Understanding Debt Negotiation

A Next-to-Last Resort

Debt negotiation is an option that more and more Americans are being lead to by credit counselors due to the various factors that surround their debt situation which makes consolidation or budget counseling unworkable. As with credit consolidation, there are several factors that must be met before debt negotiation will be considered including:

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• Damaged credit score: This is one of the factors that will separate a debt negotiation client from a debt consolidation one. Getting a debt consolidation loan requires that the borrower have sufficient creditworthiness remaining to secure a substantial loan. If, however, a customer comes to a debt counseling service only after they've battled long and hard with their debt and have seen several accounts go into collections, that option is likely off the table.
• The ability to meet negotiation obligations: There is no point in a counseling service going to bat for a customer in an attempt to negotiate down the debt if the customer could not meet the new financial obligations. Customers must either still be employed or have a substantial sum of money (such as savings) remaining that can be used to pay off their debts in reduced lump sums.
• Do no harm: Debt negotiation will usually harm a customer's credit score, but not compared to bankruptcy or just letting the debts go unpaid for longer periods of time. For this reason, counselors will often advise a customers as to the hit that their credit scores will take once the negotiations are complete. Creditors will likely report on a customer's credit score that they failed to meet their original obligation as promised and that a renegotiation became necessary. It's their way of throwing a hissy-fit and getting one last (hopefully) snub in before they accept the negotiated payments that are less than what they originally bargained for.

How Debt Negotiation Works

Once your counselor has recommended negotiations and informed you of the risks and potential outcome, if you accept, they will contact your various lenders on your behalf and attempt to negotiate the debts on your behalf. These negotiations can have one of 5 possible effects. The effect that is achieved depends on any number of factors up to and including the personal charisma of your debt counselor and the mood of the debt company manager that works with your counselor. The end result may be:

• Reduction in interest: The lender agrees to lower the interest rate on your debt and probably to erase any late payment fees that currently exist on your account. This reduction will help you to pay off your debt much quickly and may lower your monthly payments.
• Extension of loan terms: Usually only for car loans or home mortgages, an extension of loan terms means that the lender will extend the terms of your loan, from say 2 more years to 3 or 4. This will drastically lower your minimum monthly payments and give you some breathing room.
• Reduction in total amount due: The lender agrees to take a certain amount, sometimes as low as .50 cents on the dollar, as the total due on the loan. This can turn a credit card with a $10,000 balance on it into a credit card with a $6,000 balance and substantially lower monthly payments.
• Agreement to a lump sum payment: Different from a reduction, in that a lump-sum payment must be paid immediately. This option gives more leeway to negotiate even smaller amounts by the debt counselor because the lender will accept that it is more secure to just accept $4,500 from you right now in cash, rather than waiting years and years for $6,000 and hoping that you are able to hold up that bargain. Lump sum payments will not be negotiated unless you have proven to your counselor that you have the sums necessary to meet the payment immediately.
• No effect: Though rare, sometimes lenders will simply fail to respond to a negotiator's tactics and insist that the original credit agreement be upheld.

If you do go through debt negotiation with credit card debt, you should know that the lender will most likely cancel your credit card as a part of the agreement to settle your debt.