Debt Negotiation – Honorably Pay Back Loans

Caught up in your day-to-day life and routine, you haven’t noticed your credit card/debt dues increasing every month. You start defaulting regularly, resulting in an increase in the debt. When you have finally opened your eyes, you find yourself at the bottom of a huge pile of dues. So, is bankruptcy the only solution then?

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Although personal bankruptcy may discharge you of certain debts, it has a long lasting effect. It will appear on your credit reports for the next 10 years. This will hamper your chances of getting credit, buying a house or car, getting life insurance etc. Therefore this needs to be considered as the last option of debt management.

The good news is there is a way around your financial problem. In most cases doing nothing about your increasing debts leads to more problems. Debt negotiation is the best option for those who default regularly and don’t qualify for debt consolidation.

Debt negotiation is a process through which the debtor and the creditor come to an agreement to ward off a certain amount on the actual balance and settle on the smallest amount possible, that will be regarded as payment in full (or there might be some remainder amount to be paid in easy monthly installments). Debt negotiation is possible only on unsecured debts like credit card debts etc. House loans, car loans etc may not be eligible for negotiating debt.

It is mostly when the debtor defaults regularly or is unable to make his/her monthly payments that the creditor agrees to debt negotiation. This helps both parties as:

  • It increases savings for the debtor and reduces monthly payments.
  • It helps the debtor become loan-free quicker.
  • There is no fear of losing a house or an asset for the debtor, as there is no collateral involved.
  • It makes it possible to avoid the stigma and intrusive court mandated controls of bankruptcy.
  • It reduces the stress of debtor and creditor.
  • It increases the trust of the creditor in the debtor.
  • It decreases risk for the creditor.
  • The creditor can recover more funds as the money spent on collection agencies can be saved.

One can negotiate the debt on their own, with the help of a lawyer or can approach a company offering these services. If approaching a company, be careful to make the payment once the deal is made and as per the amount reduced on the actual amount of your debt. Also it is important to ensure that the debt negotiation company functions as per the FDPCA guidelines.

Debt negotiation may have negative impact as well. The following are the common objections to negotiation:

  • It may lessen your chances of getting credit in future. If the debtor obtains a “paid in full” certificate, the debtor’s credit record should show no sign of the settlement. Therefore it is advisable to check with the state attorney, local consumer protection agency and the Better Business Bureau and get the right information before going ahead with the program.
  • The creditor may still sue you if he/she fears danger of bankruptcy, even after the negotiation. On the occasion of the creditor winning the case, it is possible for the other party to garnish your income or put lien on your house.
  • The Internal Revenue System may consider any amount forgiven as a taxable income. The IRS considers more than a certain amount of debt forgiven to be taxable.
  • Specific debts of the borrowers themselves affect the success of negotiations. Some creditors have aggressive resistance against negotiations.

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