Shrink Your Debt

In general, the best choices for debt negotiation and settlement are unsecured loans and credit cards. Since there is no collateral that can be attached to satisfy the debt, creditors are more likely to negotiate to avoid writing off the entire debt. The two most common approaches for debt negotiation are to pay a lump sum that is less than the total amount owed, or to restructure the payment schedule with lower monthly payments.

With the first option, you negotiate a reduced, upfront payment that permanently cancels the entire debt. Many creditors will only accept this approach because their goal is to erase the debt from their books without having to wait an extended period. If you are already struggling with your current debts, it may be difficult to raise the cash necessary to accomplish this. In which case, you might consider the second option to reduce the principal and possibly stretch out the payments.

Contacting Creditors
Many companies specialize in debt negotiation and settlement assistance. While some of them are very reputable and do achieve results, with some advance planning and strategic thinking, you can do the negotiating for yourself.

The first step is to contact the creditor and ask to speak with a manager authorized to negotiate. Briefly explain your circumstances, and make an appointment for a personal meeting if geographically feasible. A face-to-face meeting demonstrates that you are serious about resolving your problem, and allows you the undivided attention of the person you are dealing with. It’s also a good idea to take notes of all conversations, regardless of how they are conducted. Sign and date all your notes.

Negotiation Strategy
Do not threaten to close your accounts if you are having trouble paying your bills. You will be perceived as someone that has shirked their responsibilities and opted for the easy way out. The best approach is to deal directly and openly with your creditors in order to find a mutually acceptable solution.

Your first offer should be less than you are willing and able to pay, to allow room to maneuver and counteroffer if necessary. With the prospect of rising defaults due to a faltering economy, creditors are more likely to deal and this leverage should be used to your advantage. The old saying “a bird in the hand is worth two in the bush” definitely applies to debt settlement.

Many creditors sell delinquent accounts to collection agencies, usually for a fraction of the account value. Knowing this puts you in a position to make a lowball offer and judge the reaction of the agency. All the agency needs to do to turn a profit is to settle for something slightly above the amount they paid for your account. Keep this in mind as you try to reach a settlement. Be patient and firm, and resist the temptation to raise your offer during the negotiation process. You can ask that the collection be removed from your credit file as a condition of settlement, but that will not erase the detrimental impact of the original creditor.

Unsecured creditors face the risk of getting nothing if you decide to declare bankruptcy. While there is no way to predict what each creditor will accept in lieu of full payment, your target should be to pay one-third to two-thirds of the outstanding balance, depending on your particular circumstances. Many creditors will be very tempted to accept a 50-50 split as the final settlement, even if it takes a few counteroffers to arrive at that conclusion.

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