Debt Settlement: Tips for Negotiating with Creditors

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Debt Settlement: Tips for Negotiating with Creditors

When your creditors come knocking at your door, it’s tempting to want to close and lock it. Contact from creditors can be particularly stressful when you’re drowning in debt and feeling uncertainty about your ability to pay it off.

But despite how little you may want to talk to your creditors, there are reasons to consider picking up the phone the next time they call: You may end up finding out that your creditor (or collector) is willing to negotiate.

Generally, creditors are happy to collect some of the amount owed to them even if you don’t pay in full – particularly when it comes to collections companies, who tend to purchase debts for pennies on the dollar and will profit even from partial payments. That said, it makes sense to at least entertain a discussion about settling – that is, forgiving a portion of – your debt.

Nonetheless, there are certain best practices to mind when it comes to negotiating your debt, from accurately representing your current financial situation to obtaining written confirmation of any communications or transactions with your creditors.

As such, here are five tips to successfully negotiate with your creditors or collection agencies.

#1: Keep your story straight

When you ask a creditor to forgive your debt in part or in full, to extend your repayment timeline, or to lower your interest rates, you will first need to prove that you’ve undergone a substantial financial hardship. Creditors are hesitant to forgive debts for those who simply want to save money and escape the nuisance of creditor contact; they will generally only be willing to negotiate with those who have truly, honestly hit a roadblock when it comes to repayment. 

Whether your hardship stems from a job loss, a health crisis, or an unattainable increase in your interest rates, make sure you represent your situation honestly and accurately. Also, relay the same version of the story to each person you contact. If your story changes from person to person, you will lose credibility (and your creditor’s willingness to work with you).

#2: Understand your budget

Before you agree to settle, review your budget carefully to develop a strong sense of what you can – and can’t – afford when it comes to your monthly principal and interest payments. Keep in mind that often, you will reach the best settlement deal if you agree to repay your debt in a single lump sum amount, so determine whether this is feasible for you and if so, how much you can realistically manage. 

Above all, don’t overpromise. If you agree to pay more than you can afford, you’ll end up losing the opportunity to settle and will land in the same stressful place in which you started.

#3: Get it in writing!

Once you reach an agreement with your creditors, and once your debt has been settled, obtain written confirmation from your creditors reflecting the transaction. Ideally, secure your written documentation before you make any payments, to ensure that both you and your creditors are on the same page. Otherwise, you may make your payments thinking your debt has been settled, only to be continually harassed by creditors.

#4: Ask your creditors to write off your late payments

Catching up on your delinquent accounts won’t increase your credit score unless your creditors remove any record of your past late payments, which can remain on your credit report for up to seven years. Not to mention, collections accounts can remain for seven years plus 180 days from the date of the most recent delinquency. 

There is a way around this: As soon as your debts are settled, you can begin to rebuild your credit. Try checking your credit score using a free tool like Credit.com. Don’t worry about pulling your report, as checking on your credit will not affect your score.

#5: Seek help

If you’re having trouble working with your creditors to devise a plan, consider engaging a credit counseling agency or debt relief company to negotiate on your behalf. Reputable, accredited companies can take over these communications, working with your creditors to craft a repayment plan that works for you. 

Alternatively, if you think you’ve reached the end of your rope and are completely unable to pay back any portion of your debt, you may consider contacting a bankruptcy attorney to help you evaluate your options. Even if you ultimately decide not to pursue bankruptcy, an attorney can advise you as to whether a creditor is acting ethically and legally in its communications with you.

Should I Settle My Debts?

Deciding whether to settle a debt is a personal choice that varies based on each consumer’s unique financial situation. Keep in mind that certain consequences attach to the debt settlement process. For instance, you will likely see an impact on your credit scores. Nonetheless, it may be the best choice for you if you’re feeling overwhelmed. 

An experienced credit counselor can help you navigate the negotiation and settlement process while informing you of other tools at your disposal. If you have questions, consider seeking help sooner than later so you can quickly set foot on the path to financial freedom.

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