Debt Negotiation

The subject of this article is debt negotiation, also known as debt "arbitration" or "settlement". It is sometimes confused with debt consolidation but hopefully in this article the differences can be made clear. You will also receive strong warnings in utilizing either though debt negotiation may be a far greater danger, as there is greater opportunity for credit damage utilizing debt negotiation.

The Differences

To begin, debt negotiation should be viewed and considered as a last-resort measure. It is only a half step before bankruptcy. A lender has little motivation to arbitrate for a pay off less than the full amount unless the debtor is already 2-3 months behind on bills. This is exactly what debt negotiation is and which obviously means complete destruction of a credit history. Additionally, the debtor is dealing with debt owed to a lender who loaned money or property in good faith. The lender has the right to full payment if at all possible. Morally it is the correct thing to do.

But sometimes circumstances do occur that debt negotiation may be the only course of action remaining... or at least the most logical solution. As an example, perhaps an old forgotten debt exists as the only blemish on a report. Debt negotiation may be the proper course. But under normal circumstances of just too much debt, credit counseling should be the standard first attempt to reduce payments. Contacting creditors on your own, negotiating payment arrangements or asking for a lower interest rate are also potential options. Perhaps even skipping a payment can turn the tide but it all must be coordinated with the lender.

Another option is to Consolidate Debt, which basically means establishing a new loan with lower payments since it is usually over a longer period of time and perhaps at lower interest. But be aware that debt consolidation often times is nothing more than a delaying tactic and does little to correct the potential symptom-- an attitude which allowed the creation of too much debt in the first place. Consolidation should be used when debts are mostly current. Settlement or arbitration is for use when debt is VERY delinquent. Similarly, consolidation should never be considered if the objective is simply to reduce monthly payments in order to afford more credit.

Beware

Debt negotiation attorneys, Johnson and Johnson, offer an interesting Q&A on their web site... interesting but far from uncommon.

Q. "[When opting for debt settlement through Johnson and Johnson,] why do you need 60% of the balance up front? Why can't I send you the funds once you have successfully negotiated my account?"

A. "At one time we allowed such a practice but, unfortunately, we discovered that many of our clients did not have funds available once the time came to disperse to their creditors. Thus, to avoid wasting time negotiating for clients who do not have sufficient funds, we do not begin negotiations with your creditors until you have deposited 60% of the balance in trust."

My question is, "If you had 60% in cash, why would you need the service?" But also, what happens if you don't just happen to have the 60% just lying around. Well, I suppose you could take out a loan and make payments... what's wrong with this picture? Hey, maybe the debt arbitrators can loan the money... such a deal! And therein is one of the problems. The arbitrator's main objective is to loan money and not negotiate a debt.

What They Don't Bother To Mention

Sometimes a debt negotiator does not mention a couple of issues ahead of time. You need to be aware of them in advance.

Realizing they are sometimes more experienced and though they carry more clout, attorneys are expensive and do nothing more than you can do for yourself. So unless there is a lot of debt involved, consider self-arbitration. Do not pay with a check from your bank. Use a postal money order so that your banking information cannot be traced back. If you are later sued, it is too easy to access your funds. Have as part of the settlement, an agreement by the collector or lender in writing that the debt will be reported to the credit bureau as "paid as agreed" or "satisfied in full". Otherwise the debt will appear as "R9" which is the lowest possible rating and will remain for 7.5 years. Any forgiven amount (outside of bankruptcy), which exceeds $600, will be taxed as added income.