Debt Negotiation– A Bankruptcy Alternative

When individuals are in financial distress and need relief they should look at all their options and choose the solution that will help them get back on their feet the fastest.  While bankruptcy is the right option for many of my clients, some individuals come to me with too little debt to file for bankruptcy.  Others come to me clearly in a financial crisis, but with too much income to qualify for a “good deal” when filing for bankruptcy relief.  For many of these individuals the best solution is debt negotiation.
Debt negotiation is a tool used to resolve your debt by paying the creditor some portion of what you owe them less than the full balance.  The amount that a creditor is willing to take during a negotiation is often very fact specific.  If an individual has very little income, very few assets and can prove that the creditor is unlikely to get the money outside of a negotiation, then the creditor is likely to take far less.  If the individual has a large income, a number of unsecured assets and the creditor knows they can simply go after the creditor in court and get payment in full, then the creditor will expect substantially more.  For this reason, the amount of information given to a creditor should be strategically controlled by an experienced attorney.  That doesn’t mean that the creditor should be mislead.  Just to the contrary.  ALL OF THE INFORMATION GIVEN TO A CREDITOR DURING NEGOTIATION SHOULD BE TRUE.  I cannot emphasis this enough.  The worst thing that could happen to a debtor would be to negotiate a good deal, only to face felony fraud charges for lying.
However, while neither a debtor nor their attorney should lie or mislead, they can choose not to be transparent.  In a case where the individual has a large number of assets, the attorney can stall the turn over of information and simply negotiate without financials.  While this isn’t going to result in a great deal, it will result in a substantially better deal than if the creditor knows that payment in full is an easy option.
Another factor in a successful debt negotiation involves the payment of a lump sum toward settlement.  Remember, a promise was already made to pay this debt.  A new promise to pay for a reduced amount doesn’t have a huge draw for creditors if it comes with small payments over a long period of time.  However, if you are able to offer a large lump sum toward payment of the debt, then the creditor’s interest is likely to be peaked.   In fact, the best deals I have been able to negotiate in my career have involved a single lump sum payment.  These deals can range as much as 60-85% off the total debt.  If the creditor is offered a smaller lump sum with future payments, the debtor should expect a smaller discount, often between 40-60% off the total debt.  If a creditor is offered a simple payment plan with no lump sum at all, the discount is likely to be very small, sometimes as low as 10-15% off the total debt.
The bottom line is, in the right circumstances, debt negotiation can be an excellent tool.  However, experience can be critical in shaping, offering and negotiating a final deal that garners the maximum benefit for the individuals facing financial distress.  If you find yourself unable to pay your bills, be sure that you seek help from an individual that offers a full tool box of financial solutions.