If you are falling behind on your bills, your phone is probably ringing off the hook with calls from creditors and/or debt collectors. While the last thing you probably want to do is talk with them, you may find that they are willing to work with you. In fact, if you’re wondering how to settle a debt you can’t afford to pay in full, it may be time to negotiate with your creditor or collector. Collectors, specifically, tend to buy debts for pennies on the dollar. Consider, for instance, that one time talk show host John Oliver purchased nearly $15 million of medical debt for less than $60,000 — and went on to forgive it. Most collectors won’t just wave away your debts like Oliver did, sure. But what’s important to note here is that many don’t need to recoup the full amount you owe to reap a profit, so there’s a chance a collector will acquiesce if you try to negotiate a settlement. Creditors, too, may be amenable to reaching an agreement, since the alternative is to write the debt off as a loss.
How do I Negotiate With Creditors?
Keep in in mind, there are certain ramifications associated with agreeing to a debt settlement that’s less than what you owe. While the exact effects on your credit score will vary, depending on your full credit profile, agreeing to pay less than you originally owed can wind up hurting your scores. Still, it may be your best course of action: Allowing a debt to go unpaid can lead to further adverse action from your creditor or collector, like a charge off or judgment. And judgments, specifically, can lead to garnishment of your wages or assets. So, depending on what you owe and what settlement a creditor or collector proposes, the ends may justify the means. Of course, there are some best practices when it comes to debt negotiation. Here are ten tips for negotiating with creditors and collection agencies.
1. Stick to Your Story
The person on the other end doesn’t want to hear all the details about why you’re not able to pay your bills. But they do need to know if you are in a hardship situation and what you are trying to do to get back on track. It’s helpful to come up with a few sentences that you can use consistently when you talk with creditors. These sentences could include:
- “I was very ill, out of work for two months, and now I am trying to get caught up.”
- “My wife was laid off, and I’ve taken a significant cut in pay. She’s looking for a job so we can catch up, but we don’t have any money to pay right now.”
- “My interest rates have doubled and I can no longer keep up. I am meeting with a bankruptcy attorney to see whether I should file.”
Be truthful! If you tell everyone a different story, especially one that’s not true, it’s bound to backfire.
2. Avoid Drama
Try to stay calm, no matter what the person on the other end of the line says. You’ll get nowhere if you lose your temper. If you find yourself losing your cool, just tell the collector you’ll have to talk with them later and hang up. If you need to talk with that representative again, tell them you’d like to record the conversation. That usually keeps them on their best behavior.
3. Ask Questions
If a collector says you’ll be sued, or that you’ll lose property if you don’t pay, just calmly ask for specifics: “When can I expect to be notified of this lawsuit?” Or “When will you take the money from my bank account?” Some of these threats may be illegal, and the more information you have, the better.
4. Take Notes
Have a pen and paper handy so you can take written notes whenever you talk with a collector. Write down the name of the person you talked to, when you talked, and what was discussed. Not only can this help you take the emotion out of the situation, but you’ll also have a record if the creditor or collector broke the law in their attempts to collect.
5. Read (& Save) Your Mail
Don’t throw away mail from your creditors or stuff it in a drawer. Open it, read it, and save it in a file.
6. Know What You Can Afford
Go over your income and expenses with a fine-tooth comb, figure out what you can afford, and only agree to pay a realistic amount. Generally, you can negotiate the best settlement on a debt if you can come up with a lump sum amount to resolve the debt. If you agree to a payment plan, you will likely pay more over time. If you do agree to a payment plan, make sure you understand the total amount you will pay.
7. Deal With Creditors, Not Collectors
If possible, try to work out an agreement with your creditors before a bill is sent to collections. While late payments affect your credit reports and scores, collection accounts can result in even greater damage. By the way, it’s a myth that as long as you are paying something toward a debt (even $5 or $10), it can’t be turned over to a collection agency. Once a debt has been sent to collections, you may have no choice but to deal with the collector.
8. Get it in Writing
When you do come up with a payment arrangement, or a debt settlement letter, get it in writing before you pay a penny. Otherwise, the terms can change and it will be your word against theirs. We’ve heard of consumers being hounded for balances they thought were resolved years before.
9. Get Help When Negotiating With Creditors
If you are having trouble coming up with a repayment plan that works, find out whether a credit counseling agency can help you work something out with your creditors. If it is unlikely you’ll be able to pay back your debts, or if debt collectors are hounding you, request a free consultation with a bankruptcy attorney. Even if you decide not to file, the attorney can tell you what a creditor can and cannot do to collect.
10. Put the Past Behind You
Remember, catching up on a delinquent account, or paying off a collection account, won’t improve your credit unless you can get the creditor to agree to remove the late payments. Otherwise:
- Late payments can stay on your credit report up to 7 years from the original delinquency.
- Charge offs can remain for up to 7 years from the date the creditor wrote the debt off their books as a loss.
- Collections accounts can remain for 7 years plus 180 days from the date of the delinquency immediately ahead of the collection activity.
Still, all hope is not lost. Even if that’s not possible to have negative items removed from your credit reports, you can still begin to build better credit as soon as your debts are resolved. Some newer credit scoring models will even ignore paid collection accounts entirely, but, in all cases, assuming no new negative information emerges, your score should come back up the further and further you get away for all those original delinquency dates.
In the meantime, you can check your credit score every 14 days using Credit.com’s free credit report snapshot. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.