Unsettled debts pose a problem for everyone involved. For the borrower, a debt they can’t pay up is often a financial nightmare, accompanied by unhealthy amounts of anxiety. For the creditor, it spells trouble.
That’s where debt settlement comes in. Debt settlement is an agreement between two parties – one a borrower and the other a lender – for a one-time payment to cancel out the remaining debt balance. Most times, creditors realize that full payment for a debt might not be possible, so they opt for debt settlement. One question remains, though: What percentage of a debt is typically accepted in such a settlement?
Let’s consider an example. Take, for instance, Mr A, who owes $15,000 on a credit card and may be finding it financially challenging to repay this balance. With the concept of debt settlement, he may approach his credit card company, offering to pay $10,000, which is probably a more comfortable amount for him to handle. In return for a one-time payment, the credit card company may agree to this, thereby forgiving the remainder of the credit card debt, which is $5,000.
However, it’s not always this clear-cut, as different loan structures require different approaches to debt settlement. Let’s consider what percentage should be paid during a settlement and how it all works.
First of all, you should know that a lender is more likely to agree to a debt settlement agreement if they view the debt as likely to be written off. Another reason is that they, too, could be in need of cash at the moment. Since most loans involved in debt settlements are unsecured – meaning there is no property to seize in place of repayment defaulting – the creditor is often better off accepting part payment, as opposed to getting nothing at all.
Lenders typically agree to a debt settlement of between 30% and 80%. Several factors may influence this amount, such as the debt holder’s financial situation and available cash on hand. When contemplating the answer to the question “What percentage should I offer to settle the debt?” consider other factors, such as the term of the debt, as well.
You can opt to handle the settlement plan yourself or with the help of a debt settlement company. After a judgment has been reached, you are legally under an obligation to make that settlement. While it’s generally better to settle a debt before there is a judgment, in the event you don’t have such a luxury, you should aim to pay 50% or less of your unsecured debt. Most creditors are willing to take 30% to 50%.
As mentioned, handling a debt settlement can either be accomplished using a debt relief company or doing it yourself. Negotiating a judgment settlement can be difficult, but doing it yourself can save you a lot of additional fees and time compared to hiring debt relief companies.
Here are the steps to take when negotiating with your creditors directly.
Before taking on debt settlement yourself, analyze if it’s really a good option for you. Ask yourself these questions:
Another step to take when you’re considering how to negotiate a judgment settlement is to be absolutely sure of the terms of the settlement. Two things matter the most: How much you can afford to pay and how it will reflect on your credit reports.
As mentioned earlier, you should aim for between 30% and 50% of your debt. While looking at a percentage, consider the actual dollar amount. It always helps to have a budget. Also, remember you may need to pay taxes on the amount erased on credit card debt forgiveness if it amounts to $600 or more.
Your credit has probably been damaged due to missed payments, but all hope is not lost. Clarifying how the settled debts are marked can help greatly. Settling old debts marks those debts as “Settled” or “Paid Settled.” It doesn’t exactly help credit reports. To minimize the damage, you can request that your creditor instead marks it as “Paid as Agreed.”
Now it’s time to bell the cat. Negotiating with your creditors will be tricky, requiring persuasion and persistence. This is perhaps the most important part of the process.
You might be able to reach an agreement in one call, or it might take several calls. Try as many times as you need to till you reach an agreement that works for you. If you’re not making progress with any reps, then ask for the manager. Be clear with the situation. How much will creditors settle for? Often, it depends on how well you can explain your financial difficulties so that they can sympathize with you.
Remember to stick to amounts you can actually pay. Start low. For instance, suppose you can only pay 50%, you should start from 30%, and work your way up. Don’t agree on what you can’t afford.
If all fails, consider a debt management program.
As a rule, before you make any payments, have the agreement in legally binding writing. This holds everyone accountable. Your creditors are obliged to honor the agreement, but if a payment is missed, the agreement can be retracted as well.
Typically after a debt has been delinquent for about five months or more, the creditors pass on collection duties to debt collectors.
Some debt collectors are apt to hassle debtors to pay up their debts. They usually do this via phone calls. If you can afford the debt, or it’s simply something you can pay off, a written check will be enough to never hear back from them. However, most times, the reason you haven’t paid is that you simply can’t.
You could mention bankruptcy, but ultimately you’ll be asking, “How much should I offer to settle a debt?”
Now, both you and the debt collector are aware that paying outrightly is not an option, otherwise, you would have cleared the debt beforehand. This is where debt settlement negotiations come in. When entering negotiations, make sure to:
A collection agency will be keener to accept a debt settlement agreement if you’re willing to pay at once. For instance, if you have a loan balance of, say, $5,000, and you suggest paying the collection agency $3,000 to get out of debt, they are more likely to agree. The collection agency will take its fee, pay the balance to the original creditor, who will treat it as a business loss, and close the account.
Portfolio Recovery is a collection company based in Norfolk, Virginia. Its primary function is to collect debts from defaulters. When assessing the Portfolio Recovery settlement percentage, you should know this company buys collection accounts from credit card issuers, auto finance companies, and cell phone providers for 4-10 cents on a dollar and then contacts the debtors for payment.
If you’ve been contacted by a collection agent from Portfolio Recovery on a delinquent debt and can’t pay back in full, try to reach a debt settlement agreement.
Luckily, because they now own the accounts and are not working for the original creditor, settlement is more likely. Aim for maximally 50%.
This depends on what you can afford, but you would be better off offering equal amounts to each creditor as a full and final settlement. When you try to settle an old debt, for example, if the lump sum amounts to 75% of your total debt, you should offer your creditors 75% of the original amount owed.
When you pay a settlement offer, the balance is brought to zero. However, it’ll show on your credit report that it was settled for less than the full amount. Settling is considered negative to your credit report. To minimize the damage, you can request that your creditor marks it as “Paid as Agreed” instead of “Settled.”
An offer from a collection agency to settle a delinquent debt might just be what you need, especially if you can’t pay. Settling with a collection agency is not a bad idea, especially if what they are offering is something you are fine with. It’s a better alternative than being sued. However, if you can pay in full, you should do that instead.
If you can afford to, you should pay your debt in full. However – as is often the case – if you can’t, then settlement might be your best bet. Just remember to ask that the payment be marked as “Paid as Agreed” as opposed to “Settled for Less Than the Full Balance,” as the latter could be harmful to your credit report. For debt settlement negotiation strategies, read our “What Percentage of a Debt Is Typically Accepted in a Settlement?” article above.