You owe money – most people do, but what should you do when the amount you owe has gotten out of control? What if your debt has become a crippling burden in your life, affecting both you and those you love? What if the amount you owe is simply too much to repay or even manage? The answer might be settling your debt for less than you owe.
Some argue the ethical question of paying less than originally agreed, but this is counterbalanced by the nature of interest, penalties, and the general design of debt to snowball – increasing in all ways possible – by creditors. If this were not the case, there might not be agencies and legislation that specifically exist for the protection of consumers.
Another factor is simple business. A creditor who has no real hope of ever collecting from you would much rather settle for an amount greater than zero, and indeed greater than a negative figure, especially when you factor in collection costs.
Unsecured Debts
For personal debts such as credit cards, debts to local merchants, professionals, and other general unsecured debts, there are several proven strategies to eradicate the debt for less than owed.
You can negotiate settlements for less than owed either on your own or by enlisting professional help, such as a debt negotiator, consumer credit agency, or consumer protection attorney.
If you handle your own negotiations, the first step is to prepare for your approach. You will likely need to convince the creditor that the amount owed is uncollectible in your case. You might suggest that you are considering personal bankruptcy, in which case they are likely to receive nothing, or at most, twenty percent of the debt over the next five years. How flexible might they become considering those alternatives?
In any written communications, consider sending a copy (cc) to an applicable state comptroller or another relevant regulatory agency. This can have a motivating effect, as it may encourage fair treatment, especially if the creditor suspects that the agency is involved.
While not technically lowering the amount you owe, you might also consider accepting or negotiating for a lower interest rate or reduced payment. This will at least provide some breathing room in the present and allow more funds to be allocated toward other areas of your financial situation.
Bankruptcy
While careful consideration should be given and professional consultation sought prior to filing for personal bankruptcy, it is possible, with a Chapter 7 filing, to eliminate all unsecured debts. A Chapter 13 filing allows you to pay only twenty percent of your debt, spread over five years.
Barter
With these kinds of debts, it may also be possible to barter for all or part of your balance, especially if your trade, service, or profession is something your creditor can use. This can save you cash while creating a win-win situation.
Crowdfunding
A more radical approach, and previously unheard of, is called crowdfunding. Numerous websites connect investors with new businesses and inventors, and some offer a forum for individuals to seek assistance with medical bills and other financial situations from multiple contributors.
Income Taxes
The IRS has several programs in place, as required by law, that allow you to cease collection activity and actually settle your debt for less than you owe.
The Offer-in-Compromise (OIC) is probably the most well-known of these. By disclosing detailed financial information and following the instructions in the guide, you can calculate an offer that is sometimes just a fraction of what is owed, and often accepted by the IRS as payment in full, resolving the back taxes.
The acceptable amount for an OIC is based on your total available cash (let’s say $1,000), your total equity (assumed to be zero), and your available monthly cash over forty-eight months (assumed to be $100), which equals $4,800. The total comes to $5,800. It is not based on the amount owed, but rather on your ability to pay. So, if your debt were $100,000, you might settle for $5,800!
A Partial Payment Installment Agreement is a lesser-known method of paying the IRS less than you owe. Similar to an OIC, this method allows you to pay over several years if you qualify due to your inability to pay the full amount.
Another interesting possibility is a Chapter 7 bankruptcy to wipe out older tax debts. A friend recently discharged over twenty-thousand dollars in tax debt by filing Chapter 7 bankruptcy on his own (without a lawyer!) because the taxes were old enough and met the required criteria.
Mortgage Balance
Mortgage balances have been reduced en masse recently. As so many Americans are upside down—owing more than their home is worth and unable to make payments—banks have resorted to loan modifications and accepting short sales.
With a loan modification, your mortgage company may reduce your mortgage balance and interest rate to help you stay in your home and make your monthly payments.
Find out more at https://www.makinghomeaffordable.gov/ about the Home Affordable Modification Program (HAMP®) and other government programs that reduce your balance, payments, or both!
Student Loans
While private student loans are usually susceptible to the strategies mentioned for unsecured debts, government-insured student loans are generally difficult to reduce or discharge with a federal bankruptcy filing. However, there have been discussions about changes coming regarding the dischargeability of student loans.
Medical Expenses
One of the most common reasons cited for personal bankruptcy is overwhelming medical expenses. Subject to the bankruptcy filings already mentioned, medical expenses might also be candidates for settlements. If payment is in question when medical services are delivered and Medicaid is available, they may pay the bill on your behalf.
Back Rent
Believe it or not, even back rent can be erased. The determining factors are the market, the property, and how much your landlord wants to keep you.
As a former landlord and property manager, I’ve advised landlords in a tenant’s market, where finding a new tenant takes time and rents are decreasing, to forgive past-due rent and even rewrite a lease at a lower amount to keep a good tenant in financial distress. It can be less costly than a prolonged vacancy and the expense of preparing the property for a new tenant.
If cash is tight, you might try asking to renegotiate your rent if you take on more responsibility for repairs or pay weekly, for example.
The only limits to reducing your balances and settling debts for less than you owe are your own creativity and ability to research. Often, an agreeable arrangement benefits both parties, so don’t hesitate to explore your options!
