How to Negotiate a Debt Settlement & Avoid Bankruptcy

Debt negotiation is a good alternative for those who are suffering due to huge debt burdens and considering filing for bankruptcy. Though “Avoid bankruptcy in any cost” has been a slogan among many Americans for years, a numerous people are now experiencing an immense financial burden, and thinking that bankruptcy is the only way out of this financial crisis. However, there is an effective alternative to bankruptcy. And that is undertaking a debt settlement program.

Always Avoid Bankruptcy

If your approach toward filing bankruptcy is that the court may strategically discharge your debt, the downside is that a judge may also penalize you. Depending on the filing that you may be entitled to make, bankruptcy can be a costly move, one that comes with court fees, insurmountable attorney fees, and much time spent in court, etc. However, if you choose to settle your debt, paying off your total debt load can be done very fast, with affordability, and in your financial pace.

Another hardship of filing for bankruptcy is that you may only qualify to file for Chapter 13. But, in exchange of no longer being responsible for repayment of the whole amount, this means that you will have to pay a fraction of your debt. The additional tradeoff of a bankruptcy filing is that it remains on your credit report for up to 10 years and makes it very difficult for you to obtain any loan in the future. In contrast, a debt settlement does not have the same long-term impact on a debtor’s credit score.

Debt Negotiation

These days, a larger number of debt-burdened consumers believe debt negotiation, ‘the process of achieving a debt settlement’, to be the best alternative to bankruptcy. In a debt negotiation program, a professional negotiator will negotiate with the creditors on your behalf in order to help you repay only a fractional amount of your entire debt.

The objective of a debt negotiation program is always to pay back the owed money either in installments or in a lump sum payment (often 40%-50% of the owed money). It is important, after paying the lump sum amount as agreed upon, that you make sure the creditor reports the settled debt as “paid in full.” This will help improve your debt-to-credit ratio, a major component of the consumer credit standing.

Thus, debt negotiation consummates an affordable payment plan and the debtor ultimately pays off the amount as agreed and no longer remains liable for repayment of the debt to the creditor.

Finding a Debt Settlement Negotiator

Professional debt negotiators can be found online. However, before appointing or enrolling with any, check out their credentials, get customer feedback, and ensure the negotiator does not have a large degree of customer complaints. As there are great companies out there, not doing proper research, you may stumble across fraudulent companies. So, ALWAYS do your due diligence and think twice before taking any step.

Debt Settlement: Overview of Credit and Legal Conerns

Credit and legal concerns are two top concerns pursuant to the enrollment in debt settlement program. To get a better appreciation, let's walk through the following scenario:

Conversation between consumer and debt settlement adviser:

Consumer: “Will your debt settlement program reduce the interest rates on my accounts like a credit counseling agency?”

Financial Adviser: “Actually we’re very different. Credit counseling only reduces interest rates. But sometimes interest rate reduction doesn’t solve much of your financial problem. What we do is negotiate directly with creditors a reduction based on the total debt - principal, interest, and fees.”

Consumer: “Can a creditor sue me while I’m in your debt settlement program?

Financial Adviser: “Obviously, the downside of being delinquent on a debt could be a creditor lawsuit. Lawsuits are less common in the collection of unsecured accounts. At the Debt Free League website there are some examples of actual settlements. It's also possible to negotiate an out of court settlement of a legal demand.”

Consumer: “What is the drawback to my credit if I join your debt settlement program?”

Financial Adviser: “Many people already tarnished their credit due to having late payments, collection accounts, or high credit balances. We NEVER espouse that you not pay your creditors. However, we've seen cases where clients in a major financial hardship voluntarily decided to cease the the minimum payments they were struggling with in order to save the money to effect a settlement. We do however advise clients that if they cease making the minimum payments as required by a credit agreement, the drawback is that their credit will decline. On the other hand, their primary concern is to get out of debt as quickly as possible and BTW, a debt settlement can also help improve a high debt-to-credit ratio that was incurred from a major debt load.

Texas Debt Settlement Program Helps You Avoid Bankruptcy and Legal Problems

Creditor harassment is one the biggest culprits in bankruptcy filings. Anyone delinquent on their bills will easily cringe from the bombardment of daily collection calls and legal threats. However, if you’re a Texas debt settlement practitioner, who wants to fight creditor harassment and bankruptcy, good news is up ahead!

Texas has “pro-debtor” laws that diminish the incidence of creditor harassment and creditor lawsuits. As a Texas debt settlement practitioner, you may issue a cease and desist letter to a pestilent debt collector. Under this legal notification, you are exercising your rights under the Fair Debt Collection practices (FDCPA) to stop the nasty collection calls from coming to your home.

While a cease and desist letter generally stops third-party debt collectors from calling, in Texas it also extends to original creditors. Texas extends the power of the cease and desist letter from the point of non-payment until the debt charge-off date, typically six months after the date of non-payment. This is a key benefit to stop collection calls since the original creditor may still be the party initiating collection calls until a debt is written off, sold, or reassigned for collection.

As a Texas debt settlement practitioner, you can also be successful settling a creditor lawsuit. If a creditor sues and wins a judgment, a common maneuver is to pursue a garnishment order ("wage garnishment"), which forces an employer to garnish a percentage of the debtor's wages. (Note: Wage garnishments vary from state to state; the amount ranges between 10-25%.)

However, Texas, the debtor-friendly state protects a person's wages from being garnished. Again, as a Texas debt settlement practitioner, relief can be in sight in the event of a property lien. The objective of the property lien is for the creditor to collect on an unpaid debt from the equity of a property whenever the property is sold by the debtor. Fortunately, as a Texas debt settlement practitioner, you can shelter your home through a 100% homestead protection. (Note: The Texas homestead exemption has no dollar value limit.)

Credit Counseling and Debt Consolidation Bandaids

Each year, millions of consumers who are in need of aggressive debt relief refer to credit counseling agencies, or debt consolidation loans. However, despite the popularity of credit counseling and debt consolidation loans, both options are generally a “band-aid” treatment.

Many debtors need much more financial relief than interest rate reduction. This explains the 79% dropout rate of credit counseling credit counseling debt management plans. Another harsh reality, if you're considering a debt consolidation loan is that 65% of the people, who take out debt consolidation loans, end up with more debt!

Debt Settlement Letters – Experience is What Counts

There are both good and bad debt settlement companies. A general rule in finding a good debt settlement company, is the avoidance of those companies that make “undeliverable” promises or guarantees.

The truth is that no company can guarantee to settle your debt or to reach a settlement by a specific amount. The Federal trade Commission has fined companies that have “guaranteed" to settle people’s unsecured debts for a specific amount. A legitimate debt settlement company only provides “estimates” based on settlement results. What matters most is the company's track record and experience.

Another recommendation is to ask for confirmation of actual settlements. This will let you see if the company has experience settling your creditor or collection accounts.

Most debt settlement companies only negotiate personal unsecured debts, such as credit card accounts. In comparison, Debt Free League additionally negotiates medical debt and business debt.

In the last quarter of 2008, our debt negotiators maintained a monthly settlement average of 38-42%! We also work with collection agencies and collection attorneys.

You Can Stop Creditor Harassment

Many people make the cardinal mistake of negotiating with debt collectors, allowing debt collectors to antagonize and fool them with intimidation tactics. But this jeopardizes the the negotiations of a professional debt negotiator in getting you a good settlement.

The collection calls also get nastier on collection accounts because debt collectors know there's a lesser chance of collecting. Working on a “commission basis” also pressures many debt collectors to use abusive collection tactics. Consequently, many debt collectors who engage in such collection practices frequently break the law.

A debt collector may make false threats to force you to pay them. They may threaten to incarcerate you, or take away your home. They may say that they do not work with debt settlement companies. But the Fair Debt Collection Practices Act (FDCPA) gives you many rights to help you counteract illegal collection practices. Knowing your consumer rights is essential. Get informed!

Beware of “Low-Ball” Debt Settlement Companies

When searching for a quality debt settlement company, it is important that you find a reputable company that operates in the spirit of full disclosure. And one that doesn’t low ball.

Especially in our unstable economy, far too many debt settlement companies are pulling the wool over the eyes of unsuspecting consumers. A common false claim is guaranteeing to settle a debt for a specific reduced amount.

The most scandalous debt settlement companies also low ball. They skim their estimates, quoting in the “30-40%” debt settlement range. The scam is to attract more clients through artificial low monthly installments.

Recently, our eyebrows were raised by a consumer who had a $76,000 total debt, who was grossly misquoted by a law firm that claimed they specialize in debt settlement. The consumer was almost fooled into signing up with the law firm because they offered a lower monthly payment. But thankfully, we found the following kinks in this competitor’s written quote:

Not only was their quote about $8,000 higher in fees than ours, but their monthly payments included a “Good Faith Down Payment” fee. Unbelievably, the fee which was over $5,000, had to paid in the first four months of the program. Thus, after five long months, this poor guy would have started saving the first penny toward building up settlement funds.

It gets much worse...

The law firm also charges a fee of 25% of the savings based on an estimated settlement average of 40%. But the estimate was UNREALISTIC. On the average, a debt settlement manifests in six accounts; each account being settled one at a time. Until the remaining accounts are settled, their balances can continue accruing interest, late fees, and possible over-the-limit fees.

A problem with the common “low-ball” practice is that people assume they’re getting out of debt sooner. Yet, if the the add-on of interest and fees is not quoted, an estimated 36 month program could easily take 40 or more months to complete.

In contrast, because our company, Debt Free League factors in the time it would take for each debt to be physically settled, we estimate our settlements at 50% to adjust for the accrual of interest and fees. This allows clients to save more each month for settlements.

If low monthly payment sounds too good to be true, chances are that you’ll pay up a whole lot more than you thought!