Settling Your Debts For Less that What You Owe

If your credit rating is negative because of unpaid debts, then you should seriously consider settling all your debts. If you owe lenders money, they will make sure to keep the derogatory listing on your credit file, no matter how many investigations you initiate. Even if you manage to delete an unpaid listing, it may still show up on your credit rating sooner or later, especially if your account is turned over to collections. In other words, do not try to escape your debt. Settling your debts is a better option. This Section will give you details on how you can arrive at a workable agreement with your lenders.

First of all, do not stress out over overdue debts. We have all heard the scary prospects of seizure and wage garnishment. But there really is not much that lenders can do when the money you owe is unsecured, such as credit cards, other than hand over your account to collection. If your loan is secured, then the risk to your property is very real, and repossession can take place.

Here, you must differentiate between unsecured and secured debts. Unsecured debts are all those amounts that were given to you without collateral. Such debts include: Credit cards, department store cards, personal loans from people you know, collection accounts, student loans, medical bills, utility bills. Most of these can be settled for less than what you actually owe.

However, it is usually true that utility companies will not settle for less than what they are owed. But most will take and agree to a settlement.

Secured, collateral-based debts are home and property mortgages, and car loans. The usual scenario in these types of loans is repossession. It is often less costly for the lender to simply take the property rather than go through the bother of coming to terms with you. If you are having difficulties with such a debt it is best to negotiate some sort of payment relief; most lenders are willing to do this for you.

If your credit is still good, and you have paid late, but are now beginning to feel the pinch and feel that you are unable to carry on with your payments, it is best that you talk with your lenders. Explain to them your situation; they will usually give you some sort of relief. Do not merely stop paying your bills, because that can make a bad situation a lot worse, very fast.

If you are struggling with unsecured debt, keep in mind that on a small amount (below $10,000), very few lenders will go all the way to garnishment - because these are costly court procedures, and it does not make financial sense for a lender to spend more than what he can and will recover. Even if a lender went all the way to court, he still cannot recover 100% of the loan amount. It is always easier for the lender to turn over your account to collection. However, do keep in mind that legally, the lender is within his rights to use whatever legal means to recover his money. Having said this, you should do one thing: Ignore the incessant hounding of the lender and the collection agency. They can write you threatening letters and make intimidating phone calls - but that's more or less it. You have little risk of reprisals from them. The only thing they can do is to make sure your credit rating stays derogatory. But in the end, you must decide if the risk is worth or not.

It is not uncommon for most people to come to a settlement of their debt at less than what they owe. The usual rate is 60 to 75 cents on the dollar.

With the passage of time, you will find that you are getting fewer calls from your lenders and collection agents. If this has happened, then your debt has been filed away for future attention. In one sense, this is the best scenario for you, because now you can negotiate with greater ease. The rule of thumb is that the longer your debt remains uncollected, the better your chances of getting a good settlement.

The more time passes, the more likely your bad debt will be seen as a loss, and the lender will then get a corporate tax write-off. Of course, you are not free and clear, because you still owe the lender money: He is merely choosing to ignore it for the moment, and he can at any time reopen your file and give your account to collection again, seek a judgment against you, or garnish your wages.

Often times, when consumers seek to settle their debts, they tend not to have 100% of the debt amount to pay to their lenders. A large part of the debt amount is made up of accrued penalties and interest charges while the account was 60, 90, or 120 days past due. Thus asking for settling for less than what you is owe is rather reasonable, and the lender knows that it is in his best interest to get the most he can get on a losing proposition.

The primary concern for you in this scenario is not to let the lender know that you can afford to pay the debt. If the lender thinks that you have money, he will, in a way, have the upper hand and will insist on payment in full.

The trick here is to make your lender believe that you are on the brink of personal bankruptcy and you have very little money to give him, so he should take what you can give him. Make sure you let the lender know that this is your last chance at some sort of financial recovery - before you choose bankruptcy. The lender knows that once you declare bankruptcy, he is not going to get one penny.

Time really is on your side. Do not be too eager to settle. Take your time. There is no rush to settle. Do not accept the first offer that your lender gives you. As a matter of fact do not even accept the second. Let him wait. Let him contact you and let him make the settlement happen. You should merely hold off from agreeing too quickly to anything he puts on the table.

You can afford to drag matters out, because you have something that the lender wants. Hold out until you get what you want. Once you've paid, you have no more advantage. And make sure that the lender puts everything in writing before you pay him.

As we have discussed, after seven years the negative listing will disappear by itself, because each person's credit file is completely purged every seven years. If you choose to ignore the debt, you will probably never hear from your lender again. There's very little he can do. And after seven years, the derogatory listing will disappear.

In the past, if you paid any amount on your account after a long delay, the seven year clock would start all over again.

Happily, this is no longer true, and you can now pay off your collection account or charge-off, and your seven year period remains at its original setting: The day it was originally late, however many years back. Once your account goes past due and into collection, your seven-year reporting period begins ticking the very day your payment was late. This is very good for consumers and lenders as well, because you can continue to make payments on your account without having to worry that every time you make that payment, your seven-year clock is reset. And the lenders like this approach because they can see the money owed them, later if not sooner.

It is essential that if you choose to settle, then you must make your lenders agree to delete negative listings from your credit report. More often, collection agencies are quicker to agree to delete the negative listing than banks or credit card companies. As well, some lenders have an agreement with the credit bureaus that they (the lenders) will not allow a derogatory listing to be deleted upon settlement.

In view of this, it is often the case that you have to fight a little harder with large credit card companies and banks to get them to do what you want before you will pay them - delete the negative listings on your credit report. If you push hard enough, and play smart enough, you can get them to cooperate, because no matter what their agreement, a lender can have the credit bureau change the information on your credit report. If a lender reports to the credit bureau, then he can easily change what he reports.

There are two options open to you if you proceed to settle your debt, in regard to getting a negative listing deleted by your lender, namely, "Pre-notification of Negative Credit Deletion", or "Post-notification of Negative Credit Deletion".

In the first instance, you tell your lender that you will need the deletion of the complete negative listing as part of the pay-off. You must get this agreement (to delete the listing and consider the debt fully settled) in writing and properly signed before you actually make the payment. This is always the best option. The lender might come back and ask for the full amount before he agrees to this. Your reply will be that he should take what he can get from you, as you are on the verge of bankruptcy. This is really his last chance to get money out of you.

If you take the "Post-notification" route, you will agree to pay the settled amount, and then wait for the lender to delete the negative listing. For your protection, you might a document drafted by your lawyer that states that if the check is cashed, the lender will immediately delete the derogatory listing in your credit file, now that the debt has been paid in full. The lender may simply send the check back to you, but more than likely, he will not let go of the money so soon, especially if he has been waiting for it for such a long time.

Another point to remember is that you should never take any action simply because you arrived at a verbal agreement with your lender. Get everything in writing, and duly signed. It is always difficult to fight a lender after you have paid him - since he has no more incentive to honor his part of the deal.

For those especially hard-nut lenders, who will never agree to deleting your negative listing, and if you cannot wait seven years, you can follow other alternatives.

Alternative #1: You may tell your lender that you will accept a listing as "Paid" rather than a complete deletion that you originally wanted. Since such a statement is a true state of your account, most lenders will agree to do this. But do be aware that a "Paid" account is still very derogatory, since your credit report will show: "Paid Charge-off" or "Paid repossession". Therefore, it is very important that you only agree to the fact that your account show "Paid" only, and that all derogatory notations such as "charge-off", "repossession", and "collection" be fully deleted. A simple "Paid" notation is a neutral indicator on your credit report, and will not stop you getting fresh credit.

Alternative #2: You may tell your lender that you will agree if he lists your account as "Settled", if he cannot delete it altogether. However, keep in mind that "Settled" is still a negative listing, but is it not as bad as "Paid Charge-off". Do not agree to this alternative, unless you have exhausted all other avenues of settlement. You should agree only if all other derogatory notations such as "charge-off", "repossession", "collection" are deleted, and "Settled" appears alone in your credit report. If not, then you must work very hard to have the remaining derogatory notations removed by disputing directly with the credit bureau itself.

Alternative #3:In some extreme cases, the lender may never agree to change the negative listings; he may insist on showing your account as "Paid Charge-off", or "Paid Collection", or "Paid was 30, 60, 90, or 120 days late". Such a listing is usually a lender's first offer. Make it your last choice. These notations are as damaging as when your debt was still unpaid. However, it is often the case that once you've paid, you can dispute the listings with the credit bureau, who may not be able to verify the listing with the lender, because he has been paid and has little reason to verify that your account retain the negative listing. Thus, if you absolutely cannot get your lenders to budge, you can go for this alternative, with the understanding that you will dispute the listing with the credit bureau at a later date and eventually have it removed.

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