What is Debt Negotiation or Settlement?

Debt negotiation or settlement companies provide consumers with a method of debt resolution known as debt settlement. Debt settlement is an aggressive method of debt resolution that depends on the willingness of creditors to negotiate, and the ability of consumers to save sufficient funds prior to beginning negotiations.

Will this strategy work for me?

While the Debt Negotiation Plan approach is not suitable for everyone, its flexible nature makes it applicable to a wide range of financial circumstances. For individuals and families seeking an alternative to bankruptcy, there is simply no better option to get out of debt. Here are a few guidelines to help you determine whether or a Debt Negotiation Plan is something you should consider:

• Do you have a legitimate financial hardship condition? Most debt problems are caused by loss of income, medical issues, and/or divorce/separation. These are legitimate financial hardships that can happen to anyone through no fault of their own, and any one of these circumstances can wreak havoc on a household budget. The important point here is that a Debt Negotiation Plan system is not a "free lunch" for people who don't feel like paying their bills. If you are over your head due to a hardship situation, and you would prefer to work things out with your creditors rather than declare bankruptcy, then Debt Negotiation can provide an honest and ethical debt relief alternative.
• Are you committed to avoiding bankruptcy? Debt Negotiation is best viewed as a bankruptcy alternative, one that allows you to keep control over the process and maintain privacy while working through your financial difficulties. As with most things in life, success is determined by your level of commitment to staying the course, even when hurdles get in the away. The road ahead can be a little bumpy and if you are likely to give up at the first rough spot, then debt settlement is probably not the best choice for you. But if you are determined to find an alternative to bankruptcy, Debt Negotiation will likely be the most attractive debt solution for you.
• Do you owe more than $10,000 in unsecured debt? We are the first to admit that Debt Negotiation is strong medicine, and it should be reserved for serious debt problems. While everyone's budget is different, most people can work their way out of smaller debt obligations. If you only owe $5,000, for example, unless you are really in dire straits you can probably deal with that obligation the old-fashioned way - by paying off the debt in full, over time. In other words, smaller debt loads are more of a budgeting problem than a serious financial hardship. We use the benchmark of $10,000 for evaluating whether or not a prospective client qualifies for our program. (Note: Exceptions are sometimes made based on hardship circumstances, so the $10,000 figure should be used as a rule of thumb or guideline.

How does this program work?

Debt Negotiation works by reducing the balance owed (principal) on your unsecured personal debt accounts through the time-honored process of creditor negotiation. This is different from simply reducing the interest rate as with a Debt Management Plan or Consumer Credit Counseling, which do not affect the total debt balance. By reducing the balance itself, Debt Negotiation provides a much faster means of becoming debt-free. Most creditors are willing to accept 50%, 40%, sometimes as low as 20% of the balance owed in order to close out an account rather than lose the entire amount in a bankruptcy proceeding. From a business perspective, it is a matter of the creditor receiving something rather than nothing, as would be the case in most bankruptcies. Of course, different creditors have different policies, but as a rule, discounts of 50% or less achieved over a period of 18-36 months are common in the industry. As a result of this approach, money that was previously wasted on endless minimum payments (most of which went toward interest charges) goes toward reducing the actual debt balance. Debt Negotiation is the fastest debt elimination method short of Chapter 7 bankruptcy.

What happens to my credit?

The effect of our Debt Negotiation Plan on your credit score will partly depend on your current credit status before starting the program. Few people with debt troubles have perfect credit to begin with. In general, your credit score (usually called the FICO score) will decline during the program, and will begin to improve again after you have become debt-free. There are several key points to bear in mind here. We recommend against applying for new credit while going through the program. It simply doesn't make sense to take on new debt while you're trying to tackle your existing debt problem. So the short-term decline in credit score is rarely a problem for clients. Also, the credit score itself does not take into account the debt-to-income ratio, which is used by lenders (especially in the mortgage industry) to determine whether you qualify for a home or auto loan. In other words, you can have a high credit score due to a clean payment history (even though it's been hurting you financially to keep up those payments) and still be denied a new loan because you already carry too much debt. Your credit score will definitely go down while you are in a settlement program, but you must consider what is more important- your score or dealing with your debts. A settlement company can't provide credit repair, score improvement or help your score in any way, but we can address your debt.

What are the tax consequences?

When your creditor settles your debt, a savings of $600 or more of what you owed may be reported by your creditor to the IRS as Discharge of Indebtedness Income. You may wish to consult your tax advisor to determine whether your individual circumstances may permit you to exclude any such Discharge of Indebtedness Income from your reportable income due to insolvency. For more information on tax ramifications to you personally, you may also wish to consult a CPA or tax attorney and to refer to IRS Publication 908 ("Bankruptcy Tax Guide") and IRS Form 982 ("Reduction of Tax Attributes Due to Discharge of Indebtedness") available on the IRS website at http://www.irs.gov/.

Can my wages be garnished?

If you listen to some debt collectors, you might be fooled into thinking that they will seize your very next paycheck unless you make a payment right then and there. The threat of losing part of one's wages to a garnishment action is truly frightening to someone already struggling financially. This is mainly an intimidation tactic used by collectors to scare people into committing to a payment schedule whether or not they have the funds available. Actual garnishment actions are relatively rare, and do not happen without advance warning. First, a creditor must bring a lawsuit, obtain a final judgment, and then take an additional step to obtain authorization for the garnishment. Plus only one creditor can garnish your wages at a time. No one can take your paycheck without court approval, and you must be given notice of such court action through formal documentation. So don't be fooled by one of the oldest collection tricks in the book.

What are the differences between a Debt Negotiation Plan and a Debt Management Plan (Consumer Credit Counseling)?

A Debt Management Plan (DMP) is a mutual agreement between you and a debt relief organization. Simply put, you agree to repay your unsecured debts IN FULL with interest over time (usually 4 to 5 years), without taking on any more debt. In return, most creditors will agree to reduce your interest charges, eliminate future late and over-the-limit fees. But if you are having difficulty coming up with your minimum monthly payments, then a Debt Management Plan may not be right for you. The monthly payments through this plan are usually higher because your payments are calculated based on the principle balance of each account and all future interest that will be assessed on those accounts to be paid in full at an accelerated rate of time. This Plan is dramatically different from a Debt Negotiation Plan. A Debt Negotiation Plan is an alternative to bankruptcy for those who want to pay back at least a portion of their debt, but cannot afford to fully repay their debt with interest on their own, or through the Debt Management Plan. On a Debt Negotiation Plan, your monthly payments are based on what is affordable to you. Debt Negotiation Plans are usually completed within 2 to 3 years which is relatively faster than the Debt Management Plan. Debt Negotiation Plan payments are calculated based on a portion (65%) of the debt, not the full balance with interest. Other key differences between a Debt Negotiation firm and a Debt Management Plan agency is that the Debt Negotiation firm works solely for you and receives no compensation from the creditors. In other words, your Debt Negotiation firm is truly on your side. With a Debt Management Plan agency, there is a dual relationship, where only a fraction of their income comes from the consumer and the majority of it comes from "donations" paid by the creditors. This can be construed as a conflict of interest and creates doubt as to whose side the agency is really on. Debt Management Plan agencies have been called a collection arm for the creditors. A Debt Negotiation Plan provides much more flexibility than a Debt Management Plan. For example, if you have had an unforeseen expense and need to skip a payment, that situation can be managed by your Debt Negotiation firm, whereas it can cause a serious issue with the Debt Management Plan agency. The Debt Management Plan agency can cancel your Plan or advise you that you will need to restart it because of the lapse in payment(s), so all of your initial efforts including time and payments have to begin all over again. Determining which plan is right for you really depends on your specific situation including the type of debt you have, your income and ability to make consistent payments, and what you agree is affordable.

What kind of debt can be negotiated?

As a general rule, any type of unsecured debt can be successfully negotiated. An unsecured debt is one that is not tied to a specific material item that could be repossessed by the creditor. So an auto loan, for example, could not be included because the creditor could legally repossess the vehicle. Credit card debt, medical bills in collections, department store cards, signature loans, unsecured lines of credit, and revolving charge accounts are all types of accounts that can be included in our program.

Are there debts that can't be entered into the program?

Secured debts cannot be entered into our Debt Negotiation Plan. This includes home loans, second or third mortgages, equity lines of credit, auto loans, and financing contracts tied to a specific piece of property that may be legally repossessed by the creditor. Student loans, although unsecured, must also be excluded from the program. In addition, Federal and State taxes cannot be included.

What if a creditor won't negotiate?

In the course of business, we have established contacts with the major banks, collection agencies, and collection attorneys. Debt Negotiation is recognized as a viable solution by collection industry professionals, we pride ourselves on the professional reputation we have established by dealing fairly with creditors and/or collectors. In the rare instance where a creditor balks at accepting a reasonable negotiated amount at the time it is proposed, it is often a matter of simply waiting for a different phase of the collection process. Some creditors are more inclined to play "hardball" than others, but virtually all of the major institutions eventually sell their accounts to collection agencies in order to get what they can for the account. Since the collections agencies acquire these accounts for pennies on the dollar, they are more inclined to accept a reasonable negotiated amount offer, which still represents a profit on their purchase.

Can I do this myself?

Yes, it is certainly possible for a consumer to negotiate his or her own debts. However, there are several important factors that should be taken into consideration before making such a decision. First, do you have the time? For individuals with serious debt problems, the complexities of the negotiation process can be very time consuming. Many people simply do not have the time to add this labor-intensive task on of an already busy work schedule. Second, it requires a certain kind of psychological toughness to haggle with creditors. The average consumer is hampered by the embarrassment and shame they feel over having gotten into trouble. With all the tricks, traps, and pressure tactics used by creditors, most people will find themselves better off with professional assistance. Third, as with any profession, there are techniques not easily mastered by an amateur. Without professional coaching, the likely result will be high-percentage negotiated amounts in the best case and outright failure in the worst case. When you consider that the total payout including professional fees, the amount will still be far less than your original balances, it makes more sense for the average person to obtain debt help professionals.