Article originally published May 5th, 2017. Updated October 26th, 2018.
If a debt collector or creditor is calling about a balance you can’t pay in full, the last thing you probably want to do is talk with them. But here’s one reason to pick up the phone: you may find the creditor or collector is willing to negotiate.
Debt collectors tend to buy debts for pennies on the dollar, which means they don’t need to recoup the full amount you owe to reap a profit. As such, there’s a chance one will agree to a settlement. Creditors, too, may be good with reaching an agreement, since the alternative is to write the debt off as a loss.
Of course, there are some best practices when it comes to debt negotiation, including explaining your current money situation, taking notes, and obtaining written confirmation of any settlement you do reach.
Here are ten full tips for negotiating with creditors and collection agencies.
1. Stick to Your Story
The person on the other end of the phone doesn’t want to hear all the details about why you’re not able to pay your bills. However, 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.
- Late paymentscan stay on your credit report up to seven years from the original delinquency.
- Charge-offscan remain for up to seven years from the date the creditor wrote the debt off their books as a loss.
- Collections accountscan remain for seven years plus 180 days from the date of the delinquency immediately ahead of the collection activity.
Still, all hope is not lost. Even if it’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.
Plus, 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 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.
Should I Settle a Debt?
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 — but it still 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 can lead to garnishment of your wages or assets.
Plus, paid collection accounts sometimes weigh less heavily on your credit scores (depending on the credit score model) than unpaid account, especially in the long term. In fact, some newer credit scoring models ignore paid collections entirely. So, depending on what you owe and what settlement a creditor or collector proposes, the ends may justify the means.
Negotiating With Different Types of Creditors
You will find that there are several different types of creditors you have to deal with when it comes to finding a good way to settle your debt. The following are a few of these creditor types and some other useful information you can carry with you into negotiations.
Negotiating Student Loans
You will find that it may be difficult to negotiate when it comes to student loan debt. Therefore, you should consider government programs that will allow you to reduce your monthly payments, extend the repayment length, or cancel some or all of the debt completely.
Negotiating With Mortgage Companies
There are home loan modifications that can help you with monthly payments if you find that you are struggling to keep up or pay what you need to pay. These modifications may be a great solution to finding a way to free up some money for your living expenses.
Negotiating Secured Loans
It is easier for you to negotiate a secured loan over an unsecured loan because the debt has already been secured with collateral. For this type of negotiation, you can lead with bankruptcy if that is the case, have the funds available to make a payment, and focus on the bigger picture; the debt needs to be paid, so how can you negotiate payment?
Negotiating With Credit Card Companies
Negotiating a credit card debt settlement has to be one of the easiest debts that you can negotiate. However, it is still going to take some time to reach a reasonable and comfortable settlement amount agreed upon by yourself and the credit card company. All of the negotiation tactics listed above would be good for this type of negotiation.
Consult With a Credit Counselor
If you find that you have tried all of the tips we have included, but you are not making any progress or are unsure of the steps you need to take for a specific creditor negotiation, it could be in your best interest to seek the services of a credit counselor.
A credit counselor can help individuals throughout the negotiation and debt settlement process while also educating them about the tools that are available to help them reduce and eliminate their debt.
Dealing with a debt collector? We’ve got 50 tips right here to help you out. And, if you have any questions about negotiating with creditors and collectors, feel free to ask away in the comments section below. One of our credit experts will try to get back to you.