If you’ve done any research online regarding the debt settlement process, you’ve probably seen a lot of contradictory and confusing information.
At least I have.
So today I’d like to provide you with an honest, accurate and factual summary of what the debt settlement process is … and what it is not.
In case you’re not familiar with me, my name is Marie Megge and I’ve successfully owned and operated a debt settlement company for over 10 years. We have an A+ rating with the BBB and tons of testimonials from happy clients. I’ve helped my clients obtain millions of dollars of debt relief without the need to file bankruptcy.
Let’s begin with …
What Is Debt Settlement … Exactly?
Debt settlement is the process of negotiating with creditors to resolve excessive debt burdens via lump sum, discounted settlement amounts.
Under the right circumstances, debt settlement can be a good option for both creditors and debtors.
- If you’re in debt, you can obtain debt relief without the need to file bankruptcy.
- If you’re a creditor, you can maximize your net recovery on a problem account and not waste resources trying to collect money where there’s little chance of recovery. (Translation: You can cut your losses and move on.)
There are many variables that determine a final settlement amount. But if you know what you’re doing, a settlement of $0.30-0.50 on the dollar is not out of the question. Here’s proof.
You might see debt settlement referred to as debt relief or debt forgiveness. Whatever name you give it, it means voluntarily settling an account for less than full balance.
How Does Debt Settlement Work?
The overall concept is fairly straightforward:
- You negotiate a mutually acceptable settlement amount with the creditor or collection agency to resolve an outstanding balance.
- The creditor or collection agency sends you written confirmation of settlement. (IMPORTANT: Never, ever, ever release settlement funds until you have the settlement agreement in writing.)
- You then send settlement funds to the creditor or collection agency via check-by-phone. This means you verbally authorize a debit from your checking account for the settlement amount. Don’t worry, this is the industry standard procedure and it’s perfectly safe as long as you have a settlement letter in your possession confirming the settlement amount.
- After the funds have cleared your account, the creditor or collection agency will issue a follow-up letter confirming they’ve received your funds, that your account is settled and no further balance is due. (NOTE: Not all creditors and collection agencies issue this final letter automatically. Sometimes you have to request it.)
However, not everyone qualifies for the debt settlement process. The minimum criteria are:
- Legitimate financial hardship. No credit card company or collection agency is going to write off thousands (or tens of thousands) of dollars for no good reason — nor should they. If you have the ability to pay, you should honor your financial commitments. But if you can honestly say you’ve suffered a legitimate financial hardship, then it’s perfectly ok to approach your creditor(s) about negotiating a settlement for less than full balance. Examples of legitimate financial hardships would be a messy and expensive divorce, a job loss, a medical emergency, a natural disaster, etc.
- Sufficient funds. You can be the nicest, sweetest, most well-intentioned person in the world, but if you don’t have any money to work with, there’s not much you can do to settle your debts. How much money will you need? Obviously it’s impossible to say exactly what you’ll need, but I can give you a rough estimate. If you know what you’re doing, you should be able to negotiate settlements with your creditors for $0.50 on the dollar or less – in some cases even $0.30 or $0.40 on the dollar. There are no guarantees, and your results could be higher or lower. I’m just giving you an estimate based on what I’ve observed over the past decade.
It’s important to understand that the debt settlement process only works on unsecured debt — credit card debt, medical debt, department store debt, etc.
Mortgages and car loans are examples of secured debt, and creditors have little incentive to accept less than the full balance owed because these debt are secured by property they can seize if you don’t pay.
Students loans are technically an unsecured debt, however existing laws treat them as a secured debt and they are difficult to discharge via bankruptcy (which is a rant for a different day). The amount of student loan debt currently exceeds credit card debt. With student loan debt, there aren’t a lot of options but there are a few.
How To Negotiate Debt
If you conclude that the best way to resolve your present financial predicament is via the debt settlement process, the next question to answer is, “Should you hire a professional debt negotiator or attempt to do it yourself?”
There are pros and cons to each approach. Here are some things to consider:
- If you do the work yourself, you’ll save the money by not having to pay someone to negotiate on your behalf – and I’m all about saving money. But you have to be honest with yourself and assess whether or not you have the personality and temperament to be a good negotiator. I’ve seen Ph.D’s and successful business owners poop their pants (figuratively) when confronted with aggressive debt collectors. Debt collectors can be vicious bulldogs. So you have to be up to the task.
- Debt settlement professionals have scouting reports on all the major credit card companies and collection agencies. Each financial institution and agency has their own unique settlement procedures and nuances. And you only get this critical data by working in the industry week in and week out. Scouting reports are the # 1 reason we get favorable settlements for our clients.
- Sometimes it’s not what you know but who you know. Veteran debt settlement professionals usually have established contacts at credit card companies and collection agencies that allow them to bypass entry level gatekeepers whose job is to thwart your efforts.
- Before finalizing a settlement you must have the proper paperwork in place before funds are released. Otherwise you run the risk of being liable for the remaining balance at a later date. Settlement confirmation letters sometimes have innocent mistakes, but every once in a while they are written with devious intent. A competent debt settlement professional will review your paperwork for accuracy and correct wording.
It’s like selling your house. Do you have to hire a real estate agent? No. Many people are happy rolling up their sleeves and doing the work to avoid paying the agent’s commission. But there are also many people that don’t have the time or desire to try and sell their home themselves, and they’ll gladly pay an experienced professional to do the work for them.
If you’re going to attempt debt settlement on your own, get a few books from Amazon and study up on how to negotiate. Also, try and do as much research as possible online before embarking on this process.
If you’re interested in hiring a professional, here’s an article I wrote with tips on how to find a good debt settlement company.
Where To Get Funds For Settlement Purposes
You might be thinking, “Attempting voluntary settlements sounds like a good option, but where do people get the funds for settlement purposes?”
One of the most common sources is “love” money – from people that love you. It’s not like you go to your family and friends asking them to just bail you out. Instead, the funds are normally in the form of a personal loan. Then after the debt is settled you make private arrangements to pay back the money to that family member or friend (unless they’re wealthy and they say you don’t have to pay them back).
Another common way to secure funds is with a home equity line of credit. Obviously if you don’t own a home then this isn’t an option.
You can also liquidate (or take a loan against) your retirement account. It’s true you might have to pay taxes or penalties for early withdrawal from your retirement account, but the amount of debt relief you could obtain might far offset any taxes or penalties you would incur. Normally it’s best to avoid tapping into a retirement account. But if you’re strapped for cash, possibly on the verge of bankruptcy, this might be a sacrifice you’re willing to make.
You could also sell something – a car, a boat, your baseball card collection, a piece of property, etc. Maybe you sell your existing home and downsize to a less expensive home.
Another option would be to accumulate money, month after month, from your paycheck.
The bottom line is this: If a person wants it bad enough, they can usually find a way to come up with the money. Not always, but usually.
Debt Settlement vs Bankruptcy
When facing a difficult financial situation it’s wise to consider all your options … including bankruptcy. That means researching bankruptcy online or meeting with a bankruptcy attorney.
Most people I’ve talked with over the years want to avoid bankruptcy. Partly because of the stigma attached to bankruptcy, but also because of the following:
- If you file bankruptcy, you will be required to appear in Federal Court for at least one hearing, maybe more.
- The bankruptcy paperwork requires that you reveal all of your debts as well as all of your assets.
- Credit bureaus are entitled to keep your bankruptcy filing on your credit report for up to 10 years.
- In addition to your bankruptcy filing being listed on your credit report, a bankruptcy filing is also a matter of public record for anyone that wants to know about it. If your job requires any type of background check or security clearance, this could be a problem.
- Certain types of bankruptcy require a court-appointed trustee to control and oversee your estate.
- With a Chapter 13 bankruptcy filing, your employer will most likely be notified and automatically deduct pre-defined amounts from your wages.
Neither debt settlement nor bankruptcy is a perfect option. It’s all a matter of picking the solution with the greatest upside and least downside for your particular situation.
For more information on the pros and cons of debt settlement vs. bankruptcy click here
Debt Settlement FAQ
What will the debt settlement process do to my credit score? Going through the debt settlement process is going to negatively impact your credit report. Period. End of story. Anyone telling you otherwise isn’t being straight with you.
When you settle your credit card debts via negotiated settlements, there’s a trade-off. That trade-off is credit card debt relief (without the need to file bankruptcy) in exchange for less-than-perfect credit for a few years.
For many people, that’s a trade-off they gladly accept.
Having less-than-perfect credit is not the end of the world, and you can function in the world just fine. We’ve had clients able to purchase a home within a year after completing the debt settlement process.
While we’re on this topic, let me warn you that there are websites claiming you can “negotiate” how a credit card settlement appears on your credit report. This might sound good on paper, but it doesn’t work in the real world.
Creditors and collection agencies have a legal obligation under the Fair Credit Reporting Act to accurately report the facts. And if you settled your debt for less than the full balance, that is what they are required to list on your credit report.
So, yes, your credit score will be negatively impacted. But it will gradually improve over time and you’ll be able to go on as before — only debt-free.
I’ve read where I might have to pay taxes on any debt forgiveness I receive. Is that true? It is possible you will have to pay taxes on your debt forgiveness … but you probably won’t.
The IRS code states that any amount of debt relief you receive from a creditor is treated as income. Therefore, if you settle a $10,000 credit card debt for $3,500, the $6,500 that is written off is treated as income by the IRS.
But the IRS code also states that if you were insolvent at the time of settlement, and your level of insolvency was greater than the amount of debt relief you received, you are not required to pay taxes on the amount of debt relief you received.
When you file your federal tax return, you must attach IRS Form 982 to notify the IRS of your circumstances.
You can get more info on this topic here.
Will I receive calls from creditors during the settlement process? If you attempt to settle your debt(s) on your own, you can expect to receive calls from your creditors during the process. Unfortunately creditors are still legally entitled to contact you about past due balances, even if you’re waving the white flag and attempting voluntary settlements.
Some creditors and collection agencies will stop contacting you if they know you’ve retained a debt settlement company — some won’t.
Whether you’re attempting the DIY approach to debt settlement or you’ve hired a professional, it’s near certain you are going to get some collection calls during the process. That’s an unfortunate side effect of seeking substantial debt relief without filing bankruptcy.
The key is keeping your contact with debt collectors to a minimum. For more information on how to do that, check out our very thorough and detailed guide, “How To Deal With Debt Collectors“.
I read online that I can send a “cease & desist” letter to creditors and collection agencies and that will stop them from contacting me. Is this a good idea? Sending a so-called “cease & desist” letter is one of the stupidest things you can do … for 2 reasons.
First, if you want to negotiate a settlement you need an open line of communication. Sending a cease & desist letter kills that open line of communication.
Second, with certain credit card companies, a cease & desist letter is an automatic trigger to fast-track your account for litigation.
Don’t send cease & desist letters.
I read online that I should send a “debt validation” letter to a creditor or collection agency. Is this a good idea? As with the answer to the previous question, no, it’s not a good idea. Here’s why …
Certain bloggers and financial “experts” online (that have never actually worked in this industry) suggest sending a letter to a creditor or collection agency asking them to produce documentation to validate the debt … even though you know you owe the money. Their thinking is that the creditor or collection agency won’t be able to produce the documentation and you can then get off scot-free on a paperwork technicality.
Here’s what’s wrong with that strategy. Creditors can produce the paperwork 99.99% of the time — collection agencies probably 90-95% of the time.
After you force them to waste their time complying with your (bogus) request, do you think they’re going to be in the mood to negotiate with you? Not likely. So you’ve just shot yourself in the foot.
There is a time when debt validation is legitimate. If you know you don’t owe the money or the debt has been paid off or it’s a case of mistaken identity, then by all means request to see written proof that the debt is valid. If they can’t produce the paperwork, then they must cease their collection efforts and close their file.
But if you know you owe the money, requesting debt validation is usually a waste of time and it will probably backfire on you.
Conclusion
Financial problems are nothing to be ashamed of. Sometimes bad things happen to good people.
The important thing is that you educate yourself and take appropriate action, because normally they don’t go away on their own.
It is entirely possible to obtain thousands (or even tens of thousands) of dollars in debt relief without having to file bankruptcy. I’ve been assisting clients with this for years. Here are some actual results.
But the debt settlement process isn’t perfect and it isn’t the right solution for everyone.
Hopefully the information I’ve shared with you today gives you a much clearer understanding of how the debt settlement process works.
If you have any additional questions or you’d like to talk with me privately about your situation, click here.
