When you are dealing with debts that you can’t afford to pay back, that’s when it’s a good idea to look at the option of debt settlement. In debt settlement, you negotiate with your creditor and settle for less than what you owe. However, there’s a catch here, first is that this strategy only works on unsecured debts and second is that there’s no guarantee that your creditor will agree on reducing the amount.
The question here is, what will make your negotiation successful and how to convince your creditor to accept your offer? Well, the percentage you are offering plays a very critical role here!
Why Would A Creditor Accept A Debt Settlement Offer?
For someone who’s new to the concept of debt settlement, it can be a little confusing to understand that why would a lender settle for less? Well, creditors often accept such offers when they prefer receiving a large amount of the loan back all at once instead of waiting for small monthly payments. Secondly, when creditors sense the risk of losing their entire loan amount and they can see that you can’t afford to pay them back, that’s when they accept taking at least half of what you are giving as partial payment is better than no payment.
When Is It Right To Opt For Debt Settlement?
The right time to approach your creditor is when you have a significant amount of money in your account to put towards your debt. Whether you get that money from inheritance, a tax return or any other source or if you simply have been saving up that amount without knowing about debt settlement then that’s exactly the time you should make an offer to your creditor. If you are new to it all then it’s best to talk to a lawyer about how to make the most out of your resources.
The Amount You Can Afford To Pay
One of the biggest mistakes people often make in debt settlement is that they make false promises without actually knowing their financial situation. Before making an offer, you first need to assess your financial situation, make a budget, figure out your income and your expenses and then see the amount you can afford to pay as a lump sum. Offering something more than what you can afford can result in unwanted consequences and you might even face legal action.
Debt settlement is a legal arrangement and failing to meet the terms of your agreement can make things worse for you. Your creditor can sue you for it and you’ll even end up into a deeper, bigger debt than before. You just need to ensure that you can afford the proposal payment without any hassle.
The Right Percentage To Offer In A Debt Settlement
The most crucial part of your entire deal is the percentage of the lump sum amount that you are offering. It can make or break your deal so you have to be realistic with it and ensure that you are offering a ethically reasonable percentage so that your creditor doesn’t reject it right away.
There’s no exact figure when it comes to a settlement percentage. Creditors usually accept offers between 30% to 70% but it depends on several factors. Like, when reviewing your offer, your creditor will consider your financial situation, your income, the age of the debt and of course, the total amount that you owe with interest. Each creditor has his own settlement policies. It’s just that you have to be prepared for your offer to be rejected in the first go but you shouldn’t just give up here and try to negotiate with the creditor. You need to agree on middle grounds where you and your creditor, both are getting a benefit.
How To Make An Offer?
If you have an old debt, the amount is really small and you can’t afford to pay it back then start with an offer between 20% to 30% of your outstanding balance. See how the creditor reacts to it. Most probably your creditor will make a counter offer and if it’s something you can afford then accept it to just settle your debt. Once you both agree on the terms of the deal, ask your creditor to get it all in writing. Make the payment and ensure that you document every detail to avoid any future complications.
In case you are under a significant amount of debt then the wiser thing to do would be to offer at least 50% or more. Anything below this figure can really mess up your deal and your creditor will most likely reject it without giving it a second thought. As said earlier, you just need to offer a reasonable percentage in order for your deal to go through.
Reducing Your Debt By 70% To 80%
If you have one or two small debts to deal with, with some room in your budget as well, then it’s better to just talk directly to your creditor and get the agreement signed. However, if it’s a huge amount and you have multiple creditors to cater too then it’s best to use some additional debt relief. This is where consumer proposal arrangement comes into action.
It’s a type of legislated debt settlement where the offer is fair and reasonable for both, the creditor and the debtor. If you meet the eligibility criteria for it then you can get a reduction of up to 80% in your debt. A consumer proposal agreement depends on multiple factors like your income and the value of your assets. In such an arrangement, your trustee will first calculate what the creditors would get if you file for bankruptcy. As it all is paid over time, your creditor would receive a better percentage in debt settlement than what he would get with bankruptcy. These proposal offers usually range between 20% to 50% depending on the situation and the debt amount.
Getting Professional Help
If it sounds too overwhelming and difficult to you then it’s best that you use the services of a professional debt settlement company. With a company, you won’t have to worry about the details of the deal. A good debt relief company has all the expertise you need to reach a successful debt settlement. Yes, hiring a company means you’ll have to pay a fee for the services but you are only charged if the deal goes through and if it does then the fee will definitely be worth it!
Final Word
Struggling with a significant amount of debt can make your financial situation seem really bleak. If that’s the case then using professional and legal help to settle your debt with your creditor is the best decision. With the right financial counseling, the right debt relief services, you can easily become debt-free in no time. You just need to trust the process, have lots of patience as this process demands it and you need to stay consistent with your efforts. Debt settlement isn’t an overnight solution to your debt problems and it takes time. Sometimes, it will take you days and sometimes months before your creditor finally agrees on your offer.
FAQs
Q1. What Is The 20 10 Debt Rule?
The 20 10 debt rule is designed to help you avoid any dangerous levels of debt. The rule states that you should not accumulate long term debt that crosses 20% of your total income and that you should avoid any monthly debt payments that are more than 10% of your income.
Q2.How Much Debt Is “Too High”?
You need to use the Debt to Income ratio to determine the health of your personal indebtedness. If more than half of your monthly income goes into debt repayments then it’s clear that you are under too much debt. You need to have a debt to income ratio of 36% or less. Anything more than that means you need to look for a solution and cut down on your debts as soon as possible.
Q3. Is It Better To Save Money Or Pay Off Debt?
Saving money even when you have multiple debts to deal with sounds unreasonable. If you start saving money and ignoring your repayments, your debt will increase over time due to late or missed payments and eventually you’ll have to give up your saved amount too. It’s best to just pay off your debt at your earliest and once you are debt-free, you should then start saving to avoid any such situations in the future. You especially should start by paying your high interest debts first to reduce the interest overall.
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