When debt spirals out of control, you may be tempted to pay some debt negotiators to help you settle with your creditors
In theory, it can be an effective way to deal with debt but in practice, debt negotiators can often be expensive. If you owe a lot of debt and don’t have much cash to work with… a large amount of what you DO HAVE may be sucked up by the debt negotiators fees without even solving your problem.
Don’t get us wrong; working with debt negotiators can work for some, but for others, it may not be an affordable or solve your entire problem.
Another important thing to understand about debt negotiators is how their services work. Once you understand the landscape in which they operate, you’ll see how you might be able to get the job done on your own.
What are debt negotiators?
When you’re taking about debt negotiators, you’re generally talking about settling debt. While this can be done in a few ways, one of the most common methods is to propose a lump sum offer to creditors.
The amount you offer will normally be less than what you owe but you’re asking the creditors to accept that as full and final and then everyone calls it a day.
Why would a creditor agree to settle?
A lot of the time, people tend to involve debt negotiators when their debt has been assigned or sold to a debt collection or debt purchasing agency.
If the latter, the debt purchaser may have bought your bad debt from the original bank or financial institution. If that’s the case, the debt purchaser will have only paid a percentage of the value of debt you owed to buy the rights to pursue you for it.
Let’s say you owed $6,000 on a credit card and you fell super behind in your repayments. The bank defaulted your credit report and after months of being unable to negotiate, you’ve received a letter of demand from a debt purchaser.
The debt purchaser may have only paid between 10-30% of the value of your $6,000 credit card debt to get ownership of it. Now the original lender has nothing to do with the debt and instead, you owe the money to the debt purchaser.
Even though the debt purchaser may have only paid $600 – $1,200, they’ll be chasing you for the whole $6,000. Plus accruing interest charges and late fees of course.
Yep, you read that right. But, knowing the above gives you a bit of an advantage now huh?
Now you know that the debt purchaser doesn’t need the entire amount to turn a profit. So as you can see, there’s some wiggle room when it comes to debt settlement.
Is the debt completely wiped if you “settle” it?
Well, that’s the general idea. If your proposal is a goer, the creditor has agreed to accept the amount you’ve offered in order to clean your slate with them.
But, be aware that any defaults on your credit report aren’t going anywhere. Generally speaking, defaults are only removed if their existence is a mistake. In other words: listed in error.
What you can do is request that the creditor update the default record to a “paid” or “settled” status. This will inform potential lenders that although your repayment history isn’t great, you’ve since sorted the debt.
Doing this won’t guarantee credit application approvals. In a lot of cases, you may not be approved for unsecured credit until after the default listing is gone.
The reality is that defaults remain on your credit file for 5 years in total and will affect your ability to borrow.
What do Debt Negotiators do?
They tee-up the debt settlement proposal and you pay them a fee for doing so. They may have a flat-fee structure or they may charge you a percentage of the savings they negotiate.
For example; let’s say that the debt negotiators fee structure is to charge you 20% of the amount saved. If the debt was $6,000 and the negotiator wrangled a lump-sum deal of $2,500, they’d charge you 20% of the $3,500 you saved.
All in all, the deal would cost you $3,700 – and $700 goes to the debt negotiators in fees.
How can you settle your debt without using debt negotiators?
You have a few options but their relevance will depend on where the debt is within the debt collection cycle (link to life cycle of a bad debt), the amount you owe, your ability to pay it back, your access to lump sum amounts and overall financial position.
Talk to your creditors
If you’re at the very beginning stages of falling behind and your debt is otherwise manageable, then this is the first step.
Contact the bank or financial institution to let them know that you’re having some problems with making payments. They may be able to grant you an extension.
Apply for Financial Hardship
If the extension didn’t work or if you feel like you’re going to keep struggling with repayments for the next 3-6 months, then talking to the lenders hardship team would a good strategy.
While hardship policies vary from lender to lender, they usually span between 3-6 months and may involve;
- A temporary payment holiday
- Interest only payments
- Reduced or token payments
Hardship aims to resolve temporary financial problems like short-term unemployment. The idea being that once the hardship period ends – you go back to paying your debt as per your original contract.
If the situation is terminal, hardship’s only going delay your woes for a limited time. If you feel like this is you – scroll down for links on the formal options that might be available.
Make a payment plan
If you need something more long-term, you may be able to negotiate a payment plan with your creditor.
But, a word of caution; you’ll need to do up a budget and figure out what you can afford to pay first.
If you commit to an unrealistic amount, know that you’re going to feel it fast. The last thing you want to do is default on the arrangement. Or worse, fall behind on other important bills like rent or mortgage repayments.
Another thing you need to consider is whether your creditor is going to charge you interest. This is important to know because gives you an idea of how long it’s going to take to pay back the debt.
If your proposed repayments won’t cover the interest, the arrangement will get you nowhere.
So, you’ll want to ensure that your arrangement is;
- Affordable and;
- Will allow you to pay back the principal debt within a reasonable time-frame
Note: 10+ years is not a reasonable time-frame and denial ain’t just a river in Egypt.
Propose a lump sum offer
If you’ve got the cash, you might be able to put up an offer to settle the debt in full.
Remember that you may not need to go the whole-hog with the amount owed – especially if you’re dealing with a debt purchaser. At the same time, don’t want to propose something totally outlandish either.
If you’re dealing with a debt purchaser, remember they’ve probably paid a fraction of what you owe.
From there, figure out a reasonable range that you can afford and start at the lower end. If you start up top, there’s nowhere to go and negotiating down from there isn’t likely to work in your favour.
If you’re successful in settling the debt, there’s only one thing left to do. Grab your favourite bevvie and toast to the cash you’ve just saved by getting the job done, all on your lonesome.
I’ve tried to settle my debt, no dice. What now?
Now we get into the more formal options for dealing with debt, which are;
All three options come from the Bankruptcy Act and impair your credit record for 5 years. Coincidentally, that’s the same length of time a default is listed on your report.
The most commonly utilised of all three is Bankruptcy and you can read about how this option works here.
Getting some advice on your situation and the options available is a great place to start.
Call 1300 369 168, start a chat, or make an online enquiry to speak with an experienced insolvency professional today.