Negotiating Debt Negotiation - … by neil smith

11/1/07

What is debt negotiation?

This is when you have a 3rd party negotiate with your lenders on your behalf seeking better terms and payback plans.

I worked at a debt negotiation company a few years back and it was a learning experience to say the least. This company did seem a bit fly-by-night, but they did seem to be a bit more ethical and careful than what I presume a lot of other companies in this business may have been.

I was able to witness people going into this program, in the midst of this program and coming out and for certain people in certain circumstances, the feeling I came away with was that this could actually work very well. It is however, the last gasp of hope for many people over their heads in credit card debt and trying to avoid bankruptcy.

HERE’S HOW IT WORKS:

First, the person wishing to consider the program must meet a certain set of criteria:

1. Their debt-to-income ratio needs to be bad enough to where their income-level cannot pay back the debt in any reasonable amount of years, but not so bad that bankruptcy is their only option.
2. The state they live in must have a certain amount of leniency towards borrowers built in to their laws (varies state-to-state).
3. The person needs to be willing to sign a power-of-attorney giving the debt-elimination company the right to negotiate with their creditors on their behalf.

Then the person needs to stop paying their creditors altogether for several months, but not so many months that the creditor sells the debt note to a collection agency. The amount of time can be different for each credit card company, so the debt-negotiators need to know their stuff in this department. Once the creditor has gone a few months with no payments, you have their attention and the negotiator calls and trys to work out a deal to lower or eliminate interest rates altogether and sometimes negotiate down part of the debt principle itself. The negotiator is (hoefully) very experienced and knows just how far they can bend various credit companies. The creditor has an incentive to negotiate because they are no longer receiving payment from the debtor, and selling the note off to collections will only reap them a portion of the amount owed. Thus, the creditor’s incentive is to negotiate and still try to come out ahead of where they would be if they sold the note to collectors.

Sometimes it took years for people to get through this program, but many did come out the other end having paid their re-negotiated debt off and avoiding bankruptcy.

Ok, I already know where your head is going at this point… THEY TOTALLY RUINED THEIR CREDIT SCORE! And the answer is yes, absolutely they did significant damage to their credit score, but they already had a terrible credit score to begin with because of their debt-to-income ratio, so they had nothing to lose.

I know the other place your head is going too… DIDN’T THESE DEADBEAT BORROWERS BRING THE SITUATION UPON THEMSELVES? DIDN’T THEY KNOW THE TERMS AND THE INTEREST RATES INVOLVED? SHOULDN’T THEY HAVE PAID BACK THE LOANS ON THE TERMS THEY SIGNED WITH THE CREDIT CARD COMPANIES? The answer is absolutely yes! These are mostly people who over-extended themselves and exercised an absolute lack of self control, or just did not bother to read and understand what they were getting themselves into, BUT the lenders also assume a risk when lending and set their interest rates accordingly covering themselves enough to still make a very healthy profit despite the projected amount of deadbeats. And anyone who has ever owned a credit card knows firsthand how the companies will hide the most negative terms in the tiny type and confusing legal-eze in an obvious attempt to distract and dupe, so I for one am not about to shed any tears for them.

The moral and ethical ramifications of this one are certainly grist for the mill.

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