A debt settlement is a negotiation between you and your creditors that will allow you to pay off only a portion of your debt. Although this process may seem simple enough at face value, there are some intricacies that go along with it. Here’s everything you need to know.
Settlement with your creditor
A debt settlement can occur between you and your creditor is your debt hasn’t gone to a collection agency yet. However, keep in mind that creditors will generally not accept a debt settlement offer that is less than 70% to 90% of your entire debt. Moreover, if your debt is with a credit card provider, your provider is unlikely to accept a debt settlement offer at all — though you may ask for a freezing or lowering of interest rates.
Before going to your creditor to make a debt settlement offer, it’s important that you are prepared. You must first create a budget and determine what you are able to pay. Detail the reasons as to why you are unable to make the full payment. Once you contact your creditor, ensure that you are speaking with a person who is able to accept a debt settlement offer. Should the creditor accept your offer, you should read through your settlement agreement thoroughly before signing — especially read the fine print! It’s important that you know your rights as well as the creditor’s rights to avoid getting yourself into more trouble. Once your debt settlement agreement signed, follow the agreed-upon payment plan.
Settlement with a collection agency
If you’ve failed to make payments, your debt is likely already with a collection agency. Having your debt with a collection agency means that your original creditor assigned your account to one or more collectors who will make attempts to contact you repeatedly until the debt is paid. Debt collectors typically get a portion of your debt repayment.
On some occasions, a debt collection agency might accept a debt settlement. Your collection agent(s) might decided whether it would be better to accept a portion of the money immediately rather than wait for a drawn-out collection process. In such cases, you will need to sign an agreement with the collection agency that states that the collection agency accepts the reduced amount.
Reduced amounts with a collection agency does not occur very often. However, they may accept a payment plan in which the monthly amount is reduced over a longer period of time. But keep in mind that the quicker you repay your debt when it’s in the collection process, the quicker you can rebuild your credit.
Factors that determine whether your debt settlement agreement will be accepted
When it comes to accepting your debt settlement agreement, a few factors come into play. Here are the main things debt collectors will consider:
1) Your Income
If a debt collector sees that you are living off of limited income, they may be more likely to accept your debt settlement agreement. However, if you are making wages that can be garnished, then it is unlikely that a debt collector will accept a settlement. This is because it’s not worth it for them — they can just take the money you owe from the source and get the whole amount. Similarly, if your wages are already being garnished, they will very unlikely accept a settlement. In such cases, it would be best to visit a licensed insolvency trustee for help regarding a consumer proposal or personal bankruptcy.
If you are living on a smaller income and if your wages being garnished gives you great financial hardship, you can apply to court to set aside or release the garnishing order. Keep in mind that certain wages, like pension, cannot be garnished. You can use this during your negotiations with the debt collector.
2) The Amount of Debts You Owe
The amount of debts you owe plays a huge part in the debt collection agency’s agreement to your debt settlement. This is because the more you owe, the more likely they are to go to court for a garnishment order. Taking someone to court can be costly, so if you don’t have a lot of debts, the debt collection agency will be more willing to agree to or negotiate a settlement.
3) How Old Your Debt Is
Creditors are more likely to think that they can get more out of you if the debt is relatively new — typically if it’s been outstanding for roughly a year. They will usually therefore accept a minimum of 70%-80% of the entire debt. However, if it’s an older debt, they will be more willing to accept less than the full amount. Because the statute of limitations states that a collection agency cannot take legal action against you if it has been 6+ years since you acknowledge the debt, they will usually accept to reduce the debt owing by 50%.
4) Types of Debts
Unlike certain types of debts like personal loans and lines of credit, collections with the CRA works a little differently. Certain creditors will accept a lower amount if they fear that you will default on the loan. However, the CRA has very broad powers when it comes to collecting on a debt that you owe. They will only accept a payment plan in which you detail the amount you can pay per month. They may also forgive certain penalties and interest, but they will never lower the amount of the debt. That’s why, if most of your debt is tax-related, you should go to a licensed insolvency trustee and inquire on the possibility of filing a consumer proposal or personal bankruptcy.
5) Your Assets
If you have a lot of assets, creditors and debt collection agencies will generally not accept a debt settlement agreement. This is because they expect you to pay off your debt by selling some of those assets. On the other hand, if your debts are secured debts (car loans, mortgages), your lender will be able to seize your asset in order to pay back the loan.
When trying to convince your lenders/debt collectors to agree to a debt settlement, you should keep in mind that you cannot/should not ever accept a settlement for more than you can afford to pay. This will just put you in deeper waters and you’ll find yourself drowning in your debts before you know it. Review your budget before making negotiations, and determine the amount you can pay.
If you are having trouble making your payments and would like to settle your debts, contact a licensed insolvency trustee. A trustee will review your financial situation and provide you with all of the information necessary so that you can finally rid yourself of your debts and start fresh.