Settled For Less Than Full Balance
Many creditors will accept less than the full balance as payment-in-full. This is known as a settlement or resolution of the debt. However, you cannot simply ask the creditor to resolve or settle the debt for less than the full balance. To understand how to settle the debt for less than the full balance, we need to look an account from the creditor’s perspective.
When a debtor stops paying on a debt, and the number of days since the most recent payment reaches 120 days, the account is no longer considered current, and the creditor is required to “write-off” the debt. Credit issuers are required to do this by the federal Office of the Comptroller of Currency, in an attempt to prevent banks from inflating future earnings statements with old and defaulted accounts. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease, or that the debt is forgiven. The write-off date has no legal significance, and almost nothing to do with the statute of limitations for debts.
Debt negotiation, also called debt settlement or debt resolution, is the process of negotiating with the creditor to either establish a new payment schedule at a reduced interest rate, or a lump sum payment that is significantly lower than the total balance.
Keep the following five thoughts in mind should you choose to settle a debt for less than the full balance:
Who Can Help You Negotiate Student Loans
- Negotiate yourself. There’s no law against you going the DIY route and contacting the debt collection agency that has your student debt to offer a settlement. However, be careful about resetting the clock on old private student loan debt by agreeing you owe the loans and setting up payment. Federal student loans never go away, so you don’t have to worry about restarting the statute of limitations.
- Hire a lawyer. A student loan lawyer or an attorney who specializes in debt settlements can negotiate a settlement for your federal or private student loans. Hiring an attorney doesn’t guarantee you a result or that you’ll save you more money than if you tried to settle yourself. That said, a lawyer experienced in negotiating settlements with certain lenders, like Navient or SoFi, has a better understanding than you do of what’s the best settlement offer.
- Work with a debt settlement company. Debt settlement companies help by having you stop making payments to your lender and then make payments to the company. During that time, late payments will be added to your credit report causing your credit score to drop. Once you’ve put enough money aside, the company will try to negotiate a settlement. But they may not be able to do so because some lenders refuse to work with debt settlement companies. Before you hire a company, ask if they’ve ever settled with the lender that owns your loans and, if so, how often.
Does Settling Student Loan Debt Hurt Your Credit
Settling student loan debt may hurt your credit and FICO score. Lenders understand that settlements happen after delinquency and default, and the settlement will be on your credit history for years to come.
The student loan balance will be zero on your credit report, but the status will show you settled the account for less than the full amount.
However, other options like a judgment or collection can have an even greater impact on your credit. And a student loan canât be settled until youâre already in default, which is far more of a drag on your credit score.
This is one reason itâs essential to consider all of the factors in your individual case â and ask an expert.
How To Get Extra Help With Debt
Debt payoff can seem overwhelming and complicated, but there are many resources that can guide you. A good place to start is, again, a nonprofit credit counseling agency, where you can receive a free initial consultation and get help with budgeting and debt reduction strategies. If you’re not only dealing with debt collectors but you’re also involved in a lawsuit related to your debt, a lawyer experienced with consumer debt issues is the best person to work with you can find free local legal assistance through the Legal Services Corporation’s search tool.
If you’re feeling burdened by debt and you’re unable to pay for basic needs, call 211 to connect with services in your area that may offer rent, mortgage, utility or medical bill assistance. Other types of financial assistance may be available from the federal or state government, and you can take a look at the programs you qualify for at Benefits.gov.
Don’t forget to engage with organizations that work with specific populations you might be a part of, such as Military OneSource, which serves military families and offers financial and legal resources.
How To Negotiate Credit Card Debt
Negotiating with credit card companies can be tricky because many will likely be reluctant to change their terms unless they are worried about you filing for bankruptcy. Whether you choose to negotiate credit card debt on your own or hire a professional to represent you, its best to come prepared to negotiate. Start with the following steps:
How To Get A Student Loan Settlement
You can attempt to settle student loans on your own or with the help of a more experienced negotiator.
Make contact yourself. Reach out to the company thats been in contact about your defaulted loan. For defaulted student loans, this will likely be a collection agency. Contact them and ask to discuss settlement options.
Hire an attorney. Choose a student loan lawyer or an attorney who specializes in debt settlements. You will likely have to pay legal fees, and lawyers cannot guarantee better savings than you can get on your own. Attorneys can negotiate federal student loan settlements but may prove most helpful if your private student loan holder has sued you.
Work with a debt settlement company. If youre still making payments, debt settlement companies will have you stop and fund an account with them instead. Once youve put enough money aside, the company will try to negotiate a settlement. Using a debt settlement company is risky, especially if your loans arent already in default. Only some of these companies help settle student loans, and some lenders wont negotiate with debt settlement companies. Check that your lender will before selecting this option.
If you and your loan holder agree to a settlement, get the offer in writing. Once youve paid the amount as required, make sure you receive a paid-in-full receipt. Youll want to hang on to that in case questions about your debt arise in the future.
Lump Sums And Student Loan Settlements
You can negotiate a student loan settlement where you only have to pay a percentage of the total loan balance in a lump sum payment, then youâre free of the debt forever!
Sound too good to be true? Thatâs because itâs not always possible. However, hiring a student loan attorney can maximize your chances of success.
Check out my article on student loan refinancing to see if you should refinance your loans for a lower interest rate instead of trying to settle. I recommend SoFi or CommonBond for refinancing options.
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The Basics Of Debt Settlement
Debt settlement is an agreement between a lender and a borrower for a large, one-time payment toward an existing balance in return for the forgiveness of the remaining debt. Someone who owes $10,000 on a single credit card, for example, may approach the credit card company and offer to pay $5,000. In return for this one-time payment, the credit card company agrees to forgive or erase the remaining $5,000 still owed.
If You Need Additional Student Loan Help
If youre struggling with your student loan debt, first speak with your servicer or lender to:
Discuss repayment options.
Take a temporary payment pause.
Temporarily reduce your monthly payments.
If your problem is with your lender or servicer or youre not getting the help you need, look for a legitimate student loan help organization that offers counseling. Consider these vetted resources for student loan help they are established organizations with verified histories:
Student loan help resource
Advice on debt settlement, bankruptcy, default and forgiveness. Licensed in Missouri and Illinois.
Many of these organizations offer advice for free. In some cases, you may need to pay a fee, as with a certified nonprofit credit counseling agency or if you hire an attorney.
None of the organizations above calls, texts or emails borrowers with offers of debt resolution.
Offers of help that you have not sought out are likely to be scams. While its not illegal for companies to charge for services such as consolidation or enrollment in a payment plan, those are steps you can do yourself for free.
Avoid any debt relief companies that demand money upfront.
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You Could Face Hefty Fees
The fees associated with debt settlement services vary depending on local and state laws. However, its not unusual for a third-party debt settlement professional to charge between 15 percent and 25 percent of the debt that gets resolved. That means if youre seeking to settle a debt of $50,000, youll pay a fee based on that amount, not on the final negotiated repayment amount.
Its important to note, however, that according to rules enacted by the Federal Trade Commission in 2010, debt negotiation companies may charge fees only after they have resolved the debt for the client.
What Is Debt Consolidation
When you consolidate debt, you combine multiple payments, such as medical bills, credit card debt and payday loans into one single payment. Debt consolidation, also known as bill or credit consolidation, can make it easier for you to manage multiple debts while giving you the opportunity to secure lower interest rates and lower monthly payments.
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Debt Settlement Vs Credit Counseling
Credit counseling is a free or inexpensive service provided by nonprofits and government agencies. Interestingly, these services are often partly funded by credit card companies. By enrolling in a debt management plan with a , you may receive an interest rate reduction on your balances and a waiver of penalty fees.
Those concessions may or may not be sufficient to help you pay down your debt considerably faster, and you may or may not be able to afford the new required monthly payments. In addition, you may not qualify for an interest rate reduction, even if you have a significant financial hardship.
However, because you wont have to default on your debt, your credit score may suffer less. Also, credit counseling may offer additional financial assistance that can help you avoid similar problems in the future, such as budget development and financial counseling, and referrals to low-cost services and assistance programs to help you reduce your expenses. Fox says a credible debt settlement company will also work with clients to help them learn how to budget, use credit responsibly, and live within their means.
So how do you know which to choose if you dont want to pursue bankruptcy? Credit counseling is best suited for consumers who have $2,500 to $15,000 worth of unsecured debt and simply need a reduction in their interest rate to make the monthly payments manageable, Fox says.
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When Student Loan Settlement Is A Realistic Option
Your ability to negotiate your student loan debt will depend largely on whether your loans are federal or private. One thing that both have in common is that the loan must be in default.
No one can settle on a working loan, said Joshua Cohen, attorney and founder of thestudentloanlawyer.com.
Still, with millions of borrowers in default, such negotiations arent that uncommon. Heres when theyre an option:
Settlement With Collection Agency
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 its simply something you can pay off, a written check will be enough to never hear back from them. However, most times, the reason you havent paid is that you simply cant.
You could mention bankruptcy, but ultimately youll 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:
- Know your rights. You cant be harassed, lied to, threatened, or even spoken to out of business hours.
- Consider your debt. What type of debt do you owe? This will help in understanding what you could ask for.
- Speak calmly and logically.
- Make your offer. Debt collectors may settle for around 50% of your debt. Just remember to negotiate low, so when they counter, you still have room.
How Much Will Debt Collectors Settle For?
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Can You Settle Student Loans In Good Standing
You cannot settle federal student loans or private student loans that are in good standing. With both federal and private loans, a student loan settlement doesn’t become an option until you enter loan default â and that can take up to 270 days.
Of course, if you have good credit, the last thing you want is to have late payments reported to the credit bureaus â especially if you have a cosigner. But unfortunately, lenders aren’t willing to get rid of the accrued interest or collection charges if your loan is in good standing. From their perspective, it doesn’t make business sense to offer a discount for you to pay your loans early. The lender makes its money by collecting on the interest you pay each month. The longer you take to repay, the more money your lender makes.
The inability to get a settlement while your loans are in good standing is one reason why borrowers consider a strategic default. However, missing student loan payments isn’t without consequences.
Consequences of defaulting on federal loans:
- tax refund offset
- Social Security benefit offset
Plus, you’ll lose eligibility for student loan forgiveness programs, income-driven repayment plans, and new federal student aid. Finally, your name will be listed in CAIVRS and you won’t be able to borrow a mortgage from the federal government. So before you strategically default on federal student loans, make sure you know the consequences.
Consequences of defaulting on private student loans:
With The Right Negotiation Strategies You Might Be Able To Reduce Your Debt
By Linda Thompson, Contributing Author
One of the many ways to get control of debt is to negotiate with creditors to lower the overall amount due. When successful, debt negotiation might be an option for avoiding garnishment, bank levies, foreclosure, and bankruptcy. But before you start talking to creditors, make sure you understand some of the key negotiation strategies. You’ll probably want to:
- consider filing for bankruptcy
- aim to settle your unsecured debts for 50% or less
- have money readily available to make payments soon, and
- be aware of the big picture, so you know your goals.
Sometimes your negotiation strategy will depend on the type of underlying debt. Negotiating with credit card companies, for example, generally requires different tactics than dealing with a mortgage lender.
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