You should definitely consider negotiating with your creditors. Especially when the whole economy is going through tough times, creditors may be willing to work with you, realizing that they are better off getting something now, rather than less or nothing later. Unsecured creditors, like credit card companies, for example may be willing to take 20% to 70% less to apy off your delinquent debt because they know you can probably wipe out all or most of that debt in bankruptcy. But tread cautiously. The creditor is likely to ask for something in exchange, such as getting a cosigner (who will be liable for the debt if you don’t pay, even if you erase the debt in bankruptcy), waiving the statute of limitations (the number of years the lender has to sue you if you stop making payments), paying higher interst, paying for a longer period, giving a security interest in you house or car (possibly turning an unsecured debt into a secured debt), or waiving your right to sue for illegal conduct by the creditor in the initial transaction. Agreeing to terms like these could ultimately make your situation worse. If you are asked to sign anything you don’t understand or have concerns about, don’t sing. First, consult with a lawyer.
Tips on Negotiating
- Identify your bottom line. If you owe a doctor $1,100 and are unwilling to pay more than $600 on the debt over six months’ time, don’t agree to pay more.
- Try to identify the creditor’s bottom line. If a bank offers to waive two months’ interest as long as you pay the principal on your car loan, that may mean that the bank will waive three or four months’ interest. Push it.
- Bill collectors lie a lot. If they think you can pay $100, they will vow that $100 is the lowest amount they can accept. Don’t believe them.
- Explain your financial problems. Be bleak, but don’t lie.
- Offer a lump sum to pay off the debt. If the creditor will settle for 30% to 70% of the total debt if you pay in a lump sum, but will insist on 100% if you pay over time, try to get the money to pay the reduced amount and settle the matter. Ask that they unpaid debt and negative information in your credit file associated with the debt be removed from your credit file in exchange for the settlement. Creditors may not agree, but if they do, be sure to get written confirmation that the debt will be considered as paid in full when you pay the agreed amount.
- Offer a payment plan to reduce your payments and the total you owe. If you can’t pay a lump sum to settle the debt, but the creditor agrees to put you on a new schedule for repaying the debt, consider asking the creditor to “reage” your account, which makes the current month the first repayment month and stops showing late payments in your credit report. Sometimes the creditor won’t reage the account until you make two or three monthly payments first. But think carefully before asking a creditor to reage the account, especially if it’s been reported as delinquent for some time. Reaging means that the account will appear on your credit report for seven years after the repayment date, rather than seven years after the earlier delinquency date. Some consumer advocates argue that reaging an account is a bad idea for this reason.
- Don’t split the difference. If you offer a low amount to settle a debt and the creditor proposes that you split the difference between the creditor’s higher demand and your offer, don’t agree to it. Treat the split the difference number as the new top and propose an amount between that and your original offer.
- Mention bankruptcy. If bankruptcy is an option you are considering, you may want to mention that you may have no option but to file for bankruptcy if the creditor refuses to make concessions. But think carefully before doing this. In most cases, a “mentioned bankruptcy” notation will immediately be added to your account file with that creditor. If you incur any additional debt after that date – even with a different creditor – you will have a very difficult time eliminating that debt in bankruptcy if you do eventually file. The creditor will argue that once you mentioned bankruptcy, you had no intention of repaying your bills and that all debts you incurred after that date should not be wiped out. And a bankruptcy judge is likely to agree.
- Get everything in writing and follow up conversations with a written letter. Whatever your creditor agrees to – you must have it in writing. You should also follow up any conversations with a written letter stating the date of the conversation, the person with whom you spoke and the outcome of your conversation.
- Ask for help in negotiating. If you don’t feel comfortable negotiating, ask a friend or relative or hire a lawyer to negotiate on your behalf. As long as your negotiator knows and will keep to your bottom line, it will be hard for the creditor to shame or guilt the negotiator into agreeing that you will pay more. Some creditors are reluctant to negotiate with anyone other than you or your lawyer. If need be, prepare a power of attorney giving your negotiator the right to handle your debts on your behalf.
Discharge of indebtedness in bankruptcy is not taxable. However, outside of bankruptcy, such as in debt settlement, it is. Still, there’s one huge exception to this: insolvency. If your liabilities (debts) exceed your assets, you’ll just file a Form 982 (“Reduction of Tax Attributes Due to Discharge of Indebtedness”) at tax time. If you demonstrate insolvency, you won’t pay tax on the discharged debt. Warning: You should have a good tax preparer or, preferably, a CPA help you with this.