If you’re over your head with debt and can’t pay off your creditors by using the debt snowball method, it may be time for a debt settlement. Debt settlements are when your creditor accepts a lump sum of less than what’s owed as a way to close their books on your account.
If this seems like an option for you, keep reading because we’ve got the complete guide for how you can negotiate a debt settlement successfully.
What Do You Need to Start Debt Settlement Negotiations?
The first thing you’ll need is to show a history of increasingly bad finances. Remember that you’ll have a paper trail behind you that your creditor will be reviewing, so you can’t hide where your money has been going.
If your most recent statements show luxury purchases or first-class travel accommodations, there won’t be much to show that you’ve been put into financial hardship.
Step 1: Stop Using the Credit Card Now
If you can, stop using the card in question completely before requesting a debt settlement. If you can’t stop using the card, use it only for necessary expenses like utilities, medical bills, or groceries. But again, do not splurge with huge grocery bills or show any sign of “living it up.”
Your spending habits will be under immense scrutiny when asking for a settlement; don’t give the lender any reason to think there’s any other option.
Your lender will need to see that accepting less than what’s owed now is better than trying to squeeze you for the full balance later. If you can see how your lenders would consider your request from a “cut our losses” perspective, you’ll be able to use that as leverage.
Step 2: Have a Lump Sum of Money Ready
Next, you’ll need to have a lump sum of money saved up to offer. Payment plans aren’t going to work in debt settlements; you’ll need cold, hard cash.
Step 3: Contact Your Creditor
Once you’ve gotten ahold of your financial history and have enough money to offer, call your lender and ask for a manager in the debt settlement department. You’ll need to explain the situation and give evidence that shows how dire the situation is.
If you have multiple debtors, use this as leverage to get a better offer. Your debtors will know there’s a finite amount of money to go around, so getting a competitive offer accepted now means they’ll get a bigger piece of that pie.
The manager may not act sympathetic or seem swayed by how stressful the situation has become for you. Don’t take it personally; this is what they hear multiple times a day so it’s just business for them.
Even if they seem cold or unemotional, they’re still going to do their job to get the situation resolved as best they can for the best of both parties.
Step 4: Begin Negotiations
When you begin negotiations, start with a specific dollar amount around 1/3rd of the total debt owed. They may counter with something so expect a few rounds of negotiations.
If you’re approved for a settlement, make sure your agreement is in writing that shows the settlement is considered paid in full so that you don’t end up in collections. Don’t accept their word; get everything in writing and send it to you electronically while on the call if possible.
What if You’re Not Approved for a Settlement?
Suppose you’re not approved for a settlement, or the offer is higher than 50% of your total debt owed.
In that case, you can either start negotiations with another lender or simply store that money away in a savings account to accrue compound interest and make minimum payments until you’re in a better financial situation.
Should I Hire a Debt Settlement Professional?
It can feel reassuring to have a specialist in your corner when it comes to working with credit card companies, so if it gives you peace of mind to hire one, then by all means do so.
That said, there are a few things you should know that a paid debt professional might not tell you. For one, your credit card companies are only obligated to deal with you; they are under no requirement to work with a settlement company on your behalf, so you might not get a better deal with a pro than you would when working with the creditor directly.
The key to successful negotiations is to show how dire your financial situation is, and hiring third parties to negotiate on your behalf may send the wrong message. But if doing it yourself would add to your stress or anxiety, having professional work with your lender is better than avoiding it altogether.
The Bottom Line
Debt settlements will hurt your credit but are still better than going into collections. If you’re interested in getting a debt settlement from your lender, use the tips above to ensure you’re able to get out from under your debt as quickly as possible.
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