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.