If you’re having trouble paying your bills and your debts just seem to grow, it’s time to take action. It’s time to consider debt negotiation.
Whether you take on the challenge of doing it yourself or choose to place it in the hands of experts, debt negotiation is a far better option than filing bankruptcy.
Debt negotiation takes time and patience
Debt negotiation — sometimes referred to as debt settlement –is a method of negotiating with creditors to reduce the amount of debt you owe. It may mean a reduction in the interest on your outstanding debt or a reduction in the outstanding balance you still owe. It depends on what your lender is willing to negotiate. Either way, it benefits them to help keep you from bankruptcy.
How to negotiate debt by yourself
Naturally, you may choose to negotiate on your own behalf. If you do, you need to be prepared for what you might face. Debt negotiation can be tough, so you should:
- Be polite, yet firm. Your creditors have no obligation to negotiate. If they sense you are weak, they are liable not to budge an inch.
- State your case. Be honest about why you are calling. Clearly, state the alternative in a non-threatening way. Ask to speak to a supervisor, if the individual that answers the phone is unwilling to give an inch. Be willing to entertain counter-offers.
- Put it in writing. If you get nowhere by calling, put your request in writing. Write your letter in a professional manner clearly restating what you said on the phone. Keep copies of your correspondence.
- Ask for help. Perhaps you have a friend or relative who has experienced this same situation or works in a profession that provides them with good negotiation and letter writing skills. Seek their assistance or the assistance of a debt settlement firm. A professional has the skills to negotiate for a lower lump-sum amount or lower interest rates. In addition, it is their job to get the best rates possible. They have the experience you don’t.
Don’t expect miracles. Thinking that all your debt will be forgiven is a long shot. However, if you have a debt negotiation professional at your side, you may be able to get a reasonable reduction in your total debt.
Drawbacks to debt settlement
Whether you go at it alone or enlist the aid of a professional, there are some things to consider before you try debt negotiation.
Many people are so focused on getting rid of their debt that they don’t realize by settling for less than what you owe, the IRS will expect you to pay income tax on the difference. Look at it this way. If you borrow $10,000 and the lender forgives $5,000, it means you got a $5,000 payday.
One of the most important parts of settling any debt is ensuring that the debt is done and gone. To do this make sure you obtain a Form 1099-C from the creditor so they cannot send the remaining debt to a collection agency. Otherwise, you will likely begin receiving phone calls from the collection agency trying to collect on the unpaid portion of your debt.
Inform Your Creditors
Before you decide to ignore your creditors’ requests for payment, consider that they may seek legal action against you. If you work with a debt settlement company, they are aware of this.
As much as the debt settlement company will do what they can to salvage your credit rating, lenders want their money. If you don’t pay or if you negotiate a settlement, it will go into your credit file.
Pay to Play
Whether it’s money or your time, it costs to settle your debts. You’re paying for the debt settlement company’s expertise and for the pleasure of not having to negotiate for yourself. Just make sure you understand all the costs.
With a little time and a lot of patience, you can get your finances back in order. The debt settlement companies below are a good place to start if you decide to hire a professional to negotiate your debt.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.