Negotiating Down Debt

Written By Katie Johnson, WIN Staff

Sometimes life throws you a curve-ball and suddenly it may be difficult to make ends meet financially.  This feeling of losing yourself in a sea of debt is understandably terrifying and also more common than you might realize.   According to a 2018 study by Northwestern Mutual about 1 in every 4 Americans is living in debt, with an average debt of $38,000 per person, excluding home mortgages.  If you find yourself in a situation where you cannot make payments on debt or creditors are beginning to call, the first step is realizing there are solutions and that negotiation can help.  Here step-by-step guide for how to navigate negotiating debt to better equip you with the confidence you need to swim to the other side. 

Step 1: Know Your Rights

Every creditor and collector is held to the Fair Debt Collection Practices Act but this does not change the fact that the debt collector's goal is to make as much money as possible from collecting the debt. Collectors do this in two ways: by adding fees on the debt as allowed by state law, or debt buyers will earn a profit on debts they've purchased for just pennies on the dollar.  Collectors only make money when consumers pay the debt. They can't seize property or take money from consumer bank accounts unless they sue and obtain a court judgment and permission to garnish the customer’s wages. 

Step 2: Get Organized

Go over all the paperwork about the debt such as payment history, the original loan agreement, and any late payment notices.  If you're missing any paperwork, you can usually get copies from your creditor. Also before you pay anything to a debt collector be sure that the debt is legitimate and belongs to you. Debt collectors are legally required to send you a debt validation letter, which outlines what the debt is and how much you owe. If you’re still uncertain about the debt you’re being asked to pay, you can send the debt collector a Debt Verification Letter requesting more information. You don’t want to pay a sum you don’t owe or accidentally revive an old debt that might be past the statute of limitations, or even worse, fall victim to a scam.  Having all the proper paperwork can keep you focused and prepared. 

Step 3: Know When to Act

Negotiating down your debt only happens if you have been unable to pay for at least 90 days. The most success comes after 5 months (right before it’s sent to a collection agency). But that does not mean you should not be on top of your debts!  It’s likely that creditors or collection companies have been or will be calling you every day. The easiest way to start negotiations is by saying you wish to settle the debt. If they have not been calling, you can initiate contact. This may sound intimidating, but it gives you control. 

Step 4: Have a Strategy

General strategy is to pay as little as possible.  Prefer a lump sum over regular payments. Be sure that you can pay this lump sum in a reasonable period.  Start as low as possible. The creditor will likely counter your offer thereby raising the amount. The strategy works best for debts that are already delinquent. Creditors, seeing missed payments stacking up, may be open to a settlement because partial payment is better than no payment at all. 

You’ll need to negotiate two things: how much you can pay and how it’ll be reported on your credit cards. For payment, you may be able to settle your debts for 40 - 50% of what your owe. Think about what you can pay as a concrete dollar amount.  If you know you can only pay 50% of your original debt, try offering around 30%. Avoid agreeing to pay an amount you can’t afford. 

Settled debt is usually noted on your credit reports as “settled” or “paid settled” - instead try to get the creditor to mark the settled account “paid as agreed” to minimize damage.  The most important thing about renegotiating the payment terms of the debt is to free up money for other expenses. 

Step 5: While On the Call

Keep in mind that settling a debt will require persistence and persuasion. You may not be able to resolve the settlement in one go - it may take a few calls to find an agreement that works for both you and your creditor.  Approach the call with a clear narrative.  Explain that you cannot afford your regular payment and briefly describe the reasons you are unable to pay - simply being honest about your situation may work in your favor. Once you’ve explained your situation, ask the representative if it’s possible to change the terms of your repayment to the amount you can afford. 

They may be able to offer you:

• Reduced monthly payment

• Lower interest rate

• Acceptance of less debt than you owe (be sure to know the repercussions of this such as having to pay taxes on the forgiven amount)

Be sure to have a pleasant and positive tone when dealing with creditors.  People are more willing to work with those who have a good attitude. Confidence is key.  Concisely portraying the financial hardship that made you unable to pay your bills can make the creditor more sympathetic to your case.  Avoid discussing your income or other financial obligations. Be aware that debt collectors have access to your credit report and may use the information in it, such as new loans or timely payments on your other accounts, to push you into paying more than you've offered.  Remain in control of the conversation and stand firm in what you're willing and able to pay. Don't let a collector bully you into letting your other financial obligations slide. 

Call again to get a new representative or try asking for a manager if you’re not making any progress. But be sure to keep notes of all your communications with the debt collectors. Note all details about the conversation such as: the date and time of the call and the name of who you spoke to. Be sure not to agree to a loan payment that is higher than you can afford to pay.

Step 6: Get it in Writing

Be sure to get a settlement agreement in writing. This agreement will protect you if the creditor changes their mind and demands payment of the remaining amount. A written agreement holds both parties accountable. They have to honor the agreement, but if you miss a payment, the creditor can retract the settlement agreement, and you’ll be back where you started. Once an agreement is determined, have the creditor send you the agreement in writing, check for any errors, and be sure to keep a copy for yourself.

In Conclusion

Knowing how to negotiate with debt collectors will help you work out a payment solution that helps you take care of the debt collection account for good. Just remember to act confidently and decisively, expect respect and demand it from the creditor as well, don’t agree to any terms unless you understand what is expected of you completely, and finally, don’t agree to anything until you see it in writing.

Every creditor is different - some are more willing to settle than others. Negotiating debt settlement isn’t the only option. If you’re not making progress with your creditor, consider other debt-relief options such as Chapter 7 bankruptcy or a debt management plan.