Can't pay your credit card debt?
Attempting negotiated settlements with creditors and debt collectors could be a viable alternative to bankruptcy.
The big question is, "How much will they settle for?"
After working in this industry for the past 20 years, here are the ...
8 Factors Influencing Debt Settlement Amounts
Every situation is unique, but understanding these factors can help you better prepare for negotiations.
A. Age of the debt. In most cases, older debts are easier to settle for less. Why? Debt collectors know that the older (i.e. further delinquent) a debt is, the lower their chance of collecting any money from you. Debt collection is all about maximizing recovery and at some point debt collectors have to calculate the likelihood of any recovery the older a debt becomes. If you show them you're willing to pay something, they might just accept your offer to close out your account so they can focus their time/energy elsewhere.
B. Amount of the debt. Sometimes larger debts can be settled for a lower settlement percentage than smaller debts simply because there's more wiggle room. For example, settling a $20,000 debt for $0.30 on the dollar would net the debt collector $6,000. But settling a $3,000 debt for $0.50 on the dollar nets the debt collection only $1,500. In the latter example, it's a higher settlement percentage but a lower settlement amount. Remember, debt collection is all about maximum recovery and how much the debt collector is able to actually collect and deposit into their bank account.
C. Who you're dealing with. Sometimes you're better off attempting to negotiate a settlement directly with the original creditor (i.e. the credit card company), other times you're better offer waiting for your account to be transferred to a collection agency and dealing with them. Strange but true. Every creditor and collection agency has their own policies and settlement parameters — and they change constantly. But when you've worked in this industry week in and week out for years like we have, you develop scouting reports on creditors and collection agencies, which we rely on heavily to get favorable settlements for our clients.
D. Time of month/year. Debt collection is a business. And like any business, there are quotas to meet ... both monthly and annually. Knowing this, you can dramatically tip the odds in your favor by presenting your settlement offer at the correct time. All things being equal, your settlement offer is more likely to be accepted by a debt collector toward the end of a month (when they're laser focused on hitting their monthly quota) than at the beginning of a month. This phenomenon is amplified in December when debt collectors are trying to not only reach a monthly quota, but also a year-end quota.
E. Your current financial status. Debt collectors are less likely to agree to a deeply discounted amount if they can see you're driving a Land Rover with a $1,500/month lease payment and you live in a 4,500 square foot home with a $3,500/month mortgage payment. Those optics aren't good and they won't have much sympathy for you. On the other hand, if a creditor sees that you're not living extravagantly and you're indeed struggling financially, they'll be much more likely to come to the negotiating table and cut a deal to settle your debt.
F. Your hardship causing your financial status. This is a big one. Creditors and debt collectors do take into account a legitimate financial hardship that's causing your financial difficulties. Examples of a legitimate financial hardship would be a messy and expensive divorce, a job loss, an unexpected health emergency, etc. But if you really don't have a legitimate hardship, and you racked up a mountain of debt due to reckless, selfish spending, you're going to have a hard time convincing a creditor or collection agency as to why they should forgive a significant portion of the money you owe them.
G. Legal status of the debt. The legal status of your debt can also impact your settlement negotiations. If your debt is past the statute of limitations, meaning it's too old for the creditor to sue you, you might have more leverage in negotiating a lower settlement. However, be cautious about making even a small payment on an old debt, as that payment could restart the statute of limitations. It's important to know the laws in your state. The statute of limitations on past due debts varies from state to state, plus there's a lot of misunderstanding on this topic. That's why we wrote an entire article on this topic, which you can read here.
H. Whether you're negotiating yourself or being represented by an agent. Negotiation, in general, is not easy. Negotiation with debt collectors is even more difficult because debt collectors often have abrasive and intimidating personalities. Yes, you can totally attempt to negotiate settlements on your own, but you better have a thick skin. Debt collectors know they have the upper hand when dealing directly with a debtor because they know most people aren't good negotiators, and they know most people are easily rattled, and they know most people are unaware of the laws debt collectors must abide by. However, when debt collectors are negotiating with an established debt settlement company like us, it levels the playing field because they know we know how the game is played ... and that usually translates to us securing a more favorable settlement than our clients could obtain on their own.
Tips for Successful Debt Settlement Negotiations
Now that we've discussed some of the factors influencing debt settlement amounts, let's dive into some tips for successful debt settlement negotiations.
In addition to these tips, it's important to remember what you should not say to debt collectors. Avoid disclosing too much personal information, and never make promises you can't keep.
Alternatives to Debt Settlement
At first glance, settling your debts for a fraction of what is owed sounds like a great solution if your struggling with excessive debt.
But debt settlement is not be the best option for everyone because every situation is different and not everyone qualifies.
Here are some alternatives to debt settlement ...
First, let's talk about debt management plans and payment plans, often referred to as a "Consumer Credit Counseling Service (CCCS)". These are programs offered by credit counseling agencies helping you create a budget and a plan to pay off your debts over time. The agency works with your creditors to reduce your interest rates and waive fees, making your monthly payments more manageable. Debt management plans work best for people who can afford to pay off their debts but need a little guidance and structure.
Next up, we have debt consolidation loans. This is when you take out a loan to pay off all your existing debts, combining them into one monthly payment. The idea is that the new loan will have a lower interest rate, saving you money in the long run. This can be a great option for those who qualify for a low-interest loan and are disciplined enough to avoid accumulating more debt. Keep in mind that consolidating your debt doesn't reduce the amount you owe, it just makes it easier to manage.
Bankruptcy is another option to consider when dealing with overwhelming credit card debt. If you're eligible, bankruptcy can eliminate or reduce most unsecured debts. There are two types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 wipes out most of your debts, while Chapter 13 restructures them into a repayment plan. Most people view bankruptcy as a last resort, partly because it's a matter of public record for anyone to see (including family, friends, employers, etc.) but primarily because most people are good, honest and decent ... and they want to try and do the right thing to pay back at least something.
Lastly, an option that's not often discussed is doing nothing. If you're unemployed, retired or have no assets creditors could go after, you might be just fine with doing nothing. Yes, debt collectors can still call you and send threatening collection letters ... and even sue you. But as the saying goes, "You can't squeeze blood from a turnip."
Frequently Asked Questions About Debt Settlement
There's no one-size-fits-all answer because every debt collector and every situation is different. The settlement amount depends on a multitude of factors as described above. With some creditors, you can settle for as low as $0.20 on the dollar. With other more stubborn creditors, the best you'll do is $0.50-$0.55 on the dollar. Unfortunately there's no place on the internet that displays this info. Creditors and collection agencies are not going to publicly reveal their strategies and tactics, or what amount they'll settle for. The only way you get this "inside" info is by negotiating with creditors and collection agencies week in and week out for years.
Some financial professionals say to consider factors like interest rate, balance, etc. At Donaldson Williams, we have a different take. We recommend to our clients take settlements when you can get them regardless of the balance. Don't get greedy and don't hold out for every last dollar because that can come back to haunt you. If negotiations break down and you get sued, you'll be kicking yourself that you didn't agree to settle when you had the opportunity. Any time an offer is on the table, we recommend to our client whether or not we think they should accept the offer or whether they should hold out and continue negotiating, based on our past experience with that creditor or collection agency.
Although it's possible to be sued for smaller amounts, it's less common because the cost of suing may outweigh the potential financial recovery. Each agency has its own policies and the decision to sue often depends on factors like the debtor's financial situation and the likelihood of collection.
No. As a condition of settlement, your account must be closed. Sure, if you have another credit card that you're not attempting to settle, you can still use that credit card. But for any credit card where you settle the outstanding balance for less than what you owe, that credit card account will be closed.
This depends on your comfort level and experience with negotiating. If you're confident in your ability to negotiate and you understand the debt settlement process, you can try handling it yourself. However, if you feel overwhelmed or unsure, hiring a professional debt settlement company is the way to go. For more info to help you decide with you should take the do-it-yourself approach or hire a debt settlement professional, please see my article, "How To Negotiate Credit Card Debt Settlement Yourself".
Debt settlement can have a negative impact on your credit score because it involves paying less than the full amount owed. The settled debt will be reported as "settled" or "paid in full for less than the full balance" on your credit report, which can lower your score. However, the impact may be less severe than other options like bankruptcy. The reality is that you can live perfectly fine with less than perfect credit for a few years. The bigger issue is debt settlement allows you to eliminate credit card debt without having to file bankruptcy.
For answers to more commonly asked questions, please visit our FAQ page.
Conclusion
Now you know the main factors that influence how much a debt collector will settle for. There's a lot to it.
If you're struggling to pay your bills, the most important thing is to decide on a plan of attack.
Addressing financial difficulties can be very painful and scary, but they usually don't go away on their own. Usually some type of action is required.
If you'd like to talk with us about your situation and whether or not you're a good candidate for the debt settlement process, please click here. All phone consultations are free and 100% confidential.
