What is Debt Negotiation?
Debt negotiation is a form of debt settlement; it is an approach to debt reduction in which the borrower and his or her creditors agree on a reduced balance that is regarded as payment in full.
Debt negotiation is typically confused with debt consolidation. In the latter, the borrower provides monthly payments to the consolidator (entity that holds the all-encompassing debt) for a fee; in this model, creditors will continue to receive payments each month. In a debt negotiation, the borrower provides monthly payments, out of which the negotiating company takes a fee—the remaining funds are placed into a trust account.
In the debt negotiation format, the creditors are not paid until they agree to settle. Furthermore, the debt negotiator (entity or individual) will instruct the borrower not to make payments to its underlying creditors. This maneuver is intended to scare the creditors into settling for less than the full amount. That being said, creditors will pursuit alternative collection, through the hiring of a debt agency which may or may not file a suit against the borrower in court. As long as the consumer continues to provide the minimum monthly payment, a creditor will not negotiate a reduced balance. However, when the payments cease, the balance will continue to expand because of ongoing interest and late fees.
A consumer can engage in their own debt negotiation by utilizing the advice found on websites, legal professionals or debt negotiation companies. If it is done correctly, debt negotiation can absolutely help the borrower obtain a lower balance.
Debt Negotiation Process:
Debt negotiation is the process of negotiating with creditors to mitigate overall debt amounts in exchange for a lump sum payment. A successful debt negotiation will occur if the creditor agrees to forgive a percentage of the total account balance for a lump sum payment. Typically, only unsecured debts and not assets, such as homes or automobiles may be settled. Typical debts that will warrant debt negotiation include credit card debts and medical bills—student loans are typically not eligible for debt negotiation.
Debt negotiation makes sense for both sides—the debtor avoids court costs and intrusive bankruptcy filings while lowering—sometimes by 50%–their debt balances, whereas the creditor, regains confidence that the borrower will pay back what he or she can of the amount owed and not file for bankruptcy.
The debt negotiation process is instituted with a junk debt buyer or a collection agency—the original creditor is not involved with the debt negotiation. The party representing the creditor will act on behalf of the institution and settle only for amounts desired by the institution. However, a debt collection agency may agree to take less of the owed or desired amount, because the junk debt buyer has already purchased a portion of the original balance. As a part of the debt negotiation, the borrower can request that the collection is formally removed from the borrower’s credit report—this removal is generally not achieved with the original creditor.