Strategies for Negotiating with Creditors and Reducing Debt

When you have an account in the collection, it simply means that your original creditor has transferred the debt to a third party to collect it. If your account is in collection status, you can negotiate a more comprehensive repayment plan with the collector.

If you disagree with the collector, you can create a plan to pay off the debt in reasonable instalments. Learning to negotiate with debt collectors will help you develop a payment solution to get your account out of collection status.

This post will walk you through various strategies for negotiating with creditors and reducing debt. But before then, let’s learn how debt settlement works and the risks involved.

How Debt Settlement Works

Debt settlement is a negotiation between a creditor and a borrower for a massive, one-time payment regarding an existing balance with the promise that you’ll pay the settled amount in full. Debt settlement is typical in unsecured loans like credit card debt and is often employed by borrowers who cannot repay their debt.

If you’re in a state where you have ample money, like $20,000, and a rocketing credit card debt, debt settlement may be a great option to enhance your financial well-being. For instance, if you owe a credit card $30,000, you may want to negotiate with the credit company to allow you to pay $15,000 in exchange for debt cancellation for the remaining balance.

The Risks of Debt Settlement

While a debt settlement has the potential to enhance your current financial situation, there are risks worth contemplating. First, a debt settlement will impact your credit score, making it challenging to attain a good credit score and interest rates.

Even worse, the settlement will last on your credit score for seven years and can only be eliminated after then. However, settling debt will have a low impact on your credit score than not paying ultimately.

Tips to Successfully Negotiate With Creditors

1. Consider Bankruptcy

Filing bankruptcy can alleviate the pressure of handling many creditors at a time. Even though it will affect your credit score, you will feel some relief once your debts are eliminated, and you no longer have to worry about repaying.

However, depending on the bankruptcy filing, you may be required to repay a portion of the amount you owe. If most creditors are unsecured, the entire debt is eliminated, which means the creditor gets nothing. Fortunately, most creditors know this, so they’d instead reduce the debt than lose everything if you file bankruptcy.

In any case, let your creditors know about your plans for filing bankruptcy. That way, they can develop debt management plans that may convince you otherwise. If you’ve already decided, don’t pay debts that can be eliminated through bankruptcy.

2. Strive to Pay Less or 50% of Your Unsecured Debt

If you agree to settle your unsecured debts, strive to pay at least 50 per cent. It may take donkey’s years to get there, but most creditors will settle for 30 – 50 per cent. A good rule of thumb is to start with a lower offer of about 20 per cent and discuss terms.

However, consider the potential tax consequences before coming to terms with the settlement. A debt of $500 or more is considered taxable by IRS. Settling debts lower than you are owed can enhance your tax accountability depending on the discharge amount and tax bracket.

3. Get Some Leverage

Another tip to successfully negotiate with creditors is to get some leverage. Look at some things that can work in your favour and emphasise them during the negotiation process. For example, if the creditor has minimum chances of winning a case against you, they will likely take an incomplete payment.

The law of limitation can significantly impact the period that a debt is binding. Once the ruling has passed, the creditor will have difficulty convincing the court to pressure you to pay if you use the lapsed time limit as a defence mechanism.

The credit reporting time limit is another time aspect you can use as leverage. This time aspect determines whether or not a debt can be included in your credit report. For instance, if the debt is scheduled to expire soon or has already passed in your credit report, you stand a higher chance of not paying the debt.

4. Have Ready Money To Pay Off Soon

Most creditors will reduce your debt if you can pay off your debts immediately. Before negotiating with creditors, ensure you have cash, offering to transfer directly. That way, you and your debt collector can agree on a settlement that will reduce your debt significantly.

While they may not be able to recover the total amount, most creditors will quickly accept cash offers than having to anticipate numerous smaller payments progressively, some of which may never come to pass if the borrower defaults.

5. Stand Your Ground

Lastly, you need to stand your ground no matter the circumstances. Most debt collectors will use any information they can get about you to retrieve the debt from you. As such, you need to be careful about what you say and take control of your emotions regardless of your situation.

The general rule of thumb is to let out what they need to hear — more explicitly — what you are willing to offer toward your debt settlement. Refrain from talking about your income or other financial responsibilities.

Some of the information debt collectors can use against you to pay off debt is from your credit report. Since they can access your credit report, they will check out for new loans or timely payments on other accounts and use that information to force you to pay.

Regardless, take control of the conversation and stand your ground. Don’t let a debt collector intimidate you by disclosing your financial obligations. Most importantly, note what you discussed with your debt collectors, indicating who you communicated with and what the conversation was about.

Final Thoughts

Getting your debt collector to agree to a lower settlement is challenging. However, most lenders are willing to settle on a favourable payment plan for both of you. Following the tips in this post, you can make practical adjustments to your credit situation.