10 Tips for Successful Debt Mediation
9 MIN READ
Published July 29, 2023 | Updated September 25, 2023
If you are overwhelmed with debt and unable to pay, debt mediation can help you negotiate successfully with your lenders. But before you do, learn more about how it works, the pros and cons, and explore alternatives.
Introduction to Debt Mediation
Debt mediation is an alternative to debt consolidation or bankruptcy, that can help you settle debts with your lenders for less than you owe. If you have a lot of debt, know that there are many options available. Debt mediation is one such option to help you regain control of your finances. With rising inflation and housing costs, millions of Americans are facing increasing financial burdens.
Americans owe $986 billion in credit card debt. Add student loan debts, medical bills, personal loans, and housing costs to it, and debt can soon become challenging to pay off. Read on to learn how debt mediation can help.
What is Debt Mediation?
Debt mediation is a process where a professional mediator facilitates negotiations between you and your lenders with the goal of reaching a mutually agreeable resolution. The purpose is to reach a solution that allows you to repay your debts, avoid bankruptcy, and alleviate your financial stress.
Debt mediation may reduce the interest you are currently paying, set up a structured repayment plan, or settle your account for less than you owe. With any of these solutions, you’ll be in a much better place to repay your debts faster.
How Does Debt Mediation Work?
Debt mediator differs from other options like bankruptcy and debt consolidation because it involves a mediator working on your behalf. A trained mediator acts as an intermediary between you and your lenders. They negotiate extended repayment terms, reduced principal amounts, or reduced interest rates.
Debt mediators can help you create a customized repayment plan to ensure affordability. Once you reach a resolution, payments will typically be made to a separate bank account until you have saved enough to repay the settlement amount. It's important to remember that this does not mean full debt forgiveness. Only a portion of your original debt amount may be reduced.
Professional Debt Mediation Services
Professional debt mediation can offer you a number of advantages when compared to negotiating credit card debt and other unsecured debts on your own. Professional mediators are experts in negotiations and conflict resolution. They can improve your chances of resolving debts successfully and cost-effectively.
"Hiring someone that knows the ins and outs of the debt collection process and understands when it’s a good time to negotiate is critically important to achieving the best results,” advises Teresa Dodson, a debt relief expert and the founder of Greenbacks Consulting.
Debt mediation services are designed to reduce stress, provide guidance, protect your interest, and handle communications with your lenders.
Professional Debt Mediation Companies
If you can no longer pay your debts, it may be time to hire a debt mediation company to negotiate on your behalf. Knowing the difference between an average and a good mediator can have a huge impact. Any company you hire should have a lot of experience in dealing with lenders.
Their reputation also matters a lot. Take the time to check customer reviews to see what others have to say about their services. Learn more about the services they offer and the fee structure. Finally, work with someone you can connect with easily. This process won’t work well if you find it difficult to get along with your mediator.
Debt Mediation Program
Before you enroll in a debt mediation program, it is important to understand its benefits and drawbacks.
- It may help you successfully negotiate with lenders for a reduction in principal. This may lower the total debt you owe and make it easier for you to pay off your debt.
- Alternatively, debt mediation can also help create a structured repayment plan tailored to your financial situation. This ensures affordability and a clear roadmap to becoming debt-free.
- Paying off your debt can help you avoid bankruptcy and other serious consequences.
- Professional support and guidance can help you avoid stress, understand your rights, and gain a valuable understanding of how to navigate debt repayment.
- Debt mediation may have a negative impact on your credit score. With a lower payoff amount, lenders may report your account as “settled,” impacting your creditworthiness.
- Programs may last for several months or years and require discipline to adhere to the payment plan.
- There may be tax consequences. Any forgiven debt is considered to be taxable income by the IRS.
Types of Debt That Can be Resolved Through Debt Mediation
Debt mediation typically helps you pay off unsecured debts. Secured debts, like auto loans and mortgages, are not eligible. Here is a list of what kinds of debts are eligible for mediation:
Professional Debt Mediation Settlement
Debt mediation can help you achieve financial stability and reduce the burden of debt through debt mediation settlement. This may be a good option if the lender has not sued you yet and the court is not involved.
Debt settlement involves making a lump sum payment to your lenders, usually much lower than the original amount you owe. You’ll typically need to stop paying your lender and instead deposit the funds in a separate savings account. Once the lump sum amount is saved, it can be paid to your lender to settle your account. With a settlement, your total debt will be reduced to make it easier for you to pay it off.
Legal Regulations and Requirements
Debt mediation is required to operate within the required legal framework. This is one of the reasons why it’s important to always work with reputable, licensed companies. As a borrower, it is also important to be aware of your rights to understand what lenders can and cannot do to recover their money.
Many lenders use unfair tactics that violate the Fair Debt Collection Practices Act (FDCPA). Legally, a lender or debt collection agency cannot:
- Contact you at your workplace
- Contact you after 9 PM or before 8 AM
- Lie about your debt
- Misrepresent themselves
- Use offensive or threatening language
- Continue to contact you after you request them to stop
- Threaten you with violence or jail time.
If a lender violates any of these laws, let your mediator know immediately. You can also file a complaint against them with the Consumer Financial Protection Bureau.
Debt Collection Mediation
Debt collection mediation plays an important role in the mediation process, especially if you think your lender may take legal action. Debt mediation can facilitate communications between both parties to express concerns and come up with a mutually agreeable solution. It allows both parties to find alternatives to a lawsuit.
When you reach a settlement that is satisfactory for both parties, there are fewer chances of legal action. Most importantly, it preserves the relationship between you and your lender, demonstrating that you are willing to work with them. This increases the likelihood of your lenders offering favorable settlement terms.
Alternatives to Debt Mediation
If you think debt mediation is not the right option for you, there are several other alternatives to explore. The important thing to remember here is that regardless of the type of debt you have or the amount, there is almost always a solution available to help you lead a debt-free life.
Credit Card Debt Mediation
If you have large outstanding balances on your credit cards, consider mediation services that specialize in helping you pay off credit card debt. Your mediator can assess your debt and your overall financial situation.
They can review information about interest rates, fees, outstanding balances, and collection efforts taken by lenders. Credit card debt mediators can then establish communication with your lenders and seek to resolve the situation either through a settlement agreement or a repayment plan.
You can also work with debt relief companies specializing in negotiating debt settlement agreements. This can be an effective option when you have over $10,000 in unsecured debt. Debt settlement can usually be done when you are already past due on your accounts and do not have the ability to repay the entire amount you owe. The company can negotiate with your lender to accept a lump sum payment that is lower than the full amount you owe.
With debt consolidation, you can roll several debts into one. If you have a good credit score, you may be eligible for a balance transfer credit card or a debt consolidation loan. Once approved, you can use the funds to pay off your lenders. You’ll then have a single debt payment each month.
Debt consolidation can help you save a considerable amount of money because the interest rate of the personal loan is typically lower. If you opt for a 0% balance transfer credit card and manage to clear your entire balance before the end of the 0% APR introductory period, you can save even more.
As a last resort, you can file for bankruptcy if you are eligible. Chapter 7 bankruptcy can wipe off most unsecured debts, but it is means based and requires you to demonstrate extreme financial distress.
Chapter 13 bankruptcy requires you to pay off your debts over a period of three to five years. The remaining debt is then forgiven. Bankruptcy can also impact your credit rating and stay on your credit report for years. Seek legal advice to check if bankruptcy is right for you.
10 Tips and Advice for Managing Debt
Whether you opt for debt mediation, any of the alternatives above, or try to reduce on your own, consider these tips to improve your chances of getting out of debt sooner:
- Start budgeting. Create a budget to track your income and expenses. This will help you identify areas where you can reduce spending to have more funds available for debt repayment.
- Make debt payments a priority. Scale back on other expenses temporarily so you can focus on getting out of debt sooner. Short-term sacrifices can help you gain a lot in the future.
- Consider debt repayment strategies like debt snowball or debt avalanche. With the debt snowball, you start by paying off your smallest debt first. With the debt avalanche method, you begin by paying off your most expensive debt first before moving on to the next.
- Talk to your lenders to check if they have hardship programs. They may help you set up a monthly payment plan that is much more manageable.
- Identify areas where you can cut your costs. Reduce your budget for discretionary spending. Lower your utility and grocery bills.
- Try to increase your income through freelancing, part-time jobs, overtime hours, or a side gig. Use that income to accelerate your debt repayment.
- Reduce your housing costs by taking on a roommate or moving back with your parents temporarily to save money.
- Get in touch with a credit counseling agency for budgeting help, personalized advice, and debt management plans to help repay your debts.
- Consult a debt relief professional to explore your options. Depending on how much you owe, your income, and the kind of debts you have, they can offer you advice on what kind of debt relief measures will be suitable for you.
- Be consistent and disciplined. If you want to get out of debt sooner, you’ll need to continue making payments each month. Do not miss payments because it will only make your situation worse.
Paying off debt takes discipline and time. You’ll need to stay motivated by tracking your progress and celebrating little wins. If you need support, debt mediation can be an effective way to pay off your debts. Get in touch with TurboDebt to determine which debt relief method is right for you. Take benefit of our free consultation to see how we can help you find the right debt relief option for your individual needs.