Debt Negotiation

Debt consolidation services usually have two options: debt consolidation and debt negotiation. Find out how debt negotiation can reduce the amount of your debt by 50%.

Debt Negotiation Explained

You might also have heard debt negotiation called debt settlement or debt elimination.  All of these terms refer to a service that is geared toward people who are deeply in debt and possibly in danger of bankruptcy.  Debt negotiation is typically recommended for those who have over $20,000 in unsecured debt.  Here is a step-by-step guide on how debt negotiation works as a form of debt consolidation:

1. You stop paying your creditors.  When you sign up for the debt consolidation service of debt negotiation, you stop making payments to your creditors (if you were making payments in the first place).  In fact, you will not make any payments to your creditors while you are enrolled in the program.  This is to allow your debt consolidation company time to negotiate with your creditors.
2. The debt consolidation company negotiates with your creditors.  Once you stop making payments, your debt consolidation company will negotiate with your creditors to try to get them to settle your debts for less.  During this time, your debt consolidation company will handle your creditors’ calls while lobbying for a reduced settlement of your debt.  Typically, the company successfully reduces your total debt by around 40-50%. 
3. You make monthly payments to a holding account during this period.  While your debt consolidation company is negotiating with your creditors, they will either collect monthly payments from you to be put in a holding account or you will store payments in your own account.  Your money will then accumulate interest during the interim.
4. A lump sum payment is made to your creditors.  After reaching a settlement agreement with your creditors, the debt consolidation company will make a lump sum payment to them from your holding account.  Your debt consolidation company will also usually require the creditors to mark your account as “paid in full” to avoid derogatory items on your credit report. 

Potential Drawbacks of Debt Negotiation

As helpful as it is, debt negotiation also comes with some potential drawbacks.  For one, your credit will suffer considerably while you are involved with the program.  This is because you have to stop making payments to your creditors temporarily.  Secondly, the possibility exists that your creditor will not agree to settle, though this is extremely rare.  If that happens, you would end up with bad credit and seriously late payments on your credit report. For the answers to the most commonly asked questions about debt consolidation, see our FAQ page.