Debt Negotiation: What Settlement Amount Should I Offer to Settle My Debts?
A good offer of settlement is one that gives all of your unsecured creditors (excluding the IRS) a proportional amount of your available funds, just as would be given to them if you filed Chapter 7 bankruptcy and your cash was distributed fairly among them. This is the way an accountant would determine who gets paid what.
Proportional Offers of Settlement
When negotiating with unsecured creditors or debt collectors for reduced settlements and alternate repayment plans, they are more likely to go along with your plan if your plan is a fair one. By this, it is meant that each creditor should get a proportional amount of the funds you have available to pay to all unsecured creditors each month or in one lump sum settlement.
Alternate Repayment Plans
After determining how much you need each month to pay your housing and car expenses, and other necessities of life, and your secured debt, you have a certain amount of money left over to pay unsecured creditors. How much should you offer to give each one? Its proportional amount of the total amount you have available. Examples:
Suppose you needed $500 each month to satisfy all your unsecured creditors (credit card companies, medical bills, etc.) but you have only $300 available each month to pay them. To decide how much each one should get, do the following:
1. List the total amount you owe each of your unsecured creditors:
Credit Card A
$1,563.00
$1,563.00Credit Card B$2,456.00
$2,456.00Medical Bill 1$1,876.00
$1,876.00Total $5,895.00
$5,895.002. Divide what you owe each creditor by the total amount of debt you owe all of them to determine each one's proportional share:
Credit Card A$1,563.00 / $5,895.00 = .265 = 26%
$1,563.00 / $5,895.00 = .265 = 26%Credit Card B$2,456.00 / $5,895.00 = .416 = 42%
$2,456.00 / $5,895.00 = .416 = 42%Medical Bill 1$1,876.00 / $5,895.00 = .318 = 32%
$1,876.00 / $5,895.00 = .318 = 32%3. Now take the amount you have to pay all of your unsecured creditors and multiply it by the percentage you got in step 2 above. In our example, we used the figure $300.00:
Credit Card A26% of $300.00 = $ 78.00
26% of $300.00 = $ 78.00Credit Card B42% of $300.00 = $126.00
42% of $300.00 = $126.00Medical Bill 132% of $300.00 = $ 96.00
32% of $300.00 = $ 96.00Total 100% $300.00
100% $300.00Reduced Settlements: You can do the same thing if you are trying to settle debts with your unsecured creditors for less than what you owe. For example, suppose you're deep in debt and want to get out of debt much faster without filing bankruptcy. Your plan is to try and get your unsecured creditors to agree to divide up the amount you have in savings, and accept that amount as payment in full. The example below assumes the debtor has $30,000 in savings. (And yes, we understand that many of you don't have $30,000 in savings to pay off your debts!)
Hypothetical example -- you owe unsecured creditors as follows:
Credit Card 1$12,000
$12,000Credit Card 2 $ 7,568
Credit Card 3$30,000
$30,000Doctor Bill $ 3,931
$ 3,931Total Debt $53,499
$53,499Based on the amounts in the above example, do you think that Credit Card 3 would be willing to accept an amount equal to what Credit Card 2 or the doctor might receive? No! If they agree to a settlement at all, they will want a proportional amount of the $30,000 you have available since you owe them so much more than the other creditors: Your plan is to pay each creditor a percentage based on what you owe each:
Credit Card 1$12,000 / $53,499 = .224 = 22%
$12,000 / $53,499 = .224 = 22% Credit Card 2$7,568 / $53,499 = .141 = 14%
$7,568 / $53,499 = .141 = 14%Credit Card 3$30,000 / $53,499 = .560 = 57%
$30,000 / $53,499 = .560 = 57%Doctor $3,931 / $53,499 = .073 = 7%
$3,931 / $53,499 = .073 = 7%You would then offer each the percentage of your total unsecured debt. You have $30,000 available to pay them all, so you offer them the following:
Credit Card 1 22% of $30,000 = $ 6,600
22% of $30,000 = $ 6,600Credit Card 2 4% of $30,000 = $ 4,200
4% of $30,000 = $ 4,200Credit Card 3 57% of $30,000 = $17,100
57% of $30,000 = $17,100Doctor 07% of $30,000 = $ 2,100
07% of $30,000 = $ 2,100Total 100% $30,000
100% $30,000You can quickly check your math by adding up all the percentages (they should equal 100) and the amounts you are paying each creditor (they should equal the total amount you have to pay them all). We have provided 21 sample letters to negotiate your debt using both the reduced settlement plans and alternate repayment plans. You can go there now, or read more about negotiating medical debt, credit card debt and tax debt.
Next topic: How to Negotiate Medical Debt
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