Debt negotiation is working with your creditors to make your debt load more manageable. There are several ways to negotiate debts. You can speak with your creditors directly and try to negotiate more favorable repayment terms, a different payment schedule, or a discounted lump sum settlement. You will have to contact each creditor individually, and some or all of your creditors may refuse to negotiate (they are under no legal obligation to negotiate your debts).
Many creditors will agree to settle an account for less than the full balance owing even though they are not obligated to accept less than the full amount. But be forewarned that settling an account for less than the full balance will have a negative impact your credit score even if the creditor says it will not.
If you deal directly with your creditors, you can ask them to do any or all of the following:
• Lower your interest rate
• Stop late fees
• Eliminate over-the-limit charges
• Upgrade your account to “current” status
• Remove a negative mark from your credit
• Accept a partial payment in lieu of the total due
Remember that even though you have the right to request any or all of the above mentioned actions, a creditor is under no obligation to agree to any changes. It is not uncommon for a creditor to require that the account be closed and/or a significant cash payment be made towards the outstanding balance before agreeing to any of your requests.
If you choose to negotiate any change of terms or settlement with a creditor, make sure you get everything in writing on company letterhead, signed by an authorized representative of the company. If it isn’t in writing, it probably will not happen.
Many creditors will want direct access to your bank account to ACH (automatically withdraw) the settlement amount. You should never allow a creditor direct access to any of your accounts. Direct access authorizations are usually in perpetuity – not one time events. They can also be used on any date the creditor chooses to use them regardless of when they told you they would take funds from your account. This often leads to overdrawn accounts and NSF (insufficient funds) fees from your bank.
If contacting your creditors directly is something you’re not comfortable doing, you can enlist the services of a Credit Counseling Agency (CCA). CCAs negotiate with unsecured creditors on your behalf, and seek the same concessions that we discussed above. Most CCAs will conduct a brief interview, (online, over the telephone, or in person), to ask about your debts and your ability to pay. If you sign up, the CCA establishes a monthly payment plan, called a debt management plan (DMP), and you make payments directly to the CCA. The CCA then disburses payments to each creditor in the plan. At least for credit cards, most plans generally follow the 60/60 rule — you agree to pay 60% of the balance within no more than 60 months. Plans generally take 2 to 4 years to complete.
Several words of caution about CCAs who offer debt negation and/or debt management services: Many are under Federal and State investigation for fraudulent practices. Many CCAs are unlicensed even though they are non-profit corporations. Most CCAs are funded by “fair share” contributions, which are commission-like payments by the creditors based on how much the CCA recovers from the debtor. Unfortunately, some CCAs, anxious to get their “fair share” payments, encourage debtors to enter debt management plans that are doomed to fail, leaving the debtor worse off than he or she started.
There are some potential disadvantages to entering into a debt management plan. Creditors are not required to participate in the payment plan, so you may be left to negotiate and pay some debts on your own. Participation in a debt management plan will negatively impact your credit rating. Most CCAs charge upfront fees to participate in the plan. Entering into a debt negotiation and management plan may not prevent a creditor from sending the unpaid portion of your debt to a collection agency.