How Does Debt Negotiation Work?
Debt negotiation involves contacting your creditors to try to work out a realistic payment plan that will allow you to pay down your debts. This can either be done by you or through a debt negotiation firm or attorney.
Through debt negotiation, you can not only work out a sustainable plan that will let you pay off your debt in a reasonable amount of time, which will get creditors off your back, but you may even be able to negotiate lower interest rates or lessen the principal amount that you owe.
At its best, debt negotiation can be considered a workable compromise between debtors and creditors since the money that is owed will be paid off on terms that are acceptable to both parties.
What Debt Can Be Negotiated?
You can negotiate a variety of debts including personal loans, store cards, unsecured credit cards, medical bills, bounced checks and payday loans. Student loans that are not issued by the federal government can also be negotiated.
To find out if other debt such as back rent or utilities may be negotiated, it is best to directly contact your creditor – or have your debt consolidation firm or attorney contact them – and ask. Remember: It never hurts to try.
How Does Debt Negotiation Affect My Credit Score?
Debt negotiation affects different people differently depending on their individual financial situation. For many consumers, debt negotiation can boost their credit score since they will be getting back on track with their financial obligations and starting to pay off accounts on time.
However, keep in mind that creditors will generally not negotiate your debt until you are three months or more behind in payments – meaning that your credit will already be affected by the time you begin negotiations. You also run the risk of your account being marked “delinquent” or “charged-off”, meaning that the creditor has written off your account. Debt negotiation does come with its risks for your credit, so weigh those carefully before deciding to do it.
If you’ve tried all negotiations with creditors and there’s nothing left to negotiate, you might consider other avenues of paying off the debt, such as asking for loans from family or other loved ones. Personal bankruptcy is also an option if your creditors refuse to negotiate with you.
What If Debt Negotiators Scam Me?
Unfortunately, there are many disreputable debt negotiation firms out there, so it pays to exercise caution before you sign on with any particular firm. However, if you’ve already been scammed, your credit may suffer, as your payments have not been passed onto your creditors. Moreover, you might be even more in a financial hole since you’ve paid money for a service that has not been provided.
In this case, it is well worth contacting your local Better Business Bureau office, as well as The Association of Settlement Companies, which is a professional organization made up of reputable debt negotiation companies.
Ten Things You Need to Know
1. While debt negotiation can be an effective way of managing your outstanding debt, keep in mind that it can affect your credit.
2. It is crucial to choose a reputable debt negotiation firm. Contact The Association of Settlement Companies to ensure that your chosen firm is in good standing.
3. Student loans issued by the federal government cannot be negotiated or dismissed.
4. Debt that is settled is considered taxable income by the IRS.
5. You can negotiate reduced interest rates as well as total debt amounts.
6. Debt negotiation can help you avoid creditor harassment.
7. Negotiation can also help you avoid late payment charges or over-the-limit charges on credit cards.
8. Your debt settlement firm should offer you a free counseling session before beginning to negotiate.
9. You should take this time to draw up a realistic budget for you and your household.
10. Debt negotiation is only one step toward financial freedom. Take this opportunity to reassess your spending habits.