Understanding which balances are most likely to be settled is an important part of the debt negotiation process.
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Keeping up with monthly debt payments has become increasingly difficult for borrowers recently, particularly over the last few years. Between persistent (and now rising) inflation, elevated borrowing costs and higher everyday expenses, the economic landscape Americans have been facing has put a lot of pressure on people's budgets. Case in point? About 34% of respondents say they can't make the full monthly payment on all their debts, according to a recent survey from Achieve, and 44% said they'd consider working with a company that negotiates settlements on their behalf.
Settling your debt for less than what's owed isn't always a straightforward process, though. Creditors would always prefer to be paid in full, but in certain cases, there may be room to negotiate. It depends heavily on the type of debt you have and who owns it, though. In certain scenarios, your creditors may be willing to accept significantly less than the full balance rather than risk collecting nothing at all. In others, the amount owed is largely nonnegotiable, and understanding the difference between the two can save both time and money.
Knowing which balances are most likely to be settled — and which aren't — can help you focus on the options that have the greatest chance of reducing what you owe. So, what types of debt payments can you actually negotiate? Below, we'll examine five specific ones worth knowing.
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What types of debt payments can you negotiate?
While many lenders are willing to discuss temporary help or alternative payment arrangements if you're experiencing a financial hardship, that's different from negotiating a settlement on the amount you actually owe. Debt settlement involves convincing a creditor to accept less than the full balance as payment in full, and, in turn, some debts are much more negotiable than others. Here are five types of debts you can typically negotiate:
Credit card debt
Credit card debt is generally one of the easiest types of consumer debt to negotiate because it's typically unsecured, meaning the lender doesn't have collateral it can seize if you stop paying the bills. If an account becomes seriously delinquent, the card issuer must decide whether it's more likely to recover the full balance through collections or to accept a smaller lump-sum payment now to close the account.
In many cases, accepting a settlement can make financial sense for the creditor, especially after an account has been charged off or sent to collections. That's why credit card companies and collection agencies are often willing to negotiate, particularly if you can make a lump-sum payment after an agreement has been reached. Keep in mind, though, that waiting until an account reaches this stage can significantly damage your credit.
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Medical debt
Medical debt is also frequently negotiable because healthcare providers often have more discretion than traditional lenders in collecting unpaid balances. Hospitals and physician groups would generally prefer to recover part of what's owed than spend months or years pursuing collections for the full amount.
If your medical bill has already been sent to a collection agency, settlement may become even more likely. Before negotiating, however, ask whether you qualify for financial assistance or charity care, as those programs can reduce your balance without the potential credit implications of settling a debt if you qualify.
Collection accounts
Once a debt reaches collections, negotiations often become easier because the economics change. Collection agencies frequently purchase delinquent debts for pennies on the dollar or work on commission for the original creditor. That means accepting less than the full balance can still be profitable for them.
For borrowers, this often represents an opportunity to negotiate a dramatically lower payoff amount. If you take this route, though, just be sure to obtain any settlement agreement in writing before sending payment and confirm that the agreed-upon amount satisfies the debt in full.
Private student loans
Private student loans are typically less negotiable because lenders generally expect borrowers to repay according to the terms of the loan agreement. As long as the loan payments remain current, the lender has little incentive to reduce the balance.
If the loan goes into default, however, the situation changes. At that point, some lenders or collection agencies may determine that accepting a partial payment is preferable to the cost and uncertainty of continued collection efforts. That said, while these settlement opportunities exist, it's worth noting that they're much less common than they are with credit card debt.
Auto loans and mortgages
Auto loans and mortgages are among the hardest debts to settle because they're secured by collateral. If you stop making payments, the lender has the legal right to repossess the vehicle or foreclose on the home, giving it another avenue to recover its losses.
Because lenders have that protection, they're generally less willing to forgive part of the balance. Settlement usually occurs only after the collateral has been sold and a remaining deficiency balance still exists, or in situations like a negotiated short sale.
The bottom line
If your goal is to pay less than the full amount you owe, credit card debt, medical debt and collection accounts generally offer the greatest opportunity for successful negotiations. Secured loans and private student loans, meanwhile, are much less flexible and typically offer structured hardship programs rather than settlement opportunities.
Before attempting to settle any debt, though, make sure to understand the potential tradeoffs. Debt settlement can negatively affect your credit score, and forgiven debt may have tax implications in some situations. If negotiating with creditors on your own feels overwhelming, a reputable debt relief company may be able to negotiate settlements on your behalf and help you determine whether debt settlement is the right strategy for your financial situation.
Edited by Matt Richardson
