How to Negotiate Debt Obligations with Creditors

(August 27th, 2007)

If creditors do not receive on time payments from you, they will often report your delinquency status to the major Credit Bureaus (Experian, Equifax and TransUnion). But what if you are willing to make payments to the creditors, but not the full amount they are asking for? For example, you have $15,000 of credit card debt and your minimum monthly payment is $375. However, you can only afford to pay $200 a month at the moment. How do you negotiate with your creditors so as to get the payment terms to your advantage and get negative items deleted off your credit report? That is the purpose of this article.

Steps to Negotiate Debt with Creditors

i) Sit down with your creditor and explain your situation. Give him a brief summary of your finances, family commitments and other debts you are making payments towards. Persuade the creditor that you really want to clean up your credit report and remove all negative items on it. It helps in this case if you have a long history of making on time regular payments, rather than defaulting on them.

ii) Tell the creditor that you have been a long time valued customer and want to keep a good relationship with them. Tell them you have made __# of on time payments in the past and would like to keep doing so. Ask them to remove negative entries off your credit report so you can get better loan terms (lower interest rate) and can enhance your ability to keep up with payments.

iii) If the creditor says they cannot help you in this matter, ask to speak to a supervisor. You will probably get this response from customer service representatives who are making $10/hour and already stressed out on the job. They are not willing to take on more stress and deal with you.

iv) Talk to the supervisor. If the supervisor says the account has been charged off, ask for the name of the collection agency that has bought out this junk debt. If the supervisor says the account is in collection, here are two ways to negotiate a debt settlement:

1) Offer a lump sum payment to settle the debt and ask the creditor to remove the negative entry from your credit report. For example, if you owe $10,000 of credit card debt and offer to settle for 65%, you would pay the creditor $6500 and he would remove the negative entry from your credit report.

2) If you cannot come up with the full lump sum payment ($6500 in the above example), offer a repayment plan where you make a certain amount of monthly payments every month until the account is paid off in full. Upon getting paid in full, the creditor promises to remove any negative entries off your credit report. Make sure you have all this correspondence in writing.

Technical Tips for Successful Debt Negotiation

i) Any settlements you achieve, make sure you get them in writing. Keep copies of all your communication with your creditors including letters, phone calls notes, etc for future reference.

ii) Negotiate to settle debts with those creditors with the lowest balance first. Once those debts are fully paid off, negotiate debt with creditors with the next highest debt. Go from smaller debt levels to higher ones. Read this article on Debt Elimination to learn more about this Debt Snowball Elimination technique.

iii) Create your monthly spending budget to show to your creditors so that they can understand your financial situation better. Read this article on Debt Reduction to learn more about evaluating your debt, creating a household budget and getting out of debt.

iv) Don't ask the creditor what amounts they are willing to accept. Tell them how much you can afford to pay. Never offer to pay more than what you can afford.

v) Many creditors are willing to accept a lump sum debt settlement for as low as 70% of the original amount. Rather than getting reduced monthly payments from you (who knows whether you will default on them or not?), they will want to take a one time reduced settlement.

vi) Negotiate debt with the original creditor and not the debt collection agency. This means you have to be fast in reacting to debt collection calls. For example, if the original creditor calls you regarding payment, do not ignore them and wait. They may sell this debt off to a junk debt buyer and matters will get even worse.

vii) Never over-stretch yourself in negotiating your debts. Tell the creditor what you CAN do, not what you CAN'T do!

viii) Show the creditor your determination to take control of your financial life, pay off your debts and regain a good credit score again.

Mental Tips for Successful Debt Negotiation

i) If the creditor refuses to settle debts the first time, do not give up. Wait for 1 month and present the settlement again. As time passes by, the creditor may realize it is in their best interests to settle the debt with you.

ii) Be specific about your debt reduction goals. Tell them specifically what you want to achieve (in this case you want to reduce your debts and clean up your credit score). If creditors do not understand your goals, they will not respond to your desires.

iii) Present a win-win situation to your creditors. Tell them that if you negotiate a debt settlement, they will have to avoid going through the collection agencies and the courts. This settlement will also help you repair your credit score. This is a win-win situation for you both. Do NOT present a settlement where you are the winner and the creditor is the loser, you will not succeed at this.

iv) Be polite when negotiating debt with creditors. This is because creditors come across lots of difficult and rude customers, you will be better off if you are polite and understanding.