How To Negotiate With Creditors?

If cutting your spending, earning more money, and sticking to a strict budget (see more budgeting tips) are not enough to solve your financial problems, it’s time to bite the bullet and contact your creditors. Find out if they are willing to negotiate new, more favorable payment plans so you can catch up on your arrears and continue to pay off your debts. 

You may be reluctant to negotiate, but easing your debts can mean no more futile attempts to pay off your debts, no more threatening letters and calls from pesky collection agencies, and less damage to your credit score

We can not guarantee that 100 percent of your creditors will be willing to sit down at the negotiating table with you. But if you contact them early enough – as soon as you realize it’s getting difficult to pay your debts, or as soon as you fall behind on your payments – we are betting most will be willing to work with you. 

They may not give you everything you ask for, but even a few concessions from your creditors can make a big difference in your financial situation and ultimately save you from the bankruptcy court. In this article, you’ll learn how to prepare before you contact any of your creditors, and we will let you know how to contact them and who to talk to. 

We also explain what you should and should not say during your negotiations. In addition, we point out the importance of putting the details of any agreement you reach with a creditor in writing.

Getting Ready to Negotiate

Upfront planning and organizing are essential to the success of any negotiation, whether you’re trying to negotiate world peace or convince one of your creditors to let you pay less each month or have a lower interest rate. Your upfront planning and organizing should include

  • Create a detailed list of your debts. 
  • Decide which debts to negotiate first and what you want to ask from each of your creditors. 
  • Review your budget (or create one if you don’t have one yet — see our guide to creating a budget)
  • Pull together your financial information.

In this section, we walk you through each of these steps. If you don’t do the necessary planning and organizing, you won’t have any idea what you really need from each creditor and what you can offer in return. 

You’ll be shooting in the dark, and the results could be disastrous for your finances. If you don’t feel comfortable doing your own negotiating, you may want to ask your attorney or CPA to handle it for you, if you have a long-established relationship with that person. 

Assuming you have that kind of relationship, the CPA or attorney may agree to help you out for very little money. Another option is to get negotiating help from a nonprofit credit counseling agency in your area (see later in this chapter). You can also ask a friend or relative for help, especially if you know someone who is good at making deals.

1. Listing all your debts

Create a list of all your debts, separating the ones that are a high priority from the ones that are low priority. For each debt on your list, record the following information:

  • The name of the creditor
  • The amount you are supposed to pay every month
  • The interest rate on the debt
  • The debt’s outstanding balance

Also, note whether you are current or behind on your payments. If you are behind, record the number of months you are in arrears and the total amount that is past due.

You should also note whether a debt is secured or unsecured. For each secured debt, write down the asset that secures it. For example, your car secures your auto loan, and your house secures your mortgage and any home equity loans you may have.

When you list your unsecured debts, like your credit card debts and past-due medical bills, list them according to their interest rates. Put the debt with the highest rate at the very top of the list, followed by the one with the next highest rate, and so on. 

Leave space next to each debt on your list for recording the new payment amount you would like each creditor to agree to, or for recording any other changes you want from a creditor, such as a lower interest rate or the ability to make interest-only payments for a period of time. You will record this information after you have reviewed your budget.

Learn more about different kinds of debts.

2. Zeroing in on certain debts first

All debts are not created equal. Some debts are more important than others because the consequences of falling behind on those obligations are a lot more severe. For example, if you don’t keep up with your secured debts, the creditors may take back their collateral: the assets you used to guarantee payment. You could also lose assets if you don’t pay the taxes you owe to the IRS. Therefore, when you are preparing to negotiate with your creditors, negotiate these debts first:

  • Your mortgage
  • Your past-due ren
  • Your car loan
  • Your utility bills
  • Your court-ordered child support obligation
  • Your past-due federal taxes
  • Your federal student loans

During your negotiations, don’t be so eager to reach an agreement with one of your creditors that you offer to pay more than you really can afford. Also, don’t agree to a temporary change in how you pay a debt if you really need the change to be permanent. If you can’t live up to the agreement as a result, most creditors probably won’t negotiate with you again.

When you negotiate your lower priority debts, which will probably all be unsecured debts (such as credit card debt and medical bills), start by negotiating the one with the highest rate of interest — because the debt is costing you the most each month.

3. Reviewing your budget

After you create your list of debts, it’s time to review your household budget. You need to figure out exactly what you need from each creditor in order to be able to pay off any past-due amounts and keep up with future payments. For example, you may want a creditor to agree to

  • Lower the amount of your monthly payments on a permanent or temporary basis.
  • Lower your interest rates.
  • Let you make interest-only payments for a while.
  • Waive or lower certain fees.
  • Let you pay the amount that is past due by adding that total to the end of your loan rather than paying a portion of the past-due amount each month.

If you are at least 120 days past due on a debt, you may want to ask the creditor to let you settle the debt for less than the full amount you owe on it. The creditor may be willing to do that if it’s convinced that settling is its best shot at getting at least some of what you owe. 

For example, the creditor may know that suing you for the full amount of your debt would be a waste of time because you are judgment proof: You have no assets that the creditor can take, and your state prohibits wage garnishment. 

There can be federal tax ramifications to settling a debt for less than the original amount. Please don’t start tearing out your hair, but the amount the creditor writes off is actually treated as income to you and may increase the amount you owe to the IRS when your taxes are due. 

For example, if you owe $10,000 to a creditor and the creditor agrees to let you settle the debt for $6,000, it sends the IRS a 1099 form reporting the $4,000 difference as your income. However, you may not be affected if you are insolvent by IRS 1099 standards. 

A CPA can tell you if the IRS considers you to be insolvent. When one of your creditors agrees to let you settle a debt for less, ask the creditor to report the debt as current and to remove all negative information related to the debt from your credit report. The creditor may or may not comply with your requests, but you won’t know unless you ask.

4. Pulling together your financial information

Some creditors may want to review your financial information before they agree to negotiate with you or agree to the changes you request. Prepare for that possibility by gathering together the following information and putting everything in one place for easy access:

  • Your household budget
  • The list of all your debts
  • A list of your assets and their approximate value
  • Copies of your loan agreements

Sharing information about your assets with your creditors can be dangerous. If one of them decides to sue you to collect on your debt, you’ve made it easy for that creditor to figure out which asset(s) to go after. However, if you are anxious to strike deals with your creditors so you can continue paying off your debts, you are between a rock and a hard place; you may have no option but to share the information with them. 

Another risk you take by sharing information about your assets is that a creditor may demand that you sell one of your assets and give it the sale proceeds. However, you don’t have to take that step unless you want to and unless doing so is in your best financial interest. After you have pulled together your financial information, review your list of assets to determine whether you can use any of them as collateral. (Ordinarily, you must own the assets free and clear in order to use them as collateral.) 

Perhaps you own a boat, motorcycle, or RV, for example. As a condition of agreeing to lower your monthly payments or to let you make interest-only payments for a couple of months, one of your secured creditors may require that you increase your collateral. If you do not have any assets that you can use as collateral, the creditors may decide it is too risky to work with you and take back the collateral you’ve already used to secure your debts with them. 

A creditor may make having a cosigner a condition of any new agreement. We suggest that you determine ahead of time whether a friend or relative would be willing to cosign for you. As a cosigner, your friend or relative will be as responsible for living up to the agreement as you are, which means that if you default on the agreement, the creditor can look to your cosigner for payment. 

To be fair, before you ask someone to cosign for you, be sure that you can live up to the terms of the agreement. Also, make your friend or relative aware of the risks of cosigning before she signs any paperwork related to the agreement.

Getting Down to Business: Contacting Creditors

After you’ve completed all your upfront planning and organizing, you’re ready to begin contacting your creditors. How you contact them — in person or by phone — and whom you talk to depends on the type of creditor. For example, if the creditor is local (and not part of a national chain), an in-person meeting is appropriate, and you probably want to meet with the owner, credit manager, or office manager. 

However, if you want to negotiate your MasterCard or Visa bill, your mortgage, or the debt you owe to a national retail chain, for example, you start negotiating by calling the company’s customer service number.

If a creditor asks you to put your negotiating request in writing, send the details of your request via certified mail and request a return receipt. That way, you have confirmation that your letter was received, and you will know when to follow up.

Whenever you speak with someone, maintain a record of who you spoke to (name and title), the date of your conversation, what you asked for, how the creditor responded, and the specifics of any agreement you reached. You should also file away all correspondence related to your negotiations that you send or receive.

When you contact a creditor for the first time, explain that you are having financial problems and provide a general explanation of why the problems have occurred. For example:

  • You lost your job.
  • Your child is ill, and you have been saddled with a lot of unreimbursed medical expenses.
  • Your former spouse is not paying you the child support you’re entitled to.
  • You took on too much credit card debt.

Give the creditor confidence that you’ll be able to live up to any agreement you may reach with one another by explaining what you are doing (or have already done) to improve your financial situation and minimize the likelihood that you’ll develop money problems in the future. For example:

  • You are living on a strict budget.
  • You have enrolled in a money-management class.
  • You are working at a second job.
  • Your spouse has taken a job outside the home.

Tell the creditor that you want to continue paying on your debt, but in order to do so, you need the creditor to agree to some changes. Be specific about exactly what you want the creditor to agree to. For example, you would like to pay $200 less each month on your debt or to make interest-only payments for three months.

If you get nowhere with the first person you speak with, end your conversation and try negotiating with someone higher up, like a supervisor or a manager. That person is likely to have more decision-making authority and to be in a position to agree to your request. In fact, when you call a creditor for the first time, you may want to ask the person you speak with if he has the authority to negotiate with you. If that person does not, ask who does.

Some of your creditors may refuse to negotiate directly with you and may indicate that you should contact a credit counseling agency and let it do the negotiating for you. Later in this chapter, we tell you how credit counseling agencies work.

If the person you are negotiating with tries to pressure you into paying more than you can afford, stick to your guns.

Making the Agreement Official: Putting It in Writing

Whenever you and a creditor reach an agreement, ask for the agreement to be put in writing. If the creditor refuses, prepare the agreement yourself, date and sign it, and then send a copy to the creditor. The agreement should include

  • Its duration.
  • All deadlines.
  • All payment amounts.
  • Applicable interest rates.
  • The amount of any fees you have agreed to and under what circumstance you must pay each fee.
  • Everything the creditor has agreed to do or not do. For example, the creditor may agree to waive certain fees, forgive a past-due amount, or not report to the credit bureaus that your account is delinquent.
  • When you and the creditor will be considered in default of the agreement and the consequences of the default.

If a problem develops with your agreement after it is official — if your creditor violates some aspect of the agreement or accuses you of doing the same thing — and you do not have the terms of the agreement in writing, resolving your differences may be difficult. Each of you is apt to have different memories of the agreement details. As a result, you may both have to hire attorneys to help you work out your disagreement, and you may end up in court where a judge will decide what to do.

Before you sign any agreement that you may reach with a creditor, especially if it involves a lot of money or an asset that you do not want to lose, ask a consumer law attorney to review it. You want to be sure that you are adequately protected and that the agreement does not have the potential to create future problems for you.

Don’t hire an attorney until you have found out how much he will charge to do the review, which should not take more than one hour of his time. Most attorneys charge between $100 and $500 per hour for their services, depend- ing on where they practice law and the size of the law firms they work for: Attorneys in metropolitan areas on the East and West coasts tend to charge more than attorneys in rural areas or in the Midwest. Attorneys who work for large firms tend to charge more per hour than attorneys with smaller firms.

If you cannot afford to hire an attorney, you may be able to get help from the Legal Aid Society in your area, which is essentially a law firm for poor people. Also, if there is a law school in your area, it may run a legal clinic, and an attorney or law school student with the clinic can review your agreement for free. Another option is to contact your local or state bar association to find out if it can refer you to a consumer law attorney who does a lot of pro bono work for financially strapped consumers.

After you have a final agreement with a creditor, revise your budget accordingly. When you are ready to contact another creditor, be sure that you pre- pare for your negotiations by working with the revised budget, not with your old one.

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