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American consumers owe trillions of dollars on mortgages, credit cards, auto loans and other types of accounts. If you’re one of them, you know how stressful it can be to make regular monthly payments. You may even fall behind once in a while, prompting your phone to ring off the hook with calls from collection agencies.
The good news is that you have options. You don’t have to put up with constant collection calls or resign yourself to a life filled with debt. Learn how to negotiate with debt collectors to improve your financial situation.
What you need to know about debt negotiation
When you open a credit card or take out a loan, you agree to make regular payments until you’ve paid back your original balance plus interest. If your financial circumstances change, however, it may be difficult to make your monthly payments.
What is debt negotiation?
Fortunately, you may be able to negotiate with your creditors. In many cases, debt negotiation involves convincing your creditors to accept less than the amount you owe. This is known as a debt settlement.
For example, if you owe $1,000 on a credit card, you may be able to negotiate a settlement of $600. Once the creditor receives your $600 payment, they’ll close your account and cease further collection efforts. In this case, negotiating a debt settlement is beneficial because it saves you $400. It also helps you avoid the stress of receiving constant collection calls.
Even if you can’t negotiate a settlement, you may be able to negotiate better account terms. For example, if your current minimum payment is $100 per month, you may be able to negotiate that down to $50 per month. You can use the extra $50 to pay off other debts or cover some of your monthly expenses.
Effects of debt settlement
Note that debt settlement doesn’t make negative items disappear from your credit reports. Creditors will still be able to see that you made late payments or missed some of your scheduled payments.
Additionally, debt settlement may have some tax implications. The Internal Revenue Service classifies canceled or forgiven debt as taxable income. This means you may have to pay taxes on the difference between your original balance and your settlement amount.
For example, if you settle a $1,500 debt for $800, you may have to pay income tax on the $700 difference. If you’re concerned about the tax consequences of debt settlement, speak with a certified public accountant or tax attorney.
How to negotiate with debt collectors in 10 steps
Now that you understand the purpose of negotiating with your creditors, you’re ready to get started. Here’s how to negotiate with debt collectors in just a few simple steps.
1. Explain your circumstances
When you contact a collection agency or an original creditor, be prepared to explain why you haven’t been able to make your payments. Don’t exaggerate—just give a factual account of what’s happening. For example, if you lost your job, let the collection agency know you don’t have any wages coming in.
2. Keep a clear head
It’s natural to be stressed about your financial difficulties, but don’t let that stress bleed into your conversations with debt collectors. Stay calm and be clear about what you want. Let the collection agent know if you want to settle your debt, negotiate a lower interest rate or get a little extra time to pay.
3. Save up for a settlement
If you’re aiming to settle a debt for less than the amount owed, it’s helpful to save up some cash before you contact the collection agency. You may be able to negotiate a much lower settlement if you agree to pay immediately.
For your protection, avoid giving collection agencies access to your bank account. If possible, pay the settlement with a money order or certified check. Make sure you get the agreement in writing before you submit the payment. Otherwise, the collection agent may go back on their word, causing collection efforts to continue.
4. Have a plan in mind
Before you contact a creditor, know exactly what you want to get out of the conversation. For example, if you want to reduce your monthly payment, you need to know how much you can afford to pay. Knowing what you want reduces the risk that a collection agent will talk you into accepting unfavorable settlement terms.
5. Negotiate better terms if the debt collector won’t settle
Some collectors insist on collecting the full amount owed, no matter what kind of financial problems you’re having. If you encounter one of them, be prepared to negotiate the terms of your debt. You may be able to get a lower interest rate or request more time to pay your balance.
6. Be honest about what might happen
Creditors are more willing to compromise if there’s a chance you’ll have to file bankruptcy or stop paying your bills. If you’re in a dire financial situation, be honest with the collection agent. They may be willing to settle for a low amount rather than risk having the debt wiped away in a bankruptcy case.
7. Never give up
Not all creditors are willing to “play ball” right away. You may have to call several times before you connect with someone who’s willing to help you. If this happens, don’t give up. You have to be persistent.
8. Document everything
When you speak with a creditor, note the date and time of your call, the name of the agent you’re speaking with and their agent ID, if applicable. It’s also helpful to write down what the agent says.
If you have trouble taking notes, consider recording each call. Just make sure you understand your state’s laws regarding consent. In a one-party state, you can record a conversation as long as you’re a party to the conversation. You don’t need to let the other person know you’re recording.
In all-party states, every party involved in the phone call must give their consent for recording. This means you have to notify the collection agent that you’re recording the call. Note that a collection agency may be located in a state other than your own, so you may have to get the other party’s consent even if you live in a one-party state.
9. Follow through on your commitment
If you tell a collection agent you’re going to send in a money order, do so as soon as possible. Creditors are more willing to work with you when you follow through on your commitments. If your circumstances change, contact the creditor right away to negotiate new settlement terms or let them know you need a little more time to pay.
10. Consider working with an attorney or a credit counseling agency
You can negotiate with creditors on your own, but many people feel more comfortable having someone do it on their behalf. If you’re one of them, consider hiring an attorney or working with a nonprofit consumer credit counseling agency. Legal professionals and credit counselors understand the ins and outs of the law, so they may be able to negotiate better terms than you’d get on your own.
What if a creditor won’t negotiate with you?
Some creditors are unwilling to negotiate with consumers who are going through tough times. If you encounter one, you may benefit from debt consolidation or bankruptcy. Talk with a licensed attorney to determine if either option is right for you. Lexington Law has extensive experience helping consumers file disputes with the major credit bureaus and improve their credit. You can get your free credit assessment today to see if you have any collection accounts on your credit report hurting your credit.
Note: The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.