DISCLAIMER: This article is provided for informational purposes only and should not be considered financial advice.
We’ve witnessed debt settlements ranging from 30% to 80% and know that several factors affect these offers. As a former CEO of a debt settlement firm, I have considerable experience negotiating and settling debts, giving me valuable insights into the ideal percentages to offer. I understand the nuances of settling debts, the risk of litigation, and the benefits and drawbacks of representing yourself versus hiring a professional firm.
It’s crucial to weigh the pros and cons of hiring a debt settlement firm. One significant advantage of representing yourself is that you can save on fees charged by debt settlement companies, which typically range from 15% to 25%. However, working with a debt settlement firm has its advantages too.
1. Know Where You Stand in the Debt Settlement Process
Before beginning the debt settlement process, it’s essential to gather all of your financial information and determine where you stand with each separate debt. Do you face a lawsuit or the potential for one?
Pre-Lawsuit Debt Settlement
If you’re not currently facing a debt collection lawsuit, creditors may be more open to settling for a lower amount than if you were sued. For instance, let’s say creditor 1 agrees to accept 50% of the amount owed if the account is 180 days behind. However, if that creditor hires a law firm to sue you, the collection agency may now settle for 75% instead of 50% to cover its expenses and pay out the law firm.
Post-Lawsuit Debt Settlement
A debt collection lawsuit is different from dealing with a typical debt collector. Depending on your situation, you may need to negotiate with either the original creditor or the law firm suing you. If you negotiate with the original creditor, they can help you settle the debt and get everything in writing.
However, two important factors to keep in mind when dealing with a debt collection lawsuit are that you’ll likely sign a stipulated judgment and that the percentage you settle may be higher due to the lawsuit. A stipulated judgment means that if you don’t continue to make payments on the settlement’s terms, you may face a default judgment. Additionally, the creditor may believe it has the upper hand and demand a higher percentage to settle to avoid the risk of losing in court and receiving nothing.
2. Identify the Creditor and Anticipate Settlement Rates
It’s important to research creditors to identify those more likely to settle than others. While it’s always worth a try, it’s best to manage your expectations. Settlement percentages may vary among creditors, so it’s wise to start small and anticipate counteroffers.
For instance, you may start with a settlement offer of 25%, expecting that the creditor may increase it up to 50% of the original debt. If you can’t come to an agreement with the creditors, you may consider asking about a payment plan.
Credit Unions and Federal Credit Unions May Not Settle for Less
It’s important to note that credit unions may not offer discounts. However, it’s still worthwhile to inquire, just in case. For example, if you receive social security or disability income and can demonstrate that you don’t make any additional income each month, you may qualify for debt forgiveness and lower monthly payments.
3. Consider the Age of the Debt
Contracts, promissory notes, and revolving credit accounts all have payment due dates that trigger a “default date” when payments are missed. Default dates are significant because they start the statute of limitations clock ticking, and older debts may be easier to settle than newer ones. It’s also important to note that each creditor’s scenario may differ.
Debt that is past the statute of limitations could potentially be settled for less, especially if you haven’t made a payment on it in a few years. However, each scenario is different, so it’s essential to speak with your creditors and understand your options.
4. Choose Between a Structured Settlement or Lump Sum Payment
When settling a debt, you’ll have to decide between a structured settlement and a lump sum payment. A structured settlement involves paying off the debt over time, while a lump sum payment settles the debt in full.
If you opt for a lump sum payment, you may be able to negotiate a better deal, as creditors prefer receiving a lump sum upfront over monthly payments that aren’t guaranteed over time. It’s crucial to get both the debt settlement offer letter and the paid-in-full letter in writing.
5. Explain Your Financial Hardship
Your creditors may be more willing to work with you if they understand your financial hardship. For instance, if you receive Social Security income only, you may be in a better position to negotiate a lower settlement than someone with assets and a higher income. However, there’s no guarantee that your creditors will be sympathetic, so it’s crucial to provide a clear explanation of your financial hardship and why you can’t pay the debt in full.
Summing it Up
Debt settlement is a negotiation between you and your creditors to pay off your debts for less than the full amount owed. To determine the ideal percentage to offer for debt settlement, it’s essential to understand where you are in the process and which debts to prioritize. Older debts or those past the statute of limitations may be easier to settle. Structured settlements involve paying off the debt over time, while lump sum payments settle the debt in full. Lastly, explaining your financial hardship to your creditors may help you negotiate a better deal. By considering these factors, you can increase your chances of successfully settling your debts for less.