishment. A creditor won’t agree to negotiate a settlement for less if they have already garnished your wages. If you are unable to pay back the entire debt at that point, you will have to file for bankruptcy or a consumer proposal in order to stop the garnishment.
Debt collection settlement percentage
When you are in arrears on debt payments, your account can be sent to collections. If the debt is old, it may eventually be referred to a collection agency from your creditor’s internal collections department. You will be interacting with the debt collector rather than your original creditor once the debt has been transferred to a third-party collection agency.
You can attempt to negotiate a debt settlement on your own if you only have one or two accounts that are past due.
What Percentage Should I Offer to Settle Debt with Creditors or Debt Collectors?
FAQ
What percentage should I offer to settle a debt?
What is the lowest a debt collector will settle for?
Will debt collectors settle for 10 percent?
What if a creditor refuses my offer of payment?
How much should a creditor accept?
Typically, a creditor will agree to accept 40% to 50% of the debt you owe, although it could be as much as 80%, depending on whether you’re dealing with a debt collector or the original creditor. In either case, your first lump-sum offer should be well below the 40% to 50% range to provide some room for negotiation.
How much should a creditor settle a debt?
When you’re negotiating with a creditor, try to settle your debt for 50% or less, which is a realistic goal based on creditors’ history with debt settlement. If you owe $3,000, shoot for a settlement of up to $1,500.
Can a creditor accept less than what you owe?
The creditor isn’t under any legal obligation to accept less than what you owe. Rather, you must show that it’s in their best interest to accept less. If some of your debt isn’t cleared and you declare bankruptcy, the creditor, especially creditors of unsecured debt like personal loans and credit cards, could receive nothing.
How much will a creditor accept a settlement offer?
Once you’ve done your research and put aside some cash, it’s time to determine what your settlement offer will be. Typically, a creditor will agree to accept 40% to 50% of the debt you owe, although it could be as much as 80%, depending on whether you’re dealing with a debt collector or the original creditor.