Personal Finance

What is debt negotiation?

Learn more about what debt negotiation is, how it works and how it may benefit you.
What is debt negotiation?

If paying off your debts seems like an impossible task and debt consolidation simply won't do the trick, there are other options available. Typically reserved for people experiencing serious financial difficulties, debt negotiation is a strategy that may help you to avoid bankruptcy. Learn more about what debt negotiation is, how it works and how it may benefit you.

What is the aim of debt negotiation?

Occurring between a borrower and a creditor, debt negotiation is a process that aims to develop a mutually agreed settlement on a debt that is currently held by a borrower. It is a strategy commonly used by borrowers who cannot repay their debts in order to avoid bankruptcy and the serious financial consequences that accompany it.

How does debt negotiation work?

The debt negotiation process begins with the borrower, or a debt negotiation company working on behalf of the borrower, proposing to the creditor how the debt will be dealt with. After receiving and considering the proposal, the creditor then chooses to accept, reject or compromise upon the original proposal. Debt negotiation can be quite a lengthy process as all parties involved need to agree on the same terms and there is likely to be a decent amount of correspondence between both the borrower and the creditor.

Although the outcome will vary from case to case, the borrower and creditor may agree that a debt will be reduced or eliminated, or that a new repayment arrangement will be introduced.

When might debt negotiation be an option for you?

If you're having difficulty making your monthly repayments, are experiencing serious financial hardship or are attempting to avoid bankruptcy, debt negotiation may be a suitable option. The process relies heavily on the discretion of the creditor, though, meaning that a positive outcome isn't always a given. The strategy should ideally be used in conjunction with financial counselling and other financial management tactics that will help you to avoid similar circumstances in the future.

What types of debt negotiation are available?

As everyone's circumstances are different, there's no one-size-fits-all solution for debt negotiation. The types of debt negotiation available will depend on the type of debt, the creditor and the creditor's own policies.

Some common debt negotiation strategies include:

  • Applying for a financial hardship extension, where the due date of a repayment is extended temporarily
  • Requesting to have any interest applied to your debt waived
  • Making a smaller payment that shows that you intend to repay your debt when you are able
  • Asking to have your debt waived if you will not be in a position to repay your debt at anytime in the near future
  • Pausing repayments for an agreed period of time

What are the benefits of debt negotiation?

Although it's never good to be in too much debt to handle, the process of debt negotiation can provide some benefits, especially if you're having trouble staying on top of your credit card repayments, loan repayments and other financial obligations. Some of the main benefits of debt negotiation for borrowers include:

  • Avoiding bankruptcy
  • Having a much needed reprieve from overwhelming debts
  • Settling debts
  • Reducing general financial stress

While it might seem like the debt negotiation process primarily benefits borrowers, it can also assist creditors too. Some benefits of debt negotiation for creditors include:

  • Settling a debt that may not otherwise be repaid
  • Recouping some of the initial amount borrowed
  • Organising a plan for future repayment with the borrower

What are the risks involved in debt negotiation?

If you're considering debt consolidation, it's important to remember that there can be some drawbacks to the process too. Some risks involved in debt negotiation include:

  • Not being able to negotiate effectively with creditors
  • Facing additional costs, such as interest, late fees and even legal expenses
  • Negative impacts on your credit score
  • Needing to gather a substantial amount of money to meet any agreed repayments or make a lump sum payment

Can you negotiate a debt settlement on your own?

In some circumstances, negotiating a debt settlement on your own can be an achievable, yet time consuming, task. More often than not, you'll need to spend a decent amount of time on the phone, communicating with several different departments and filling in paperwork.

The best place to start is to get in touch with your creditor early. Ignoring overdue notices won't do you any favours and late fees are likely to start adding up if you don't take action sooner rather than later. Many companies have their own hardship provisions that you can access if you meet a certain set of criteria, allowing you to pause your repayments for an agreed period of time or alter your repayment terms to meet your current circumstances.

If you're not confident negotiating a debt settlement on your own, you might opt to use the services of a professional debt negotiator. Having an expert on your side can help improve your chances of achieving the best outcome for your circumstances, especially if your financial situation is particularly complex. It's important to note that choosing to employ debt negotiation services can be expensive, with the process not completely guaranteed to give you a better result than if you were to negotiate on your own.

Does debt negotiation work?

While debt negotiation might seem like it could be the answer to your financial problems, the process doesn't always result in a positive outcome for everyone. As the process is essentially a negotiation between the borrower and the creditor, the final result won't necessarily always be in the borrower's favour. Creditors have the freedom to reject your proposal if they don't believe that the outcome will be of benefit to them.

Does debt negotiation affect your credit score?

The process of settling your debts can have a negative impact on your credit score. Although the balance of your debt will be brought down to zero when the account is settled, your credit report will still display that the full amount was not paid. In many cases, though, it's better to settle your debts than to leave them unpaid to help prevent continued damage to your credit score.

Although debt settlements will affect your credit score negatively, there's no reason why you can't build a more positive credit history moving forward. If you are in the position to do so, you can start to rebuild your credit score by making your future repayments on time and paying off any other existing debts you may have. For some people who have struggled financially, the clean slate that debt negotiation and debt settlement offers can be a positive step towards removing themselves from a cycle of negative credit behaviour. Without unmanageable repayments to focus on, their attention can turn towards better financial habits.

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