Debt Negotiation: Understanding Credit Card Debt Negotiation Services

A relatively new industry, some consumers are unclear about the dynamics behind debt negotiation. Debt negotiation is the process by which a company negotiates with a credit card company to attempt to get them to to agree settle a debt that a consumer owes for less than he or she owes. In some cases, when a settlement program is successful, a debt negotiation client may be able to save thousands off their balances as a result of settling their debts, helping them to become debt free faster on those accounts that were able to be negotiated down. In order to get a creditor to agree to a settlement of the debt, however, a client must be behind on their payments to the creditors, which may have an adverse effect on your credit. On top of the credit rating concern, there are several other factors to consider before choosing debt negotiation. The purpose of this article is to break down the different factors that determine the effectiveness of a debt negotiation program. In no way does this article make the point that people are guaranteed successful negotiations if they meet the criteria outlined below. Results do vary and are dependent upon creditor willingness to settle and your ability to meet the savings requirements for a settlement, and creditors change their policies continuously, so this may not reflect the current landscape for debt negotiations.

 Debt negotiation and the Importance of Program Length

In any debtor-credit scenario, a creditor is reserved the right to sue a debtor in court if they are not paying according to the terms stipulated. Although creditors may choose to settle, legal action does occur to debt settlement clients. This does not mean we cannot settle it, but the percentage tends to be higher than our estimates, and in some cases settlement isn’t possible altogether, so we set up payment plans with the creditor instead.  In the event that a client does not have sufficient funds for a settlement or payment plan and a creditor does in win a judgment against the client, they may be able to garnish your wages, freeze your bank account or put a lien on your property depending on your state.  It should be noted that the last situation is rare but it is of course possible.

So what causes a creditor to pursue legal action? 

That's the million dollar question which is impossible to answer, but we do know that attorneys generally get involved in two types of circumstances:

 1) when a credit card company decides on their own that an attorney is the best means for collection - This can happen after being just six months past due or maybe less.  The point is no settlement company can control or remotely predict when this will happen, although certain creditors tend to use this method for collection more than others

(detailed below).

 2) when a creditor has exhausted every other collection method possible and feels like filing a lawsuit is the only way to get a resolution on the account. This can happen after your account has been handled by a variety of other collection agencies and has been past due for quite some time.  The easiest way to make sure this doesn't happen is to make sure accounts are settled before this point, and the only way this can happen is if funds are available for a settlement. That means putting clients on shorter programs which require higher monthly payments.  As a rule of thumb, being in a debt negotiation program for longer than 3 years is not advisable, and even then going shorter is a much safer avenue and has a higher likelihood of success for the client.

 The Importance of your Creditors in Debt Negotiation

 As one should expect, each bank deals with debt negotiation in a different manner than the next. While almost every creditor does in fact settle, some creditors are more antagonistic than the rest. Two in particular stick out as difficult creditors:  Discover and Capital One. For one, these creditors' historical settlements tend to be much higher than the rest. Secondly, these creditors are more likely to pursue legal action to collect your debt. Third, Discover has a flat out policy of not working with settlement companies except in rare circumstances, and settlement companies usually can only settle with them once an account is in collections.  The likelihood of legal action is usually reduced dramatically by enrolling in a shorter program, but all in all, it may be possible that seeking the advice of a bankruptcy attorney may be a better alternative if these are your only creditors.

 Debt Negotiation and the Importance of your Hardship

Believe it or not, creditors are human. If your enrollment in a debt negotiation program is the direct result of circumstances that you could not control (divorce, medical issues, job loss) and you can document it, then you're far more likely to get a favorable settlement versus a person who the creditor feels could have paid the debt back in full. If you're buried and unable to afford the minimums or a credit counseling program, but it was more the result of poor budgeting than financial hardship, it's still possible that you'll be able to obtain a settlement. Had you just been diagnosed with brain cancer the settlement in many cases may be a lot more favorable and the negotiations process a whole lot easier. Sympathy still goes far these days.

 Debt Negotiation and the Importance of your Recent Account Activity

This plays into your hardship in a sense because it's all about whether the creditor feels you've been fraudulent in your business with them. For example, if you just bought a plasma TV on your credit card a month ago, I'd think twice about doing debt negotiation. If the creditor doubts that you ever had any intention of paying them back, then the negotiations over your debt are more likely to fail. In the end that means you'll be stuck in court paying back a debt that's even larger than original balance because of the late fees and interest charges that were tacked on during the course of your debt settlement program.

Debt Negotiation and the Importance of your Credit History

More specifically, if you've filed Chapter 7 Bankruptcy in the past 7 years, you may be out of luck. The main draw of debt negotiation for creditors is that they can recover a substantial portion of a bad debt that otherwise could and/or would be completely wiped out by bankruptcy. Unfortunately, if you've filed bankruptcy in the past 2 years, then you can't file again for another 5 years, so a creditor loses some of the incentive to negotiate a balance. That is, in their mind, they may be saying, "This person can't file bankruptcy anyway. What do I gain by lowering their balance?" That being said, even if you have filed bankruptcy in the past 7 years, a settlement can still be reached in some cases. Why? There are two reasons: a) a lot of times a creditor won't be able to collect the debt from you anyway because you may not have any assets or sufficient income, and b) having a sizable part of the balance in one lump sum is attractive when it means the creditor doesn't have to waste time and money chasing you down. Finally, the longer it's been since you've filed, the stronger your negotiating position may be. In other words, if it's been 6 years since you've last filed, then the time line when you're eligible for bankruptcy again is too short for some creditors to risk potentially losing everything by refusing a settlement.

The purpose of this article is to alert consumers to some important points about debt settlement, and although this may initially be alarming, Franklin Debt Relief still believes strongly in debt settlement as an alternative to bankruptcy.