How to Negotiate With Your Creditors and Settle Your Debts

Settle with your creditors and avoid bankruptcy

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You Can Negotiate With Your Creditors!. Getty Images

One of the central strategies to avoid filing for bankruptcy is to negotiate with your creditors. These negotiations can lead to lowered account balances and affordable monthly payments. Although this strategy is generally geared towards settling with private and institutional creditors (e.g., credit card companies), it may also be applicable to government creditors, such as the IRS.

Initial Contact

Before you talk with a collector, it is best to know your rights. Collectors are bound by the Fair Debt Collection Practices Act and many similar state statutes, but they violate these laws all the time. Know your rights before you go in and you will understand that you are dealing from a position of strength.

In many instances, if you are very far behind on your monthly payments, it is likely that the creditors and/or collection companies will be calling you every day and night. If your creditors are calling you, the easiest way to start negotiations is to inform the caller that you wish to settle the debt. Set up a time with the creditor or collector to call and discuss a settlement. If the creditor has not been calling you, you can initiate contact. That may sound intimidating, but the fact is you're the one who's actually in control.  Act confidently and decisively and demand respect.

If you do not understand something a collector tells you, ask for clarification. Do not agree to any terms unless you understand what is expected from you completely. Do not agree to anything until you see it in writing.

Strategy

The general strategy of negotiating with your creditors is fairly straightforward: pay as little as possible on the outstanding debt that you owe.

This, of course, must be balanced with how much a creditor is willing to accept. Generally, creditors will want to obtain a lump sum payment over regular payments. Thus, a good strategy is to offer a one-time payment, at a reduced amount. For example, if you owe $10,000 to a credit card company, you might wish to offer a one-time payment of $5,000.

Start Low

You have nothing to lose (and maybe a lot to gain) by starting low. This means that you should certainly not make the highest offer you can afford at the outset. This is because a creditor will likely counter your offer, thereby raising the amount. If you start low, this will make it more likely that the creditor's offer will be closer to the range you can pay.

Tone and Interaction

It is essential to maintain a positive atmosphere and tone when dealing with creditors. Although a bill collector may be unpleasant, if you are professional and positive, there is a possibility that a settlement will be reached. This is simply based on the principle that people are more willing to work with those who have a good attitude and treat others well. This may be difficult, but it is important to achieve the goal of debt settlement!

Settlement Agreement

After you reach a settlement with your creditor, it should be boiled down to a settlement agreement. Although it is not necessarily cost effective to involve an attorney, it is legally in your best interests to do so. A settlement agreement should be drafted (something very brief), which consists of a general release of claims by both parties. A settlement agreement protects you if you pay the creditor and the creditor changes its mind and demands payment on the remaining amount. A settlement agreement will absolutely be necessary in the case where a creditor has already sued you.

Effects of Debt Settlement

Debts settlement can have the tremendous positive effect of allowing you to avoid filing for bankruptcy. However, the downsides include having to work with multiple creditors and no guarantees of success.

Furthermore, the debt settlement will be reported on your credit report and may lower your credit score. Additionally, you may have to consult an accountant to determine if the debt settlement will be considered a taxable gain that you will have to declare on your taxes.

Although debt settlement via creditor negotiation is not a perfect solution or the right fit for every individual, it may be an effective and viable option for many. Please note that this article does not constitute tax or legal advice.

To learn more about what happens to debts in collections, see:

Timeline of a Consumer Debt Lawsuit: Before the Lawsuit is Filed

Is It Worth It To Defend a Credit Card Lawsuit?