Learning how to negotiate with your creditors is a key stepping-stone before beginning a debt settlement plan.
Personal debt has seen an epidemic-like rise in the United States as middle-class Americans have struggled more and more to cover their monthly expenses.
To make matters worse, many people turned to using credit cards and payday loans provided by unsecured creditors after the recent economic downturn. In too many of these situations, the borrower had just been hit with a pay decrease or unemployment.
According to the U.S. Census Bureau, the average household’s total debt increased from $50,971 in 2000 to $70,000 in 2011, with those having the most debt being between the ages of thirty-five and forty-four years old.
In April 2018, the Federal Reserve showed the total outstanding consumer debt at $13.21 trillion. That’s a $63 billion increase just from the fourth quarter of 2017. And a $490 billion increase in just 1 year.
Many Americans have made it a priority to pay off their debt, but sometimes it’s just not that easy. You may need to do some negotiating to get what you owe to an amount that is more realistic for your situation.
Whenever possible, try working with the creditors before your bill is sent to collections. Late and missed payments impact your credit score, but collection accounts will result in an even greater impact.
Important to keep in mind: making “good faith” payments towards debt will not necessarily prevent that debt from being sent to collections. Don’t believe the myth. Once your debt is in the hands of the collections agency, you will most likely have no choice but to negotiate with the collector, which can be more difficult and stressful.
This article is going to discuss how to negotiate creditors for debt settlement, and what the consequences are for not paying your debt.
When You Can’t Pay Your Debt
When you are struggling to pay your bills and want to know what your options are, the first thing to do is know what kind of debt you have, and what happens if you don’t pay it.
There are two types of debt, secured and unsecured.
Secured debt is debt secured by property or other assets, called collateral, to guarantee repayment. In most states, when you don’t pay the secured debt, the creditor is allowed to take the collateral property as payment without first suing you for a judgment.
Home equity lines of credit, mortgages, and car loans are all considered secured debt.
Unsecured debt is not tied to any property or assets. The creditor must sue in order to obtain a court judgment to take personal property as payment.
Medical bills and credit card debt are examples of unsecured debt.
Tax debt and federal student loans have their own category. The government can take more drastic collection procedures without requiring a court judgment.
According to Nolo, unsecured creditors can (and will) call and send letters when you become delinquent. They may continue to call and demand payment during the negotiation process, which is why you must stay firm until all negotiations are finalized in writing.
Unsecured creditors can also sue for breach of contract, and some will even file a lawsuit in the middle of negotiations. If the creditor wins the lawsuit against you, they can garnish wages directly from your paycheck & bank accounts.
Both secured and unsecured creditors are subject to collection laws, which limit the tactics a collector can use to collect debts. It is also expensive for creditors to sue. Many companies aim to settle out of court, and typically see litigation as a last resort.
Strategies for Dealing with Creditors
1) Aim for 50% or less of your total debt
First and foremost, know what you can actually afford to pay, and offer less.
Start negotiations with a lower offer, around 15% of what you owe and take it from there. Most unsecured creditors will eventually settle for 30% to 50% of your total debt.
Creditors are more likely to settle if you have cash that can be transferred immediately. Creditors are also more likely agree to a lower settlement offer if you can immediately transfer the money.
They would rather take an offer of cash now than wait for a series of payments.
2) Potential of bankruptcy?
When someone files bankruptcy, the amount they owe to unsecured creditors is discharged. Read: the unsecured creditor will get nothing.
The creditors know this, so hinting toward the possibility of bankruptcy will likely get the creditor to lower their settlement offer.
Important note: The ethics of this ‘tactic’ should be called into question if you are not legitimately at risk of filing bankruptcy.
3) Get it in Writing
Once the creditor agrees to a settlement, do not give them any money until you receive the settlement agreement in writing.
This will absolve you of any further obligation to pay back more than what you agreed to in negotiation. However, once you receive this agreement in writing, you will have to send the amount agreed upon within the time allotted (typically ranging from a day or two, to one month).
This is why it is important to have cash-on-hand when negotiating and settling an agreement.
4) Know the Facts & Remain Firm
Some unsecured creditors will try to convince you they are secured, and that they can take back merchandise. By knowing what kind of debt you have, they won’t be able to fool you with this tactic.
Don’t be rushed into accepting a settlement. Never accept the first or second offers, and never let the creditor think they have the upper hand.
Regardless of what the creditors insist on, prioritizing your bills is fundamental. Always pay your rent and buy the food you need to survive first.
Regardless of how much or what type of debt you have, the best thing you can do is: take action.
Look at all of your debt compared to your income, and scrutinize the actual possibility of being able to pay off half of that debt. Come up with a number, and start negotiating.
When negotiating, stay strong and firm. Focus on the goal: becoming free of bad debt. You can do this.
Do you have any advice on negotiating with creditors to settle debt? Please share it with everyone in the comments section.