What is debt negotiation and how does it work?

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Having a significant level of debt is stressful, even more so if your financial circumstances mean you are unable to pay off your debts to any effective degree, or find yourself doing little more than servicing the interest each month. If you are already struggling and have started to miss payments, you might be receiving regular letters and calls from your creditors or a debt collection agency working on their behalf.

If this is the case, then it is likely your credit rating is already being negatively affected and some potential solutions, such as a debt consolidation loan may therefore be inaccessible. This doesn’t mean that your debt situation will see you going down the route of having defaults and court writs on your credit file, or being made bankrupt. One option that may remain open to you is that of debt negotiation, which is also sometimes referred to as debt settlement. What is this, and how does it work?

Understanding Debt Negotiation

As its name indicates, debt negotiation is the process of negotiating your debts with creditors in order to come to a mutually acceptable settlement agreement. Many creditors are willing to negotiate debts should the borrower have fallen on financial difficulties. On the part of the borrower, looking to negotiate is an acknowledgment that at least they are looking to repay some of the outstanding debt, which is usually what they can afford. From the creditor’s perspective, debt negotiation means they are going to end up with something, whereas going down the route of seeking court action doesn’t always guarantee them getting repayment.

“As its name indicates, debt negotiation is the process of negotiating your debts with creditors in order to come to a mutually acceptable settlement agreement.”

Creditors have a lot of experience in debt negotiation, and it is worth noting if you are a borrower that you will need to be assertive about what you can pay during this process, though at the same time realistic as to what a creditor is likely to accept. Debt negotiation services are available for those who do not feel confident in going to creditors and negotiating their debt themselves.

Using a debt negotiator is also useful for taking advantage of their experience and knowledge, while it may also help you to be free of the stress and the emotion of the situation. Many debt negotiators will know what some creditors are likely to accept and how they work, meaning settlements can often be made quicker while also getting a better deal than you might by ‘going it alone.’

Debt Negotiation and How it Works

Creditors willing to negotiate debt usually only do so on the basis that a lump sum will be paid. Receiving a lump sum now rather than having to wait potentially years to receive what they are owed is a big motivating factor for creditors to negotiate on this basis. During a debt negotiation, the borrower will usually offer a lump sum now, smaller than the full amount owed, in return for the creditor considering the account ‘settled,’ this removing any further debt repayment obligations.

The debt negotiation process can be a lengthy and stressful one, and you will normally continue to pay what you can towards your debts while negotiating, although a debt negotiator may advise you to stop making payments.

Why Debt Negotiation can Benefit Both Sides

If the debt negotiation process is managed effectively, both sides can benefit. The borrower can clear their debt obligations by making a lump sum payment for less than the actual amount of outstanding debt, while the creditor receives something they might not otherwise have done. In many cases whatever you offer will be profit to the creditor’s business, which is why they’re willing to negotiate, albeit they’ll still look for the best possible terms in their favour and the highest possible repayment.

“If the debt negotiation process is managed effectively, both sides can benefit. The borrower can clear their debt obligations by making a lump sum payment for less than the actual amount of outstanding debt, while the creditor receives something they might not otherwise have done.”

You should carefully consider whether debt negotiation is a solution that could solve your financial difficulties and leave you in a better place to start repairing your credit rating and building towards a brighter financial future.

Please seek independent legal advice prior to any debt negotiation. This article is for general information only.

Disclaimer:  This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs.  Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.

Categories: Debt Management

Approved customers only. Terms, conditions, fees and charges apply. All applications are subject to NOW FINANCE’s lending and approval criteria. Settlement times may vary depending on circumstances. Loan repayment terms range from 18 months to 7 years. Interest rates range from 7.95% p.a. (9.56% p.a. comparison rate) to 16.95% p.a. (18.53% p.a. comparison rate).

*Comparison rates are based on a loan of $30,000 over 5 years.

WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

EXAMPLE: An unsecured personal loan of $30,000 borrowed for 5 years with the interest rate of 7.95% p.a. (9.56% p.a. comparison rate), would estimate to a minimum total amount payable of $37,741.60 via the weekly payment option (including a $495 establishment fee and $13 per month administration fee). Rates are subject to change.

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