People with a significant amount of outstanding debt often look for options to just get rid of the debt somehow. It makes sense because all the collection calls, the burden of monthly repayments and not being able to afford the payments can take a toll on your mental health. If you are a victim to such a situation then chances are that you are facing a financial hardship due to which you can’t afford the payments. If so, debt settlement can really work wonders for you.
Understanding How Debt Settlement Works?
For starters, when you are in debt and facing a financial crisis, all at the same time, there are multiple options you can go for. From debt consolidation to declaring bankruptcy or talking to a financial counselor, you can sort your situation easily. However, if nothing suits your situation then requesting your creditor for a lower settlement is the wiser solution.
In debt settlement, you basically negotiate with your lender to reduce your loan amount and just write it off. It’s not like you don’t pay anything at all, in fact, you at least need to pay 50% of what you owe to the creditor so that he agrees on the settlement. Offering anything less than 50% can lead to rejection. The best tactic here is to find a middle ground where you and your creditor, both can agree on a benefiting settlement.
The Type Of Debt That Qualifies For Debt Settlement
There are two types of debts; secured and unsecured. A secured debt is where you use collateral to get the loan amount. It can be anything, a valuable asset, your car or even your home. On the other hand, an unsecured debt comes with no collateral. It can be in the form of personal loans, credit card loans or medical loans.
Debt settlement only applies to unsecured loans where you don’t have any collateral to offer. These are mostly private loans where you are dealing with private creditors so yes, a negotiation can work in your favour, if you do it the right way.
How To Talk To Your Creditor About Debt Settlement?
Now comes the most important part of the process; talking to your creditor and negotiating for a debt settlement. For this, you need to possess some great negotiation skills but if it’s not your cup of tea then the other option is to just hire a debt relief company to make the deal for you.
Remember, in something as serious as debt settlement, your negotiation can make or break the deal so you have to be really good at it. To make the process easier for you, here are some steps you need to follow for a successful debt settlement;
1- Acknowledge Your Situation
Before starting the negotiation, make sure that you are well aware of your circumstances and your financial situations. You first need to make a budget that includes the total amount you owe, the interest and the amount you can afford to pay. To get your figures straight, you’ll have to assess your expenses and your income too.
2-Talk To Your Creditor
You need to start a negotiation before the creditor forwards your debt to a collection agency. Dealing with a collection agency means a whole other level of stress. Just talk to your creditor directly and explain to him your financial hardship in detail without any misinformation. Moreover, don’t get too emotional and don’t put unnecessary pressure on the creditor as this can lead to unwanted consequences.
3-Make Your Offer
For starters, to convince your creditor that you really are dealing with a financial hardship, you need to have a history of at least 5 to 6 months of missed payments. This just puts the creditor in a situation where he thinks about accepting your deal instead or taking the risk of losing the complete amount.
Be realistic with your offer. If you are offering your creditor anything below 50% of the total amount you owe, chances are that the deal can take a bad turn and the lender will reject it. You have to come up with a convincing offer like 50% or more to make the deal successful.
4-Tell The Truth And Stay Consistent
Consistency is the key when you are asking your creditor to write off a certain percentage of your loan. You have to tell the truth about your financial situation and keep the story consistent. Remember, your creditor is clever enough to sense any lies or misinformations and you might even end up being sued for it.
5-Keep Your Tone Polite
Getting into a debt settlement is basically requesting your creditor to just forgive some amount of the loan. You can’t be rude or harsh with your words when making a deal here. You need to keep your tone polite and present your proposal in a professional way to make the best out of the deal.
6-Ask For A Written Agreement
If the deal goes well, you need to ask your lender for a written agreement where every minor detail of the deal is mentioned. It includes the lump sum amount decided, the timeline provided and the fact that once you are done with your payments, the creditor will mark your loan as “paid in full” or “Settled”.
Things Not To Say To Your Creditor In A Debt Settlement
1-Making Any False Promises
Assessing your financial situation is of utmost importance before getting into a negotiation because that way, you’ll be able to fulfill your promises as per the agreement. You can’t just make any false promises to your creditor like “I’ll pay this amount to you every month” without ensuring that you can afford it. If you do so, your creditor can take legal action against you and it will also damage your credibility.
2-Being Aggressive
When making a deal, you should sound professional and keep your tone polite. You cannot expect things to turn out well if you are becoming overly aggressive with your creditor and the worst would be, threatening him like, “If you don’t accept this deal, I will take legal action against you”. This can cause unimaginable damage.
3-Sharing Any Unnecessary Personal Details
When negotiating, don’t let your emotions take the best of you. You don’t need to share any unnecessary personal details to your creditor. Especially don’t share anything about your income or the assets you own if it’s not required.
4-Excessive Lowballing
If without any justification, you are offering your creditor a significantly low amount then it’s obvious that your creditor will not accept it. You need to be professional when it comes to negotiating a debt settlement and offer a realistic and reasonable amount for your creditor to accept it.
The Final Word
When you make up your mind to embark on a debt settlement journey, you need to be prepared for both, good and bad scenarios. If you are following the professional route with your proposal, have authentic financial hardship and have the lump sum amount ready, chances are that your deal will be accepted. However, if you let your emotions take the best of you, tell lies or miscommunicate with your creditor, your deal can take a wrong turn and you might face unwanted circumstances.
If it all seems too overwhelming to you, you can always choose another option and that is to hire a professional debt relief company. With a professional debt settlement service provider you can expect your deal to go through with your creditor. You just need to look for reliable and trustworthy debt management companies that know how to deal with such situations professionally.
FAQs
Q1. How To Write A Debt Settlement Proposal Letter?
The letter should include all your important details like your contact information, your name, your address and mailing address. You then have to specify the amount you can pay along with what you expect from the creditor. A good starting point would be to offer at least 30% of the total amount you owe.
Q2.What Is The Risk Of Debt Settlement?
One of the downsides of debt settlement is that it can do long term damage to your credit score. A poor credit score can really affect your ability to get any loan, credit card, a house or even a job in the future.
Q3. Is Paid In Full Better Than Settled?
Yes, paid in full is better than “Settled” as it will not damage your credit score. A “settled” debt will stay on your credit report for years and that will lead you to more financial problems and restrictions.
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