In my last blog post I talked about debt settlement, and laid out the benefits and some of the pitfalls associated with exploring that option. In this post, let's talk about the practical side of things.
In my opinion, unless you really have no ability to speak assertively over the phone, you really should not hire someone to negotiate your bills down. I know that this sounds counter-intuitive, since we rely on professionals to help us every day, but you should only pay someone for something that you cannot do yourself, and in this case, you can do this yourself.
Trust me when I say that nobody brings anything special to the table here. Every week somebody calls me up and wants to pay me to negotiate with their creditors. My hourly billable rate as an attorney makes this an extremely cost prohibitive exercise. The truth is that I would not be using my legal expertise in any way during that negotiation. Negotiating with your creditor for a settlement is no different than negotiating at your local farmer's market for a good price on some homemade jam. Just do it. Don't overthink it.
I use the “High School Prom” rule when it comes to negotiation. The worst thing that they can say is “no”. So what? If they don't go for it, your position has not changed.
What about using some sort of debt settlement service? They must know what they are doing, right? Well, outside of being slightly more organized than you, they don't bring any special skills to the table, and oftentimes their fees are significantly higher than what I would charge for Bankruptcy? They are not doing anything that you cannot do for yourself. Go back to the High School Prom rule…you can ask your friend to ask that special someone out, or you can do it yourself. If that person says “yes”, they would have said yes, even if you had asked yourself instead of sending your friend over.
So how do I negotiate? First, pick a flat fee figure that you can be confident that you can pay as one lump sum to clear the debt in full. Most people want to negotiate a lower payment, but the problem here is that there is no incentive for the creditor to accept that lower payment, and no security in case you fail to meet your end of the bargain.
For example, let us say that you owe State Bank $10,000 and your normal monthly payment is $500 per month. You quickly realize that this is not working out and you want to negotiate with them. If you offer to pay them $100 per month, that may be great for you, but how does State Bank know that you are not going to default on that payment in a few months, and now they have missed out on all of those missed payments. From their perspective they are much better off taking a lump sum payment and just ending their relationship with you. So, if you asked for a payment reduction, you have a low chance of success. Now that is not to say that there are not programs that allow for payment reduction or even payment forbearance, but keep in mind that this is not a matter of negotiation. These would be programs/policies that the bank has set up in advance, and you either qualify for them or you don't qualify for them. So this isn't really negotiating, but instead just finding out if you can qualify for some type of payment relief.
So back to our State Bank scenario. You owe them $10,000. If I were negotiating, I would contact them and tell them that you would like to settle the debt in full for a one-time lump sum payment. Typically in the industry nearly every creditor will take 50% of the outstanding balance in full satisfaction of your debt. There are one or two credit unions that I can think of that have a policy of only accepting 75% of the outstanding balance, and there are even a few credit card companies that I have had accept as low as 10% of the outstanding balance.
When you come up with a starting price, you always start low and then move high. This has been the rule of negotiation since cave-man times. I would start by figuring out what is the absolute maximum that I could afford to pay in one lump sum. That is my high figure, and I cannot go past that. Then I would realistically look at my debt, my payment history, and come up with a good low figure. In general, I start negotiation at around 15-20% of the outstanding debt and see what they say. Keep in mind that you need to sell them on it. I have always laughed when I see fairly wealthy people on vacation in developing countries trying to negotiate with local shopkeepers. The shopkeeper sees the person wearing a $2,000 watch and they are haggling over $20. Guess what? The shop keeper plays hardball, because he knows that the person can afford to pay. On the other hand, when the impoverished student that is on vacation comes by the same vendor and he sees that the student only has a few extra dollars to spend, suddenly the same item becomes $5.
You need to do the same. You need to sell the creditor on why this is a good deal for them. This should not be hard, since you are living your circumstances. You know your job situation. You know your own inability to pay your important bills and how this particular bill is not something that is essential. You also know that if the creditor boxes you into a corner, you will simply file for Bankruptcy and that creditor will get nothing. You already have more negotiating posture by your own story than any “expert” could bring to the table.
Expect that this is going to take a few tries and that you might have to speak to different people in the chain of authority at the bank. Also once you come up with a final figure, make sure that you get something in writing from the bank acknowledging that this will be the one and only payment in exchange for “full satisfaction” of the debt. That language is important. “Satisfaction” is the legal term that means you are no longer obligated on the loan.
Can the writing be in the form of email? Yes it can. Email is not perfect, and there needs to be enough information in the email to show a Judge (assuming someone contests that they actually forgave your debt) that you had a reasonable justification in relying upon their representations.
Finally, as I discussed in the last blog post, expect to give them your social security number (if they don't already have it), so that they can send you a 1099 form for the end of the year for your taxes. Remember, you won't just have the payment to the creditor, but in all likelihood you will have to pay taxes on the amount that was forgiven.
Remember that the biggest issue here is that you should not do this if you will just end up filing for Bankruptcy anyway. So, take a full picture of your debt and if you don't think that you can eliminate enough debt to make settlement a viable option, don't waste your money. A reputable Bankruptcy attorney can explain both your Bankruptcy and non-Bankruptcy options, but be a good consumer and make sure that you trust the person that you are dealing with. Anybody that wants to rush you into making a decision does not have your best interests at heart.
Good luck, and remember, the worst thing that they can say is “no”, and that is not a reason to be intimidated by them.