Negotiating Unpaid Debt

Debt negotiation for less then what is owed can have both benefits and detriments for creditors and consumers. In many cases, negotiating a debt can save a customer from bankruptcy. This helps preserve the customer’s credit rating, and also the creditor’s interest in the debt, since unsecured debt is normally forgiven or paid at pennies on the dollar in a bankruptcy proceeding. However, while negotiating a debt can be a wise decision in some cases, there are also plenty of downsides for both creditor and debtor as well, including a loss of income for the lender and a tarnished credit rating for the borrower.

Debt Negotiation for Consumer

Debt negotiation can sometimes become an unpleasant reality for consumers. In many cases, debt simply spirals out of control as a result of an unexpected illness, job loss, or other any number of other factors. Once you fall behind on payments, late fees and interest begin to mount and it can become difficult or impossible to catch up.  As a result, debt negotiation or bankruptcy may become the only options.

When a consumer negotiates debt, a consumer pays back a portion of the debt owed. This portion usually ranges between 30 to 50% of the amount owed. In most cases, a creditor will not negotiate debt until you are late on your payments. These late payments will show up on your credit report and adversely affect your credit score, since 30% of your credit score is determined by payment history. When the debt is settled, it will be reported on your account as “Settled” instead of “Paid in Full” which can also have an adverse impact on your credit report. However, although your credit will be harmed, the harm is not as detrimental as bankruptcy. The difference between debt settlement and bankruptcy is similar to the difference between a short sale and foreclosure: in a short sale, you are paying less then owed but negotiating with the bank to do so, while in a foreclosure the bank is taking your house involuntarily. 

Some people might wonder why debt negotiation might be more favorable than bankruptcy, especially since you have to pay a portion of the debt back and your credit suffers harm anyway. In order to make that decision, you need to understand how the bankruptcy laws apply to you. Under new bankruptcy laws, many people are no longer eligible to file for Chapter 7 bankruptcy, which liquidates your debt. Instead, you have to file for Chapter 13 bankruptcy, which requires a repayment plan. Your eligibility to file for Chapter 7 bankruptcy is determined by your income: in general, you must make less than the median household income for your size family in your state, and a calculation is done to determine how much average income you will have left in a repayment plan. If you are not eligible to file for Chapter 7 bankruptcy, you will end up paying back some of your debt to your creditor’s anyway, so it is advisable to negotiate debt and avoid the expense and detrimental impact on your credit score that comes with a bankruptcy. 

Debt Negotiation for Creditors

Debt negotiation for creditors also has benefits and detriments. For most creditors, it is usually much better to negotiate debt with a consumer then to sell the debt to a collection agency. Collection agencies pay pennies on the dollar, and creditors are usually able to negotiate for more from a consumer then they would be able to sell the debt for if they sold it to a collection agency.

Negotiating a payment plan with a debtor also allows creditors to avoid having to institute legal proceedings against the debtor. The cost savings associated with avoiding legal proceedings can make it more financially advantageous to negotiate the debt then to attempt to initiate a lawsuit. This is especially true for unsecured debt, where the lawsuit would be result in a claim on assets (money) that the debtor might not have. Furthermore, if a debtor declares bankruptcy, there is a good chance that a creditor will recover nothing in the bankruptcy proceedings.

In order to determine whether it is advisable to negotiate debt, you need to understand the assets that the debtor has. In many cases, you can request to see proof of income or other financial data during the negotiation process. While the debtor is under no legal obligation as there are not debt negotiation laws, to turn those documents over to you, many debtors will in order to facilitate negotiations.

Finding Legal Help

Whether you are a borrower or a lender, negotiating debt can be complex. First, he creditor and debtor respectively each must determine whether negotiating debt is more or less advantageous then either filing bankruptcy or attempting a lawsuit.  Once the decision to negotiate is made, creditors must be careful to comply with Fair Debt Collection Practice’s Laws, while debtors must ensure that the legal settlement agreement truly absolves them of their debt.  It is advisable to hire an attorney experienced in debt settlement and debt negotiation to help evaluate your options and guide you through the negotiation process.