One alternative to filing for bankruptcy is to contact one’s creditors and attempt to negotiate down whatever debt is owed, either to be paid in monthly installments or as a single lump sum. This method of relieving debt is difficult to achieve and will only work for people with very specific financial circumstances. Let’s examine the process and who is best suited to attempt negotiating a debt settlement.
Who Should Attempt Debt Negotiation
Debt negotiation is usually only available to those whose debt is primarily unsecured and in the form of credit card charges. Creditors of secured loans will never agree to a negotiation when the property attached to the loan is still available to sell and recover their losses. Even most unsecured loans will not be negotiable, especially any that have been deemed non-dischargeable by the bankruptcy code, like student loans and child support debts.
In addition to credit card debts being the primary kind of debt that is open to negotiation, the debtor will need to have some funds available to negotiate with. Creditors are more likely to agree to a debt settlement if the debtor can show either available funding to make a reduced one-time settlement payment, or that they will have sufficient future income to pay off a debt at a reduced amount through monthly installments. To this point, it’s likely that anyone working with a debt settlement agency will be asked to put this money in an escrow account at the start of negotiations.
Another thing to keep in mind is the tax consequences of a debt settlement. Any forgiven debt in a settlement is treated as income for taxation purposes. The creditor will report the settlement to the IRS and send a 1099-C form to the debtor. The debtor will then have to report the forgiven amount on his or her tax return and pay income taxes on it. However, there is an exception if the debtor was insolvent, meaning the debtor’s debts exceed his or her assets. If a debtor is insolvent, any debt forgiveness up to the difference between debt and assets is excluded from income taxes.
Lastly, only those with the “right” amount of debt are likely to have any success in negotiating a new deal. Debtors with enormous credit card balances in the tens of thousands of dollars are more likely to be sued by a creditor when payment stops, as it will be worthwhile for the creditor to invest in a lawsuit to recover the large debt.
Those with credit card debts that are too small to be worth a lawsuit but are still worth making collection attempts will have the highest chance of successfully negotiating a debt settlement. It’s best to consult with an attorney experienced in these negotiations to determine whether one’s debt is of the right kind and amount to be successful in reaching a settlement.
What to Expect
The process of reaching a debt settlement is less complex than filing for bankruptcy, and involves significantly less paperwork as well as no appearances in court. However, while bankruptcies are typically successful over 90% of the time, debt settlements are only achieved around 10% of the time. Why? It has to do with the negotiation process.
When a person decides to attempt a debt settlement with a creditor they will need to be prepared. First they should have an accurate understanding of all their finances, including all income, debts, assets and potential future expenditures.
Next, they’ll need to do some math. Creditors aren’t just going to agree to whatever deal is offered. Typically settlements are achieved when the debtor is able to pay between 40-70% of the original amount owed, either up front or over the course of the next 2-4 years.
It’s important to note the range of accepted settlements. A person with $10,000 in credit card debts could reach a settlement that pays out between $4,000 and $7,000. Where does this difference come from? The debtor’s skill in negotiation and their ability to convince the creditor that not only will they have the funds to make these payments, but that it’s in the best interests of the creditor to accept this deal.
Creditors will approach this negotiation from a position of power. They’re not required to accept any deal, and they can always sue or hire a collection agency to go after the debtor for the money they owe. On top of this, the creditor is likely to have conducted hundreds or thousands of these negotiations, while this could be the first time a debtor is making such an attempt.
These negotiations can drag on for months, during which time a debtor can continue to receive calls from debt collectors. Confidence is key in these negotiations, and many individuals have a hard time maintaining confidence under the heavy pressure of their debt. This can make do-it-yourself debt settlements very difficult.
That’s why it’s best to consider hiring a skilled attorney experienced in these negotiations to speak on the debtor’s behalf. A good attorney can save a person thousands of dollars and will greatly enhance their chances of coming to an agreement with the creditor.
Why Hire a Lawyer and not a Debt Settlement Company?
Unlike debt settlement companies, lawyers are bound by rules of professional responsibility. While anyone can set up a debt settlement company, only someone with a law license can practice law, and anyone with a law license has to follow certain rules. Although debt settlement companies are regulated, the Federal Trade Commission has warned consumers that many companies in the industry are scams. A person is much safer dealing with an attorney who has a name, a face, and a law license than with an anonymous debt collection company.
Another reason to hire a lawyer is because a lawyer provides more options than a debt settlement company. A debt settlement company does one thing: debt settlements. However, as we explained earlier in the article, a debt settlement might not be the best option. A lawyer can evaluate a person’s entire situation and determine whether another option, such as bankruptcy, would be better.
Pro’s and Con’s of Debt Settlement vs. Filing for Bankruptcy
A person with the right kind and amount of debt for settlement will still want to consider the advantages and disadvantages of attempting settlement versus filing for bankruptcy. Here are some important things to consider:
Will have to pay 40-70% of debt
Non-exempt unsecured debt will be completely wiped out
Private transaction, affects credit for 7 years
On the public record, affects credit for 10 years
Creditors can still make collection attempts
Creditors are automatically stayed from collection attempts during the proceeding
Creditor does not have to accept offer
Debts included in bankruptcy will be discharged regardless of creditor’s wishes
There are several more things to consider when making this decision, including whether to file for Chapter 7 or Chapter 13 bankruptcy and whether keeping one’s property is a primary goal. It’s important for anyone struggling with debt to understand all of their options and how they will apply to the specific financial circumstances they find themselves in.
The 2008 financial crisis saw a boom in “debt relief service” companies offering debtors incredible deals that see their debts getting mostly wiped out without having to file for bankruptcy. In the years since, many of these companies have been revealed as scams.
These companies will promise the world to a person struggling with debt…they just need to pay some money upfront. Once they have the money, they then go on to make a few less than adequate attempts to relieve a person’s debt, and when they fail they do not provide any refunds. The Federal Trade Commission has been actively trying to shut down these scam operations, but many are still out there.
At Rosenblum Law, our attorneys are ready to provide a completely free consultation where they can discuss an individual’s financial situation and the options available to them, all before any fee is discussed. Call us today, we’re here to help.
It’s always better to pay off a debt in full if funds are available, as settling the debt will have a negative impact on one’s credit, though not necessarily as negative or long lasting as filing for bankruptcy.
There is a six year statute of limitations on debt collection attempts in New Jersey. After this period creditors are barred from making collection attempts on a debt or initiating a lawsuit to collect. However, if a judgment has already been issued, it will remain in place for twenty years and can continue to be collected on.
It’s not likely. Most credit card companies will refuse to forgive any debt owed to them, but many are open to settling the debt for a lesser amount. The settled amount will be negotiated between the creditors, the debtor and their attorney if they have retained one.
You cannot go to jail for failing to pay a civil debt, like the ones that arise from credit cards or medical bills. However, failing to pay certain other debts like taxes or child support can result in jail time.