Debt settlement may be possible for some borrowers who can no longer keep up with credit cards, medical bills or other outstanding balances, but the chances of reducing what is owed vary sharply depending on the type of debt and its stage of collection.
A recent survey by Achieve found that 34% of respondents were unable to make the full monthly payments on all their debts. The same survey found that 44% would consider using a debt relief company to negotiate settlements on their behalf.
Creditors may offer hardship arrangements, such as lower interest, temporarily reduced payments or a longer repayment period. Agreeing to accept less than the full balance, however, is a separate process and is more common with some forms of unsecured debt than others.
Which debts are most likely to be negotiated?
Credit card balances are generally among the easiest debts to negotiate because they are unsecured. If an account becomes seriously overdue, the card provider may decide that accepting a smaller payment immediately is preferable to pursuing the entire balance through collections.
Negotiations can become more likely after an account has been charged off or passed to a collection agency, particularly where the borrower can offer a lump sum. Waiting until this point can seriously damage a person’s credit, however.
Medical debt may also be open to negotiation. Hospitals and medical providers can have greater discretion over unpaid bills than traditional lenders, while accounts already with collection agencies may provide further scope for a settlement.
Before attempting to settle a medical bill, borrowers should check whether they qualify for financial assistance or charity care. Such support may reduce the amount owed without the potential credit consequences associated with settling a debt.
Collection accounts can also offer an opportunity to agree a lower repayment. Agencies may have bought delinquent debts for less than their face value, or may be working on commission for the original creditor, meaning a reduced payment can still be financially worthwhile.
Anyone reaching an agreement should obtain the terms in writing before making a payment and confirm that the sum agreed will clear the debt in full.
Private student loans are less commonly settled while payments remain up to date, as lenders generally expect borrowers to follow the original loan terms. If the loan defaults, some lenders or collection agencies may consider accepting a partial payment, although such arrangements are less frequent than with credit card debt.
Car finance and mortgages are among the least flexible debts because they are secured against an asset. A lender can repossess a vehicle or pursue foreclosure on a property if payments stop, giving it another way to recover money owed.
Settlement on these loans is more likely to arise after the asset has been sold and a shortfall remains, or through arrangements such as a negotiated short sale.
The risks of debt settlement
For borrowers seeking to pay less than the full amount, credit cards, medical bills and collection accounts generally provide the greatest scope for negotiation. Secured loans and private student loans are more likely to involve structured hardship arrangements than a reduction in the balance.
Debt settlement can harm a borrower’s credit score, while debt that is forgiven may have tax implications in some circumstances. Borrowers who find negotiations difficult may choose to seek help from a reputable debt relief company, but should first consider whether settlement is suitable for their financial position.
