What is Debt Settlement? Answering Your Disturbing Questions

debt settlement

What is Debt Settlement in a Nutshell?

Basically, debt settlement is an agreement that a lender makes with a borrower. Too brief explanation? Well, typically, they make that agreement when dealing with large payments to be settled as a one-time payment. In exchange, the lender forgives the remaining debt.

Say, someone owes you $10,000. The sum may seem distressing to the borrower, so they may offer you to pay half of it at once if you erase the other half of $5,000 they factually owe.

The first thing you need to understand about debt settlement is that it presents a stress-free way for parties to negotiate payment options peacefully. As a result, the borrower can pay back the portion of the personal debt, but which portion — depends on the negotiation and how good you both are at it.

Sometimes, they may ask a professional debt negotiator for credit advice or discuss payment options rather than doing it themselves. If they decide to negotiate single-handedly, they may start their offer with something like 30% of their initial debt, and it is your call whether to accept it.

Why Should I Forgive a Part of the Consumer Debt, Anyway?

Quite a reasonable question that hinges on the consumer’s balance and current paying capacity. Through their payment history, at some point, you may realize their total inability to pay you back, if this is the case for your debt settlement. Instead of losing all, you will likely choose to lose some part, which is the right moment for you to start negotiating the debt.

Are There Any Specific Requirements I Should Have to Give a Loan?

It depends on your organization. However, there are some general rules to keep in mind when carrying out debt settlement procedures:

  • A consumer should have a substantial amount of cash to pay at once, as it won’t be convenient for you to receive the debt bit by bit.
  • Make sure the consumer keeps a good record of payments along the way. Otherwise, you have every right to drop their offer and stop serving them in general.
  • If the account gets past-due, you should seriously doubt the consumer’s credit score. If it’s possible, avoid dealing with them in the first place.

What Does a Typical Debt Settlement Process Look Like?

When asking for a loan, typically, the consumer contacts you by phone. They explain to you the gravity of their situation. Some may complain a lot, letting you think they have no pennies to rub together, while others are just a bit out of pocket.  

Mind that some may mention in the talk that they have several accounts to settle the debt. At that point, you should consider making them an offer that is worth the competition.

As we said earlier, they may start by offering to pay 30% of the total debt. Don’t hesitate to make a counteroffer with a higher percentage; after all, this is a negotiation. But don’t play too high; if the offer is above 50% of the debt, the consumer may turn to another collector.

Once you agree on payment terms with the consumer, make sure you provide a written agreement confirming debt settlement. Agreeing on resolution verbally is considered a bad tone for any recognized lending firm. With the agreement at hand, make sure the agreed sum to settle is specified in it.

Any Risks I Should be Aware of?

Again, it depends on your firm’s debt settlement rules, and you should warn the consumer about these beforehand. Meanwhile, we should highlight the most common ones.

Debt delinquency and settling debts with the less amount you initially agree on don’t clear the debt. The higher the score the consumer misses, the more it should affect their credibility in your eyes.

If they don’t make any payments in due time, you will have to charge them a higher interest as it is added to their balance, though paying off the debt becomes harder in this case. Upon delinquency, you should be more persistent with more calls to follow. 

Also, delaying debt payments is a sufficient reason to file a lawsuit, especially if the owed sum is considerable, which may damage your company’s welfare. And if the damage took place, you may be forced to reconsider the terms and ask for the settlement at a higher rate than the consumer might hope in the first place.

Is It Possible to Negotiate Debt Online?

Of course, and our Paydit solution is intended to facilitate debt settlement. Paydit demonstrates how debt collection can be automated to make the whole process more efficient. With the key procedures now executed autonomously, debt collection firms can focus more on consumers. The intelligent system can adjust debt settlement procedures to internal requirements and provide essential statistics on consumer behavior and solvency.

Finally, this is compliance. Automation makes it easy for collectors to settle debts while following the Fair Debt Collection Practices Act and Telephone Consumer Protection Act, which prevents legal mistakes and discrepancies. It includes the automation of legal wording in letters to be sent to consumers, setting the right time to make calls (not too often or not too frequent, or both), and more.   

Want to discover Paydit’s regulation capabilities in full? Request a demo on the website.

Nick Varnitski, Co-Founder and CEO at Armada Labs