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How Does Debt Negotiation Work?

The following is a guest post from Suzan Bekiroglu.


When consumers are making their debt payments, but are unable to prevent the amount from increasing due to fees and interest charges, debt negotiation may be required. This process assertively seeks to reduce and to resolve financial obligations. Essentially, the creditor agrees to accept a lesser amount rather than see the total debt go into default.

Revolving Debt Becomes an Easy Trap

In the modern world where physical money has all but disappeared in favor of swiped credit and debit card transactions and other electronic forms of payment; debt spirals are easy traps. Revolving debt, that which is carried over from statement to statement, such as credit card debt, grows easily.

Particularly in hard economic times, a person’s money tends to go naturally toward the basic necessities, with only the required minimums being paid on credit card debt. If the consumer is not vigilant to track associated account fees, they can wind up with a higher balance each month for a card that essentially sits in a desk drawer unused.

Revolving debt was a primary factor in the weakening of the American economy that preceded the beginning of the Great Recession in 2008. One of the major responses of the Obama Administration to the economic crisis was the formation of the Consumer Financial Protection Bureau whose primary mission is to make financial products and services more transparent and easily understood for consumers.

Considering credit card debt only, the average American household owes $15,956 on some combination of 3-4 credit cards. In December 2011, there was a total of $801 billion of outstanding revolving debt in the United States with 98 percent of that amount tied up in credit card debt.

Debt Negotiation Stops the Downward Spiral

The primary goal of a debt negotiation process is to make the debt manageable for all concerned. By lowering the amount to be paid and arriving at a set interest rate, the consumer is afforded an opportunity to resolve the debt more quickly.

The debt holder, for instance the credit card company, will get their money — certainly not as much as they would have were the consumer to spend the next 20 years making interest and fee payments, but the negotiated settlement is always preferable to a complete loss.

The consumer’s credit report will be affected by the negotiation for a period of time, normally seven years, but this would be true in the case of a debt default and bankruptcy as well. Although the debt negotiation is actually positive, in that it seeks to resolve the amount owed, the consumer may well be denied credit until the incident ages off of their credit score.

Negotiation Removes Emotion from the Process

In a debt negotiation, mediation specialists broker the agreement, which proceeds through a series of steps to develop a fair debt settlement plan. When this process is handed over to professionals, the emotional and often desperate elements are removed for the consumer and the matter becomes “just business.” This alone provides significant relief to cash-strapped debtors.

It is common for consumers to speak of being “at the mercy” of their creditors and to grapple with a mixed bag of reactions from fear to anger and even shame. A debt negotiation is not without its consequences, but may be far easier for the individual to cope with than the ongoing management of their financial obligations.

Debt negotiation is not an attempt to “weasel” out of an obligation, but is rather a proactive step toward debt resolution. Debt represents profit for any creditor. Default represents loss. In the vast majority of cases, a creditor would much rather accept a negotiated portion of the amount owed than to be left with a complete loss on their books.

About Andrea Whitmer

Andrea is a freelance web developer and mom trying to maintain a sense of humor in an otherwise chaotic world. She blogs in hopes of helping others avoid the same mistakes she made in the past. Join in the discussion here on So Over This, or connect on Twitter, Pinterest, Instagram, or Google Plus. You can also subscribe to new posts via RSS so you never miss out!


  1. If you settle a debt for an amount less than what is owed, the amount forgiven may be reported to the IRS on a 1099-C (cancellation of debt), which then becomes taxable income. For example, you owe a credit card company $3000 and settle for $1800, the $1200 that was forgiven may become taxable income. If you receive a 1099-C, you should report it on Line 21 (other income) of the 1040. There are exceptions for certain types of discharged debt that does not have to be reported. Go to for more information.

  2. kathryn says:

    In my opinion it is a way for someone to "weasel" out of paying their debt. If the debtor actually only bought necessities, that may be one thing. What I consider necessary and what they consider is usually a mile apart. The pack of cigs, take out coffee,case of beer, can always be reasoned in somewhere (I worked hard all week, and I deserve it) Steak is on sale, and I'm saving lots of money buying it. May be true if the person didn't the whole steak themself, but instead used it as the base for an entire meal, such as a stew.
    Taking in a roommate, providing weekend childcare for friends who need to work, taking a p/t job instead may be a better option.
    Having the creditor modify the agreed payment plan will do nothing to change the habits of the debtor.

    • Christi Frederick says:

      Debt consolidation or "management" and debt negotiation or "settlement" are two different options. My credit card companies hammered me with an interest rate that shot from 9.9% to 22.9%…no fault of my own, I was on autopayment from the start and never exceeded my limit. I chose to not settle, but to have a company negotiate down my interest rates and freeze my accounts until paid in full. Try having a deadbeat dad stop making child support payments on two children for 24 months and running and see if you can manage your debt…the only "weasel" in this picture is my ex husband. Both my current husband and I work two jobs, and my 16 year old works 30 hours per week. Not to mention the credit card companies will still get their money, plus interest, just not the 22.9%.

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