How to Negotiate with Creditors on Unsecured Debt
The idea of talking to creditors when bills are past due can be difficult but having a strategy will help you better prepare for negotiating a better offer to help you get back on track. Here's what you should know.
Falling behind on bills can happen to anyone. Sometimes a large unexpected medical bill or losing a job can make it difficult to keep up with daily expenses let alone payments on credit cards or personal loans. While ignoring calls from creditors can seem like an easy option, doing so can result in making matters even worse by sending your debt to collections. Luckily, there are some ways to negotiate with your creditors for a better offer that will save you money and headaches down the line. Here are a few steps you can take to get started on talking to your creditors.
Get organized
Before talking to your creditors, be sure you have all of the paperwork corresponding to the debt you’re looking to settle such as the terms and agreements, payment history, and any late notices you’ve received regarding your account. Being prepared with this information will make your phone calls a lot easier.
Research your options
If you have multiple accounts that are in need of negotiating, you may be considering bankruptcy. While bankruptcy should be used as the last resort, it is an option that can grant you some relief and help you start on a fresh financial path.
You could also let creditors know that you’re considering bankruptcy as an option, which can sometimes help you obtain a lower settlement offer. Creditors know that they risk getting the debt discharged and receiving zero dollars, so chances are they’ll take something rather than nothing. But if you do plan on filing for bankruptcy, don’t settle any debt that can be discharged in the bankruptcy.
Know what you can afford
It may be tempting to quickly pay off a debt that’s been giving you trouble by using all of the funds you have but it’s important to take into consideration all of your expenses before doing so. Agreeing to pay off a debt right away could come at the expense of defaulting on more important items like a mortgage or car payment.
Take a look at your net income and your total expenses and factor in any other costs that require your attention and figure out how much you have to put towards the debt. This number will help you avoid any offer you won’t realistically stick to or actually pay.
Call your creditors
Once you know the amount you can actually afford to pay, you can start the negotiating process. The representative will most likely let you know that you have to pay the full amount but communicating why you can’t afford to pay the loan can open up some options like:
- Lowering your monthly payment by giving you a longer repayment period
- A lower interest rate
- Removing late fees
- Settling for less than total amount owed
Whether you’re looking to cut down on a high monthly payment to help you pay off other debts or wishing to settle what you owe for less, you should be aware of the negative effects on your credit report when taking up these offers. New payment arrangements and settlements for less than the amount owed will show up on your credit report and could affect your credit opportunities down the line.
Try and pay 50% or less of total debt
If you’re looking to settle a debt, begin at 15% of the total debt and aim to go lower. If possible, having cash on hand can sometimes get creditors to settle at around 30 to 50% since they much prefer an immediate payment rather than waiting for smaller installments.
Stay focused and persistent
Getting a yes from a creditor will most likely take several calls so it’s important to keep polite and patient during the process. You may encounter representatives that will be difficult to negotiate with, but stick with your reason as to why you can’t make your payments. If the representative remains unhelpful, ask to speak to a supervisor.
If you are able to come to an agreement that aligns with what you can afford, be sure to get the new terms and payment agreement in writing.
Need more help?
Perhaps your debt situation requires a lot more help, if that’s the case, non-profit credit counseling could be another solution. Find reputable credit counselors and avoid scammers by visiting the Federal Trade Commission website to learn more. The Consumer Financial Protection Bureau is also a valuable resource and provides negotiation tips and information about your rights.