Not everyone facing a debt problem needs to file a consumer proposal or turn to bankruptcy. There are ways you can negotiate your way out of debt. The key is to do so carefully, making sure your debt settlement has legal validity and that it’s the right approach to contact your creditors for debt reduction yourself rather than with the help of a debt professional. We explain what you should consider when making a plan to settle your debts on your own.
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What exactly is debt settlement?
Debt settlement is an offer you make to your creditors to have your debt considered paid in full for payment of less than you owe. Your creditors agree to settle for pennies on the dollar because otherwise, they may see nothing or far less than that.
How much will creditors settle for?
This depends on many factors including how big the debt is, how old it is and how far in default you might be. Creditors will accept a settlement that involves less than you owe if they think they have no option. If your account is in good standing, and you have no late payments, you are less likely to be able to negotiate a reduction directly with your creditor. You may, however, be able to negotiate an interest rate reduction which can help you repay your debt sooner.
A word of caution: we never recommend that you stop paying your debts when negotiating with creditors. If you’ve recently stopped making payments, your creditor will not likely be in a mood to accept a settlement offer early.
How much will debt collectors settle for?
If your debt is old, or in collections, you have a stronger negotiating position to put forward a settlement amount.
On older debt in collections you can expect to achieve a settlement rate of anywhere between 30% to 50% of the debt. On newer debts you may have to offer up to 70%.
Lump sum or repayment plan?
Generally, you can negotiate a better settlement offer if you can provide a lump sum payment. However, don’t discount the benefit of asking for a repayment plan. It may be better for you financially to negotiate a payment over time for a larger amount if you can’t come up with all the money up front.
How to negotiate debt settlement on your own
Successful negotiation involves many steps, all of which you should follow to ensure that you arrange both the best amount and can complete the settlement deal.
- Determine how much you can afford. Review your budget and see how much you can realistically pay off. Determine if you have enough money to offer a lump sum amount or if you want to ask for a payment plan.
- Write down your ‘story’. You want to have the details of why you are experiencing hardship, and why you need to settle your debts, prepared before you make any phone calls. It’s important that you stick to the truth and stay on script during your conversation. You don’t need to disclose embarrassing personal details, but you do need to provide enough information to convey a sense of need. For example, you may say “I was sick and couldn’t work and fell behind, I’m back at work now but need some help catching up”. To get the best deal, your creditors need to know there is a downside. If it’s feasible, you might mention that you are considering filing bankruptcy or making a formal consumer proposal. Again, be honest. If you are only trying to settle one old debt, this may be an idle threat so don’t use it.
- Stay calm and know your rights. When you do call, it’s essential that you stay calm and don’t let the creditor or debt collector throw you off. The debt collector’s goal is to collect as much money as they can, but they are not allowed to issue threats or speak harshly. Before you even make that call, educate yourself on your rights when it comes to dealing with collection agencies, so you know what is allowed and when they are stepping over the line.
- Clarify and write everything down. During the conversation ask questions. If they say they are going to sue you, ask if and when they will be notifying you. Make sure you fully understand the deal you have both agreed to, confirm this more than once and write down critical points during the conversation. Don’t be afraid to ask them to repeat themselves so you can take notes.
- Make sure you are dealing with the right person. Confirm that the person you are talking to has the right, and authority, to make a settlement offer. It’s always best to speak directly with your creditors if you can but if you account has already been sent to collections you may need to deal with the collection agency.
- Don’t be afraid to hang up. If things are not going well, feel free to end the conversation. If you can’t get a workable agreement, it’s time to explore your other debt settlement options.
- Get it in writing. Once you have agreed to a settlement amount and payment terms, confirm everything in writing. Send an email right away outlining what you have agreed to. Have them send a confirmation back and any paperwork necessary to formalize the offer. Confirm how and when you will be making your payments.
- Make your agreed payments. After you have your settlement agreement in writing make sure you complete all your agreed upon payments. If you miss payments your deal could be null and void; your creditor will pursue you for the full amount and possible additional costs as well.
While it is possible to negotiate with your creditors on your own, it’s not always the best choice. If you have significant debt or are having trouble with multiple creditors, contact us to talk with a licensed professional about legal debt settlement options before you begin. Consultations are free and can help you avoid the lengthy process, and stress, of trying to make calls on your own if they are not likely to be successful.