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Neal Frankle
I’m Neal Frankle, Certified Financial Planner™. Credit problems are a serious business. In fact they changed my entire family life when I was 16. This site is here to help you repair your credit without getting ripped off. Read my story.
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Debt Negotiation Is Likely To Have Negative Consequences On Your Finances

by Neal Frankle, CFP®

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There are several ways for you to deal with your debt and credit problems, including debt negotiation, debt settlement, and bankruptcy. In this article, I want to focus on debt negotiation, since it is probably the least understood of the three.

Debt negotiation is your effort to get a creditor to agree to lesser terms than they originally agreed to when they first did business with you. And once you go down this road there could be serious implications. In fact, there usually are.  That’s why you really have to understand what you are doing before you take action. Let’s make sure you don’t get off the path by taking a really close look at debt negotiation.

What is Debt Negotiation?

When you negotiate your debt, you try to work out a plan with your creditor. In this way, it’s similar to debt settlement.  As I hinted above, you are trying to get them to agree to accept a lower payment, lower interest, longer terms, a reduction in outstanding debt or any combination of all these. Your end goal is to get the creditor to agree to these terms (which are more favorable to you) and close the particular debt item.

What Debt Negotiation Can Do For You

While there are significant drawbacks to negotiating your debt, there are some clear benefits. If things go well you may be able to get rid of all your debt and pay much less than you owe.

And when you do this using a professional firm, you won’t have to worry about dealing with rude creditors during the process. They do all the heavy lifting for you.

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Why would any creditor agree to accept less than full payment? Because they are convinced that this lower payment is the best they can hope for. They fear that if they turn you down, you’ll just file for bankruptcy and they’ll get nothing.

Why do they think this way? Keep reading.

The Downside Of Debt Negotiation

In order to make the creditor think you are financially wobbly, many debt negotiating companies will ask you NOT to pay your bills. This “proves” to the creditor that you are broke and softens them up for negotiations. Of course, when you do that, it creates more negative information which is reported to the credit bureaus and that in turn makes your credit report very ugly. Keep in mind that during this process, there is nothing to stop the creditor from taking legal action against you.

Also, debt negotiation doesn’t make your debt disappear. You’ll still have to come up with a substantial amount of money in order to get the creditor to come to terms. For example, if you owe a total of $50,000, you may have to come up with $25,000 to entice the creditor to sign off on the debt. And if you can’t come up with a good chunk of what you owe over a few years, the creditor won’t likely budge. If that’s the case, debt negotiation may not be worth your time or expense.

What to Look Out For With Debt Negotiation Firms

If you do decide to go the debt negotiation route, there are a few things you’ll need to look out for, and they’re huge:

  • When you hire a company to work out your debts, sometimes they set up a savings account for you and they’ll ask you to send money in each month to fund this account. They say they’ll use this money to eventually settle the debts. Make sure that the trust account is held in an FDIC insured bank account and make sure it’s in your name – not the name of the company. This is actually a federal requirement, but not all debt negotiation firms are compliant.
  • Even though you may not be paying your bills the negotiating company will generally collect a fee – taken out of your trust account – to pay for their services after each debt is settled. This should be fully disclosed.
  • The negotiation firm should disclose the potential for fees and penalties with any creditors that you will not be making monthly payments to.
  • They should disclose that their services extend only to unsecured debts, like credit cards and medical debts. They do not cover secured debts, like mortgages and auto loans.
  • They should not collect their fees upfront – but some will try to do just that. Legally, they are not entitled to collect any fees until they actually perform a service (settling an account).
  • Get a “Good Faith Estimate” that will not only spell out the cost of their services, but also the timeframe.

That last point is extremely important. The longer it takes for the plan to be completed, the longer you will be paying fees to the negotiation firm. It also means that you will have to make payments to existing creditors that much longer.

Is Debt Negotiation the Right Way for You to Fix Your Credit Problems?

If you have no other choice, debt negotiation may be the only path still open to you. That said, please understand that debt negotiation is all about debt – not your credit report. As I said, the very process that may help you settle debt may indeed worsen your credit file.

There are different ways to deal with credit problems, and debt negotiation is just one of them. Before seriously considering debt negotiation, study the process and understand it. Also, study the alternatives and see if there might be another plan that will work better for you.  Bankruptcy – as ugly as it sounds – might be a better path.

Are you struggling with debt? Have you tried debt negotiation? Have you tried any other strategies to fix your credit problems?

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