Debt Negotiation Explained

Debt Negotiation for Specific Situations

Negotiating your debt is a process that is reserved for particularly difficult cases and usually will be recommended as a form of debt therapy after certain conditions have been met.

• There are no open accounts that can be used for a loan consolidation
• Credit has been negatively impacted already to such a degree that getting a new loan would be difficult or impossible
• Income is drastically lowered below the ability to pay minimum payments
• There is no home or other sufficient collateral from which to draw equity.

If all of the above conditions have been met, debt negotiation may be recommended as a form of debt therapy. One other condition must be present, and that is the ability to adhere to a negotiated loan repayment plan. Negotiations will not be made in circumstances where there is little or no income or savings with which to keep payments or make a lump-sum payoff to creditors.

A Credit Hit and Credit Salvation

Debt negotiation, since it entails rewriting a loan in order to suit the consumer (similar to breaking a promise), reflects negatively on a person's credit report, and for that reason, it usually a last resort before bankruptcy and only after other alternatives have been exhausted. This negative impact on the credit score, though potentially severe, is not as devastating as a bankruptcy filing, so if possible, negotiation is the preferred way to go. In fact, it is the threat of bankruptcy that drives most lenders to negotiate their debt (better a reduced amount than nothing at all under a bankruptcy ruling).

What Debt Negotiation Delivers

Debt Negotiation is usually best conducted by professional services, since they have the experience and relationship with lenders that will help to convince them to negotiate the debt for the consumer's sake. Consumers who contact their lenders directly, and attempt to negotiate their debt will usually receive a negative reaction and be referred to a collection agency in order to resolve the debt. When a debt management company calls on a consumer's behalf, on the other hand, a lender is more likely to sit up and take note of the seriousness of the situation and act to preserve at least a part of the base amount of the loan as opposed to risk losing the entire amount in a bankruptcy filing.

As a part of debt therapy, debt negotiators will contact lenders and convince them to do one of three things. In order of likelihood of success, they are:

1. Lower or eliminate the interest rate - By lowering the interest rate on a loan, the lender makes it much easier for a customer to repay the debt.
2. Accept a lump sum settlement - Convincing a lender to take as little as 50% of a debt's total balance is not an easy thing to do, but it can be done under the right circumstances. This will result in a closing of any credit card account and a negative mark made in the borrower's credit report. Oftentimes this lump sum payment will have to be paid in a relatively short period of time as well.
3. Forgive the debt - Rarely accomplished, convincing a lender to forgive a debt (which is not really forgiveness, since the creditor will make as negative a mark on the borrower's credit report as possible first), means getting them to understand that the debt is so severe that even a negotiated amount is not possible and collections efforts will only waste the lender's time and money.