How to Negotiate with Creditors

Negotiating a debt with your creditors can be complicated, hence there are many debt negotiation firm which offer debt negotiation services to assist with debt negotiation advice. Your interests and the interests of your creditors are directly adverse in a creditor debt negotiation: you want to pay as little as possible to settle the debt, while your creditors want to collect as much as possible of what you owe. In order to make the negotiation process easier, it is important to understand why each your creditor is willing to negotiate so that you can take advantage of that knowledge to maximize your chances of settling your debt for less then what is owed.

Step One In Negotiating Debt: Verify Debt

In some cases, the first step to negotiating to settle debt with creditor is to verify the debt if there are any doubts about whether you actually owe the money. If the company is your original credit card holder, this step is not usually important. However, when working with a collection agency, it is important to ensure that they actually purchased the debt from your original creditor and that they are legally entitled to collect this money from you.

Proof of a valid debt may include account statements, a copy of your original credit card application or loan agreement, or payment records. If the collector cannot verify the debt, in some cases the Fair Debt Collection Practices Act mandates that you do not have to pay the debt.

Step Two in Negotiating Debt: Time Your Negotiations

Credit card companies will not negotiate debt with you when you are current on payments, as they have no reason to believe that you will default. Creditors only settle debt for less then they amount owed if they are afraid they will collect nothing, either because you will declare bankruptcy or because you will become insolvent and unable to pay entirely. Credit card debt consolidation services are also available in these situations. The best debt negotiation advice to give is to negotiate your debt when you are at least 90 days behind on your payments, but prior to falling six months behind. Many creditors sell your debt to a collection agency once you fall six months or more behind on your payments, and you will no longer be able to negotiate the debt with the original creditor once the debt is sold.

During this 90-day period, you should be saving the money you would have made on your credit card payments, as well as any other money you can. Most creditors are more inclined to accept a debt settlement offer if it is a lump sum offer, which means you will need a large sum of cash to offer.

Understand that falling behind on your payments will result in you receiving calls from collectors. Know the Fair Debt Collections Practices Act laws which restrict the times when creditors can call your home, and place other restrictions on what collectors can do to try to collect a debt. If you are uncertain about your rights, consult an attorney with experience in debt negotiation, especially if you feel you are being harassed. Creditors may not break the law and use unfair debt collection techniques, and if they do, they may be subject to litigation.

Step Three: Make an Offer

Most credit card debt settles for between 30 and 50% of the amount owed. In rare cases, debt may settle for much less or much more. Creditors in general are more likely to accept a single lump sum payment as satisfaction of a debt, however in some cases they may be willing to work out a payment plan if you are unable to come up with the money in full.

All offers should be made in writing. If you are uncertain about who to make an offer to or how to structure your offer, you should consult with an attorney. You will want to ensure that the offer states that you are offering $X as payment in full, or as full satisfaction of your debt.

Do not accept any over-the-phone offers and do not send any money on the basis of an oral or verbal agreement. All debt negotiations and debt settlement plans must be in writing, in case there is a legal question regarding what was owed or what the terms of the settlement were.

Step Four: Make Your Payment(s)

You should only make payments after you have a signed written agreement. In most cases, it is a good idea to pay via a money order, cashiers check or personal check.

After The Settlement

Your credit will be adversely affected by debt settlement. Your credit report will reflect the late payments made during settlement negotiations, and the settlement will be reported as "settled" instead of "paid in full" on your credit report. Creditors also usually close accounts when you settle a debt, so your credit report will report "Closed by Creditor."

Many states consider the forgiven amount of debt to be taxable income. You will receive a 1099 Miscellaneous Income form and have to pay tax on the amount of forgiven debt (the difference between what you owed and what you paid.)

Ensure that you keep records of the debt settlement agreement and payments made, including cancelled checks. In rare cases, credit card companies have sold settled debt to collectors who then try to collect on the unpaid balance. You will need to have proof of the debt settlement agreement in the event this occurs.

Finding Legal Help

The debt settlement process can be complex, and it is important to protect your rights. If you feel you are being harassed by creditors or are not certain about how to structure a debt settlement offer, you should contact an attorney who specializes in debt settlement or debt negotiation.