How to Negotiate Debt Settlement on Your Own. Credit Score Impact
It is possible to look at different repayment strategies if your unsecured debt is significant. While debt settlement might look appealing from the outside, it can often be more difficult than you think. Professional debt settlement is a deal that involves you working with a debt settlement agency that negotiates for your creditors. This can be an expensive undertaking, leave your accounts unresolved for years, and have a negative impact on your credit score. But there’s another way to deal with debt. It is called “do-it-yourself” or “DIY” resolution. This offers some advantages over professional, but also has some drawbacks. Let’s take an in-depth look. Here’s some key stage.
DIY: When and why?
DIY debt settlement may offer a better alternative than professional debt settlement. Although this is true, debt settlement is probably the least effective and most reliable method to repay your debts. The DIY settlement should only be considered for those who are already in debt. It is not a good idea to deliberately become indebted to seek debt settlement. A debt management plan would probably be a better solution. DIY settlement can be an option if there is only one account that you need to resolve. DIY settlement may make sense if, for instance, you only have one difficult debt to pay (e.g., a huge medical bill).
There are several reasons why you might decide to go DIY if you do not want to pay a professional. As we have documented, professional debt settlement is not without its problems. Consumers considering this option should expect fees to cover 15-25 percent of the enrolled amount. They should anticipate that the process will take 3 to 4 years. They should prepare for the fact that their accounts may not be settled. It is also important to know that forgiven debt can be taxed. In addition to all of this, we predict that most professional clients who deal with debt will see their credit score plummet by more than 100.
DIY approaches may help you avoid some of the problems.
How to Do It
These are steps to consider if DIY settlement is what you desire.
First, you need to investigate your creditor. Also, look into any policies they might have about debt settlement. You can also find forums where others discuss how they settled with creditors. You might also be able to get information from your creditor. To get a feel for what your creditor might accept, do this research.
Your negotiating leverage may be increased by having enough cash. Large lump sums will be preferred by most creditors. NerdWallet suggests that you can settle your debt with an offer that covers 40 to 50% of the balance.
Some creditors may be open to settlement payment plans to replace a lump payment. It is worth considering carefully before you make any decision. Your agreement can be ended if one of your payments is not made according to the terms.
Prepare Your Offer
Realistically you can expect to settle at 40 to 50 percent. You should make a lower offer than you originally thought to the creditor in order to allow room for negotiation. Give your creditor a lump-sum offer. You may need to speak to someone’s manager or call repeatedly until you find a helpful representative. Based on your research you might discover that your creditor operates a financial relief division. To increase your chances of success, be sure to call this department. It is not guaranteed that your creditor would agree to it.AnySettlement offer
It can be done in writing
After reaching a verbal understanding with your creditor you need to make sure the deal is written. Should there be any problems, you can have proof in writing. It’s not what you want.
Make your Payment(s).
Your last step is to keep your word. It is important to make your payments promptly and according to the agreement. Make sure that your creditor receives the payment(s), and holds up the end of the deal. To verify the correct reporting of the account’s changes, make sure you keep an eye out for your credit report.
Credit Score Impact on Taxes
You can avoid many of these pitfalls by following the steps above. DIY debt settlement is more efficient and can often be completed in a shorter time frame. Additionally, it’s cheaper because you don’t need to pay any fees to a company. There are cons.
The big con is that it can cause damage to your credit score. Every missed payment to a creditor can affect your credit score. It may take you a while to save up for a lump amount payment. Your credit score will suffer. You can also settle debt faster than you pay the entire balance. Experian states that settling any debt, even if it is done by DIY, can lead to the debt being reported: “settled”, or “account payment in full for less of the full balance” on credit reports. These are negative marks, and they will remain on the credit report for seven years from the date of delinquency.
Final note: While you no longer have to worry about paying fees to a settlement company, you will still need to worry about the IRS. A forgiven debt can be considered taxable income. After you account for this expense, the settlement won’t be as good as it appeared. You might need to start saving money again for tax bills if you haven’t saved enough cash to cover a lump sum payment.
Is it worth it
The DIY method of debt settlement does have some advantages over working in conjunction with professional debt settlement firms. But, this does not make DIY debt settlement a bad idea. Consumers would be better off if they could get credit counseling or some other method of repayment. The best way to settle your debts is by yourself if you only have one account. However, anyone who decides to pursue this option should expect significant credit damage and tax liability as well as the possibility that their settlement efforts may not succeed.