Debt settlement plan – How much can it help to reduce?
If you are burdened with huge debt and you know that you can’t pay them in full, then settlement can be the best option for you. But before you settle your debt, you should negotiate for a better deal. By negotiating, you can easily cut down your debt in half.
However, it is not possible for you to know what percentage of a debt is accepted by the creditors in a debt settlement plan. Many debt relief companies charge a lot of money from innocent consumers by enrolling them in their useless programs. Below is some important information regarding debt settlement that you should be aware of before settling your debts.
First, you need to ask the following questions to yourself to understand the percentage of the debt you are supposed to pay off in a settlement.
1. May I know my creditor?
Knowing your creditor’s nature is important when you’re exploring your debt settlement options. Some creditors are absolutely aggressive and don’t want to reduce the debt. While some creditors understand a debtor’s financial hardship and agree for a reduced payment. Thus you should understand the demand of your creditors when it comes to getting any debt settlement assistance.
2. What is my payment history?
What percentage of debt is accepted in a settlement? It depends on your past payment records. Your creditor will not agree to reduce your payoff amount in a debt settlement program if you are currently in debt. Usually, creditors agree to settle for less if the debtor is behind on debts.
So, before negotiating with your creditors, check your payment history. If you are behind on the debt, you can reduce a good amount of debt in the settlement. However, you can ask your creditor for a settlement after 30-90 days of past due. If you delay more than that (190 days), your account will get “charged off”, which means your account will be sold to a third party debt collector by your original creditor. Usually, with a “charged off “account, you will be able to reduce more debt in a settlement.
Because, when a debtor doesn’t pay a debt for 190 days, the creditor considers the debt as “bad debt” and applies for a tax break for the debt. The creditor wants to agree for a settlement because it is good to get some money instead of nothing from the debtor. Sometimes creditors sell the account to a third party after the account has been charged off and lost value. However, you have to negotiate in a good way to get the best deal.
3. Is there any lawsuit against me?
If there is any lawsuit against you, settling debts can be difficult. Remember, your debt has an expiration, which is called Statue of Limitations (SOL). Within the SOL period (usually 3 to 6 years) the credit or debt collector has to sue the debtor for the unpaid debt. Remember, SOL varies by state and debt type.
Try to settle the debt before the creditor goes to court. Usually, creditors don’t want to go to court for a debt to avoid the additional costs of suing a debtor.
How much will debt collectors settle for?
There is no magic number that creditors accept in a settlement. Most creditors decide the settlement amount on a case-by-case basis. As I said earlier, a good debt settlement amount depends on how well you negotiate with the creditors. If you or the third party negotiator (Debt relief company) is able to convince the creditor, then a good percentage of debt can be reduced in the settlement.
Here is a list of accepted percentages of debt that can be reduced in a settlement.
- 40% pay off for department store/credit cards
- 65% pay off for Citibank accounts
- 65% pay off for Discover accounts
- 50% pay off for cell phones
- 40% pay off for apartment leases
- 50% pay off for medical debts
- 80% pay off for repossessions and garnishments
- 40% pay off for signature and payday loans
- 40% pay off for collection balance over $750
- 80% pay off for collection balance below $750
- 60% pay off for debts in between $0.75K to $1K
- 80% pay off for debts below $0.75K
It is accepted by many creditors on account of debt settlements.
However, it is advisable to research the debt relief company before signing up for debt settlement.
Tips to negotiate with creditors for a lower settlement
If you default on a debt and know that you can’t pay it in full you can contact your creditor for a settlement. However, creditors usually wait for 180 days for a debt payoff, after which they can sell the debt to a third party debt collector.
Though a creditor may not agree to your settlement proposal at first, you can still try to convince your creditor for a settlement. Sometimes, creditors agree for a settlement as the alternative is to write off the debt, which is a significant loss for the creditor. However, the negotiation part of a settlement is not easy.
Here are some tips you can follow to convince a creditor of a debt settlement. Here you go:
- Talk to your creditor and discuss your financial hardshipTo convince your creditors for a lower settlement, you have to explain your current financial condition. Share your financial hardships to make your creditor understand how difficult it is for you to repay the full amount. But you want to make the debt payments to a certain amount that you can afford. Tell the creditor that bankruptcy is the last option for you to pay the debt if the settlement is not possible. Don’t create a melodrama while explaining your financial position. Try to explain the reasons for not repaying the debt within the time. It can be job loss, illness, unemployment, the death of a relative, or divorce.
- Determine how much you can afford to settle your debtYou should review your income and expenses to decide how much you can afford to settle your debt. Try to agree to pay a realistic amount. It is recommended to come up with a lump sum amount to settle your debt. Because, with a payment plan, you may end up paying more over time. So, calculate the amount before making the agreement.
- Keep a written document of your settlement agreementBefore making the debt payments, you should get your debt settlement agreement in writing. Remember, the terms and conditions can change. The creditor can deny the verbal agreement about the settlement.
- Get help in determining a repayment planIf you are having a problem understanding which repayment plan to afford, then consider a credit counseling session. They will assess your finances and assist you in deciding the payment plan that suits you. If they think that you can’t afford a settlement, then they will tell you other best options.
Tips to negotiate debt collection for a lower settlement
- If you don’t pay off your debt within 190 days, most likely your debts will be sold to the debt collectors.
- You will get phone calls or emails from the debt collector. If it happens, you should ask the debt collector to validate your debt by sending a letter. After that, you can start negotiating for a settlement.
- Negotiating parts with a creditor and debt collector is more or less the same.
- You can settle your debt on your own or with the help of a debt settlement company.
- However, make sure you don’t take help from a fly-by-night debt relief company.
- Some debt relief companies are not authentic; they promise more than what they can deliver. They often charge expensive fees.
- You should check whether or not the company you choose is an accredited member of AFCC (The American Fair Credit Council) before signing up.
- Lastly, It is better to settle a debt instead of not paying at all. Well, it is true that debt settlement affects your credit score. But your score will get a boost again if you start dealing with your credits responsively. After completing the debt settlement process, you should pay the credit card bill along with other monthly bills in full and within time.
If you ignore a debt, it will lead to more financial trouble.
Your creditor or collector can file a lawsuit or judgment against you. So, try to negotiate at your best to lower the debt amount, so that you can get out of debt.