Debt Negotiation

When Should I Consider Debt Negotiation?

If you’re deep in consumer debt and have determined that other options won’t work for you, debt negotiation might be a good choice. Rarely is it the first choice you should consider, but when debt consolidation or another form of debt management isn’t viable or won’t work for your situation, debt negotiation might.

Bankruptcy versus Debt Negotiation

In many cases, declaring bankruptcy is a safer route than debt negotiation, but bankruptcy has more long term consequences and rules for qualifying. If you’re thinking about trying debt negotiation, speak with a non-profit credit counseling agency first and make sure you thoroughly research the debt negotiation company you plan to use. Debt negotiation has its place, but it is often a risky proposition for two reasons: 1) there is no guarantee it will work, and 2) it has been prone to enough scams that it’s reputation as a viable debt elimination plan has greatly suffered.

How Does Debt Negotiation Work?

Debt negotiation programs attempt to settle your debts with creditors for less than what you owe. They allow you to pay off all your debts using money that you have saved in an federally insured trust or “special purpose” bank account. When this account is first created, you stop paying creditors and collections and start saving money instead.

Who’s In Charge?

Such programs are supervised by attorneys, who may deal with your creditors for you while you save. Attorneys or your debt negotiation company will make the program work for you and give you advice on how to deal with collections. As you deposit money into your protected account, creditors will typically begin to sell off your debts. This is because these debts are no longer making money for them since you have stopped paying interest. Thus, there is no profit left for the creditor or collections agency.

And Time Goes By

As time passes, the value of your debts continues to decrease, and they may be sold several times. At the same time, the value of your special purpose account increases because you’ve been putting money into it. The money you put in each month is usually much less than what you would have been paying in interest, so it’s manageable for you, but it also adds up quickly. Once you’ve saved a certain amount, often approximately half of what your original debt was, negotiations begin to take place. By this time, whomever owns your debt is typically willing to settle for less in exchange for cash. In a period of one to four years, you can get out of consumer debt completely without having to declare bankruptcy.

Is Debt Negotiation Bad for Your Credit?

If you’re considering debt negotiation, it’s important to know that yes, it is bad for your credit, but very often not nearly as bad as bankruptcy. When you stop paying off your debts in order to save up for a debt negotiation, creditors will report you to the credit bureaus right away. In the short term, your credit will become almost as low as it would through bankruptcy; however, it won’t stay on your record for as long. If the negotiation is successful, which it usually is, you’ll be able to show that you paid off your debts and nothing more is due. You can then begin to fix your credit relatively quickly.