Debt Negotiation and Debt Settlement

Debt Negotiation, also called Debt Settlement, is when you attempt to negotiate your debts, usually credit cards or judgments, down to a lower amount. So, imagine that you have $20,000 of credit card debt on a Chase Bank Credit Card. You offer Chase Bank $10,000. If they take it, they will mark your account “settled” on your credit report (this is not great for your credit by the way), and you will be done with the debt for that card.

One might ask, “well, why doesn’t everyone do this? Why do people pay 100% of their debt if they could settle and only pay 50%?”

The answer is that in order to get debt settlement, the following things are usually required:

  1. You must be very delinquent (usually a minimum of six months behind in your payments. Being a year or more behind in payments is more typical)
  2. You must have access to large sums of cash so that you can pay your settlements with one or a few payments.
  3. You must be successful in settling with ALL of your big creditors
  4. You must be able to tolerate being sued, having wages garnished and having bank accounts frozen during the negotiation period.

The big problem with debt negotiation, the thing that most settlement/negotiation companies don’t want you to know, is that for many people debt settlement is almost as bad or worse for your credit than bankruptcy. Why? Because to get a good settlement you have to stop paying your cards for about a year. During that time you get law suits and judgments. Putting the headache of it all aside, a year or two of missed payments and judgments is more or less as bad for your credit having a bankruptcy. Also consider what happens if you have several cards? One of them settles and the other one does not. Now you still have to file bankruptcy after paying several thousands in settlements to one card. However, the worst risk, and most common failure of debt settlement and debt negotiation is explained below.

Imagine you owe $21,000 of debt to American Express. In order to settle right away you probably need to pay AMEX somewhere between 30% and 60% of what you owe.

30% is $6,300. 60% is $12,600.

If you don’t have a big savings account or a rich relative, you will have to make monthly payments to your debt settlement company (to save up the settlement amount). If you can make monthly payments of $300, it will take you 21 months (almost 2 years) to save up $6200. Even when you settle the debt, your credit will be destroyed because you will not have made payments for two years.

BUT WAIT!!! I still didn’t calculate the FEE you pay to the debt settlement company. They will probably charge you at least $2000, and the first $2000 you pay them with your monthly payments will go right to fees. SO, it will take another 7 months (well over 2 years) before you have enough money just to settle your AMEX card debt.

BUT WAIT AGAIN!!! What about late charges, the 30% interest that the cards charge after you stop making payments? After two years, that $21,000 of debt will become over $35,000 of debt. Now $6200 won’t be enough to settle. You might have to pay over $10,000.

It goes on and on like this. Usually after a year or so, your creditor gets a judgment and garnishes your wages or freezes your bank account. Then, after having paid thousands of dollars to a debt settlement company, you walk into my office and file bankruptcy.

If you had come straight to my office a year before, you would have already begun restoring good credit.

This is why for most people Debt Settlement is a wasteful, painful dead-end street. I do Debt Settlement ONLY when it is necessary and in my client’s best interest. That is very rarely the case.