When a debt exists there are two parties involved – the creditor (source of the loan) and the debtor (receiver of the loan). Creditors and debtors are going to have an adversarial relationship when the debt doesn’t get paid in full. This adversarial relationship can actually be a good thing when it comes time to settle the debt for less than the amount owed. Over time, creditors become annoyed and want some money to feel right about settling the debt for less than face value.
Avoid Allowing the Debt to Go to a Debt Buyer
Creditors are generally knowledgeable, experienced, and savvy people or companies, who have dealt with past due debts by their debtors. You might say they’ve developed a thick skin when it comes to dealing with debtors. An “Original Creditor” is the first source of the money loaned. If the original creditor can’t get a debtor to pay their debt, they often turn the effort over to a collection agency. In some cases, the original creditor sells their debtor’s debt to a third party – a “Debt Buyer” – who pays them a percentage of the total debt to be collected. In those cases, debt buyers pay pennies on the dollar for the debt and the debt buyer now owns the debt. Debt Buyers can then proceed to collect on the full amount of the debt, plus fees, court costs, and interest and most of them go to court to get a judgment against the debtor for the highest amount possible.
When a debtor has their debt turned over to a collection agency, they need to understand that the original creditor still owns the debt. The collection agency is going to receive a percentage of the money they collect on the debt as compensation for their efforts, so they are motivated to get as much as possible as soon as possible. The collection agency can’t file a lawsuit against the debtor, only the original creditor (or their attorney) can do that.
Go to the Source
Before a debt goes to court, and even after it has gone to a collection agency, the debtor has an opportunity to settle the debt with the original creditor. Many times, the original creditor will refer the debtor to the collection agency because they don’t want to deal with the problem. Occasionally, there is an opportunity to contact the original creditor with an offer of settlement to clear the debt off the creditor’s books which the original creditor will accept.
Have a Plan
Creditors must still pay their collection agents for the debt being paid, but they can deal with them on their own terms if they are the successful party in collecting the money. Creditors can be contacted, despite any collection agency activity, but the contact must be meaningful and focused. In other words, calling them up and saying something like, “I’d like to see if I can pay less to get this taken care of,” probably isn’t going to work very well.
Debtors need to have a plan, the money, and good communications skills if they are going to be successful in settling a debt with the original creditor. For example, if the debt amount is $1,000 and the debtor has $500 in hand with which to pay it, then it makes sense for the debtor to make contact with that goal in mind. Please bear in mind, this is a negotiation and the skills of the negotiators will go a long way toward resolving the problem and eliminating the debt at the right amount.
Know the Conditions
The conditions of the negotiation are equally important. If a debt is 120 days old, the creditor will most likely want closer to the $1,000 amount. If a debt is 9 months old, the creditor will most likely accept a lower amount to settle the matter and get it off their books. Because of this fact, debtors need to do a little homework to determine what the creditor’s situation may be before attempting to settle the debt.
Making Payments on the Settlement
Everyone knows it is best not to offer all you have to the creditor at the outset of negotiations, but whatever amount is offered, there will no doubt be a counter-offer. This begins the process of negotiation. The process ends when an agreed-to amount is set. Creditors will want a lump-sum payment, not installments. However, in some cases, an installment agreement can be established which will stop the collection calls and keep the creditor from initiating court action. In most cases, if an installment agreement is established and the debtor misses a payment, the full amount of the original debt (less any payments) will again become due.
Debtors need to remember to make commitments they can live up to. The creditor already has the experience of the debtor’s failures, now they want to see a success. If the $1,000 debt was agreed to be settled for a lesser amount, be sure to get an agreement in writing from the creditor. This is usually done prior to the exchange, when the debtor actually pays the debt.
To recap, the main action items for debtors who wish to settle their debt with the original creditor are:
- Have a plan
- Make contact with Original Creditor
- Have money ready to make payment
- Negotiate with clarity
- Fulfill all promises to the creditor
- Get everything in writing BEFORE sending money
Other Resources That Can Help
Those people who aren’t confident in their ability to handle the process and negotiate the debt settlement successfully can hire an outside firm to do it for them. In general, it is best to utilize a debt settlement service with extensive experience in negotiations. Credit counselors can help, as can professional settlement companies or even lawyers. The idea is to settle the debt for as little as possible so as to avoid a court action and the negative effects the information will have on your credit report and credit score.