Everything you need to know about negotiating your debt

Debt has always been easier to create than it is to undo. The system isn’t exactly rigged, but a lot of time, effort, and money are spent in the pursuit of your precious dollars and cents. So if you look up one day to find that your debt is simply more than you can manage, you’re not alone.

Now, when it comes time to repay your debts, your first thought may be, “Do I really have to pay all of this back?”

The answer to that is, “Well…it depends.”

If you want to pay back less than what you owe, then you’re talking about negotiating with a creditor. And if you’re talking about negotiating on your debts, here’s what you need to know.

Most original creditors aren’t interested in negotiating your debt

Your credit card company is very unlikely to offer to forgive any amount of your debt. Same goes for most lenders, especially when the loan is secured with real property (like a house or a car).

Most major creditors may be able to offer some form of short-term hardship program, and some may even be able to reduce your interest rate if you make the request, but if you’re hoping to get your debt reduced or completely absolved, unfortunately you’re out of luck.

You can negotiate with a debt collector, but it may come with a price

A debt collector is much more likely to be willing to discuss a reduced payoff of your debt. This is called a settlement.

The trouble with debt settlement is always twofold: your credit score is likely to be damaged and you’ll have to pay taxes on the forgiven portion of the debt, so you’ll need to weigh those two outcomes before making a decision.

Debt collectors are trying to make a profit

The reason debt collectors are willing to accept less than the debt’s full amount is because, generally speaking, debt collectors purchase debts from the original creditor at a fraction of the original value. Their goal is to maximize the profit on any given debt.

So while they’d prefer to get the full amount, as long as they can exceed their investment they’re very willing to talk. Keep this in mind when attempting to negotiate with a debt collector. They probably won’t agree to a settlement that results in a loss for them, but if the choice is between making a small profit or nothing at all, they’ll probably be able to work with you.

A debt settlement company won’t do anything you can’t do yourself

A structured debt settlement plan usually looks like this:

  • You pay the debt settlement company
  • Your debts, meanwhile, are not paid
  • Your debts become delinquent, and are then eventually charged off by the creditor
  • The charged off debt is either moved to an internal collections department or sold to a third party debt collector
  • Now the debt settlement company uses the money they’ve collected from you to negotiate a partial payoff (or settlement) of the debt

As stated before, debt collection agencies purchase debts for less than their original value. The quicker they can collect on a debt, the better the profit margin. So when the debt settlement company comes in ready to make a large one-time payment, the collection agency is usually willing to make a deal.

If you’re tempted to go the route of debt settlement, remember that all of those actions are ones you can take on your own. You can divert your potential credit payments into a savings account and allow your debts to go into default. Then you would take the funds out of savings and begin negotiations with the debt collector.

Handling a debt settlement on your own would save you all the fees normally paid to the settlement company. The flip side is that you’d have to handle all the negotiations directly with your debt collectors, which is unlikely to be a positive experience.

Of course, in either scenario, your debts are going unpaid for months and are eventually charged off, which means that your credit is going to take a pretty heavy hit. Debt settlement is not an easy course to take, so be sure you understand all of your options beforehand and that you’re comfortable with the consequences of whichever plan you decide to take.

Smaller, service-oriented debts are easier to negotiate

Medical debts usually have more leeway for negotiation. That doesn’t mean private practices or large hospitals will definitely forgive portions of your debt. It just means that there’s a general recognition that medical debts are often overwhelming and many patients need assistance repaying those debts.

The best time to talk about pricing and repayment options is actually before any procedure has been performed, but that’s often not possible, especially in an emergency situation.

Once you’ve received a bill and verified with your insurance that the amount you owe is accurate, contact the applicable billing department and discuss the situation. Many hospitals have hardship programs to help defray the cost of medical expenses, in which case you may need to provide certain documents and complete the required paperwork.

Whatever caused the debt in the first place, if you don’t feel like you’ve got the financial ability to repay everything that you owe, take the time to speak with a certified financial counselor. There may be a solution available that you hadn’t considered. At the very least, a trained counselor can help you understand your options and walk you through the steps you need to take to reach your goals.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
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