Tips for Negotiating With Creditors to Settle Your Debt

If you’re struggling with debt, negotiating with your creditors can be a good option to lower your monthly payments or settle your debts for less than you owe. Here are some tips to help you negotiate successfully with creditors:

Determine if Negotiation is Right for You

Before you start negotiating, think about whether it’s the best option for your situation. Negotiating and settling debt can negatively impact your credit score, so weigh the pros and cons. Make sure you have enough cash on hand to offer lump sum settlements to creditors. And consider whether you’re comfortable negotiating – it takes confidence and persistence. If you’re unsure, talk to a nonprofit credit counseling agency first.

Get Organized

Gather all your financial documents in one place. Make a list of all debts, who you owe, account numbers, interest rates, monthly payments, etc. Calculate your total debts and monthly payments. Review your budget to see how much you can realistically afford to pay each month. Having all this information in one place will make negotiations easier.

Prioritize Your Debts

Not all debts are equal. Prioritize debts that have high interest rates, like credit cards. Pay the minimum on lower interest debts while you focus on negotiating the high rate debts first. Secured debts like auto loans and mortgages should also be kept current if possible, since defaulting can result in repossession.

Practice What You’ll Say

Write out talking points before you call creditors. Explain your financial hardship and desire to resolve your debt. Have a proposed settlement offer in mind based on what you can afford. Rehearse the call with a friend so you sound natural. The more prepared you are, the more confident you’ll feel negotiating.

Make the Call

When you call, ask for the creditor’s settlement or “loss mitigation” department. Explain your situation calmly and be prepared to share details to back it up. Don’t get confrontational – the creditor will be more willing to negotiate if you’re upfront but polite. Take notes on who you speak with and next steps.

Start Low

Creditors likely won’t accept your first offer, so start lower than you’re willing to pay. If you can afford 50% of the debt, offer 30% as your first proposal. Be prepared to make concessions to get to a middle ground. Just don’t agree to payments you can’t actually make – it will just prolong the situation.

Get it in Writing

Don’t agree to anything over the phone. Insist any deal is put in writing before you pay anything. Get specifics like settlement amounts, due dates, ways to pay, and ramifications if you default. Never send payment until you have a written document signed by the creditor.

Consider Debt Settlement Companies

You may prefer to have a professional negotiate for you. Debt settlement companies charge fees but handle the negotiations and have established relationships with creditors. Just be sure to use an accredited, reputable company. Get everything in writing first and read the fine print. And know that fees mean settling debt yourself costs less.

Pay on Time

Once a deal is reached, be sure to make the agreed upon payments on time. Defaulting on the negotiated settlement can void the deal and reset the debt to the full, original amount. Communicate with creditors if you experience continued hardship – they may adjust payment plans if you ask.

Be Prepared for Tax Implications

If a creditor forgives $600 or more of debt, you may owe taxes on that amount. Creditors are required to report forgiven debt to the IRS. So before settling, understand the potential tax consequences.

Expect Credit Score Impacts

Your credit score will likely drop when settling debt, since your credit report will show the settled status. The impact depends on your current score and debts settled. But a lower score means higher interest rates, so work to rebuild your credit over time.

Consider Alternatives

Debt settlement is just one option. Nonprofit credit counseling provides free education and debt management plans. Bankruptcy clears most debts but damages credit for years. Analyze all your choices to determine the best solution for your unique situation.

Get Additional Support

Negotiating with creditors yourself can be stressful. Lean on family and friends for moral support. Seek free debt and budget counseling from reputable nonprofits. And allow yourself grace – debt struggles happen, but you can take control of your finances again.