This isn't a topic I've ever written about before, nor is it one that the vast majority of my readers will ever need. However, a select few may, and many readers will know somebody who can use this knowledge. I had an advertiser apply to buy an ad on the site recently that I turned down. That in and of itself is not unusual, as I probably turn down about 2 out of 3 prospective advertisers. The company's business model was to call up your creditors, use some “negotiation techniques” to negotiate a settlement on your debt, and then keep part of the difference for their trouble. I thought that rather than sell an ad to a firm like that, it would be better to just teach you these fancy “negotiation techniques.” That's what this post is.
Unsecured Debt Only
First, you should be aware that these techniques mostly only work for unsecured debt. The issue with secured debt is that your negotiating position is terribly weak. For example, if you're behind on your mortgage, and you call up the lender and offer to pay them $100,000 of the $300,000 you owe them if they will accept it as payment in full, they're going to laugh their head off, say “no”, and initiate foreclosure proceedings. It will be the same thing with a car, boat, or airplane. In fact, it probably won't even work very well with student loans since you can't get out of those in bankruptcy, although perhaps a bit around the edges. This really only works well for unsecured loans like credit cards.
Your Credit Will Take a Hit
Settling debts for less than you owe will show up on your credit report. Before resorting to techniques like this, you should already have a terrible credit score because you have debts that you haven't been paying on already for some time. That score is going to get even worse, at least temporarily, because the accounts are going to be marked as having been settled for less than you agreed to pay. Now, it isn't as bad as a bankruptcy, and perhaps not even as bad as a foreclosure or repossession, but it is still a pretty big black mark on your credit report and score. As a general rule, the technique works best once your bad debt has been sold to a collection agency.
So what are these fancy negotiation techniques? They are basically offering the creditor something now instead of possibly nothing, but perhaps something later. Imagine you owe a bank $10,000 in credit card debt. You haven't paid on it for 18 months. They've sold it to a collection agency for 5 cents on the dollar. Now, you call up the collection agency, and you offer them $2500 today to settle the debt. They see it as a 400% profit on their investment, and it is a way to get the debt off your back for much less than you actually owe. It is a win-win. If they're dumb and say no, you tell them you'll just move on to your next creditor with that $2500 and they'll get nothing any time soon and maybe ever. Most of the time, they will accept 25, 30, or 50 cents on the dollar to settle your debt.
There are a few caveats to this technique. First, it's not going to work if you make $300,000 a year and have a net worth of $200,000, although I suppose it might be possible to hide those facts. But if that's really the position you are in, you should probably just pay the debt and move on with life. Second, never give them direct access to your checking account. If you think financial advisors and insurance agents have low ethical standards, debt collection folks are an order of magnitude worse. They will simply clean out the account, put it up against the debt, and come back asking for the rest. Third, you need to have it IN WRITING (email is okay) that they will accept this as payment in full. Keep that letter or email in your files forever. Apparently, they occasionally come back and try to collect again.
You might have secured debt but the security is worth less to the creditor than what you owe. For example, if you have a mortgage of $300K on a house that's worth $250K (and maybe $200K by the time the bank gets it fixed up and sold), then in reality you have a $200K secured debt plus a $100K unsecured debt. You might very well be able to negotiate a settlement for $220K in that sort of situation if you can convince them you do not have the ability to (or will not) make payments. Not making them for a few months is a good way to convince them of that fact. You might also be able to use this technique to eliminate additional interest, fees, and penalties. The IRS, for instance, settles debts all the time despite having the ability to garnish your wages. That's because IRS debts go away in Chapter 7 bankruptcies. Even a student loan lender might be willing to settle some debt with you if they think the alternative is getting nothing. Many times they will offer to wipe out penalties and interest if you can bring payments current again. When the alternative for them is getting nothing any time soon and your credit is already trashed, you have all the power in the negotiation.
This isn't an instantaneous process. It will likely require multiple phone calls over weeks or months. It won't be pleasant, but neither is getting phone calls and letters from collection agencies. But it certainly isn't complicated and isn't worth entering the scam-filled world of debt settlement companies to try to get someone else to do it for you.
What do you think? Have you ever settled a debt for yourself or a loved one? What was the process like? What kind of a discount did you end up with? How long was your/their credit affected? Any tips you would add? Comment below!