It happens all the time. A business owner falls behind, calls the lender or the funder directly, offers a lump sum less than the full amount, the lender/funder says “no,” and the owner hangs up. They try one more time - perhaps even a week or two later, but with no luck. That failed negotiation doesn’t mean a negotiated settlement isn’t possible. Put simply, the initial negotiations do not necessarily prevent further negotiations.
Unsecured Debt
Why would a creditor ever settle for less? Settlements usually occur only for unsecured debt. For secured debt, like a mortgage, the lender can usually just take the asset to satisfy the debt anyway, so it’s unlikely to agree to take less. Unsecured debt is different. With no collateral to take, what incentive does the lender have to accept a deal?
The creditor’s primary recourse is to sue you for what you owe. If it wins, it can attempt to enforce the judgment against you. That is an arduous, expensive, time-consuming process, and there is no guarantee the creditor will be able to collect the full amount of the judgment. That is why unsecured creditors often are willing to settle.
Settle Debt on Your Own
Now let’s get back to the failed settlement negotiation. If you settle on your own, you will save on fees and will have more control over the process. But this approach also has a few downsides. First, there are some creditors who will not even negotiate with a debtor. Even when a creditor will talk, your proposal may not make it to a decision-maker who has the power to act. Each creditor may have a different set of procedures for settling a debt, and if you don’t know how things work, you may feel overwhelmed and make mistakes.
Another reason a deal might have fallen through is you simply did not have the money available. In many cases, a creditor will only negotiate with you if you’re several months behind on payments and can show you are able to make a lump sum payment. You might also end up with worse terms than you would with a settlement company that settles accounts in bulk, and you may encounter significant delays in having your paperwork processed.
All of this is not to say that you shouldn’t try to negotiate on your own. Experts say that even when you settle debt on your own, you may still need help from others. And a failed negotiation attempt is not necessarily a bar to future negotiations.
Two Other Ways to Settle
That leaves two other ways to settle. The first is a debt settlement company. The appeal is simple: it gets you a professional at the negotiating table. You send them the money, and they negotiate the settlement for you. With a settlement company, you’ll pay monthly to the company or to an agent bank that maintains a trust account for you. A portion of your payment goes to the company’s fees; the rest goes into your trust account. During this time, the company will advise you to neither contact your creditor nor to make any payments to it.
Why can a company get somewhere you could not? Settlement companies may already have established relationships with creditors, and have bulk settlement contracts with them. This helps them process transactions more quickly and get better terms. A disadvantage of working with a debt settlement company is that you will have to pay a fee. That means you will be paying them a fee on top of what you pay to the creditor. The fee is typically outlined in your contract, and can be anywhere from 10% to 75% of the total amount of debt settled. At Delancey Street, our fee is one percentage of the total enrolled debt, quoted in writing before any work begins.
The second route is a debt settlement attorney. An attorney is different than a debt settlement company in that you’ll deal with a lawyer, not a negotiation team. That means a person licensed to practice law will represent you. A debt settlement attorney is familiar with state laws and the legal side of your debts, and can help address those legal issues. They can also bargain with creditors to get the overall balance down. They can even help you deal with calls from creditors and collection agencies. We are not a law firm, so when litigation is the right call, we refer owners to a vetted independent attorney.
An attorney can also review your debt settlement agreement letter, the paperwork that confirms the verbal agreement between you and your creditor. The fine print in these letters can be tricky. It’s important that you know what you’re signing. An attorney can make sure the terms are fair and work to your advantage.
The fees for settlement services are often different for each attorney. Attorneys can charge by the hour or by a flat fee, depending on the work they do, their experience and your needs. Some charge a percentage of the debt settled or of the amount you saved (a contingent fee). Be sure the fees are spelled out in your contract, so you aren’t in for a surprise when you get the bill.
Back to that failed settlement negotiation. You may have tried to negotiate on your own and failed. That does not close the door. Settling your own debt can be tough. If a negotiation falls through and you don’t know why, or you’re just not confident enough to negotiate yourself, you may want to think about getting help. It may depend on your situation. Each option has its merits. No matter how you settle, most important is knowing what the deal is and what your obligations are. If you want to talk it through, a first consultation with Delancey Street is free and confidential, and if a cheaper option exists, we will tell you on the first call.
