When you feel like you’re drowning in debt, talking to creditors and collection agencies is probably the last thing you want to do. In fact, if your debts have spiraled far enough out of control, you may have stopped picking up the phone when creditors call, and even left bills and collection letters unopened. That’s not an effective way to get your finances back under control, but the impulse is certainly understandable.
That’s one reason many people fall prey to debt settlement companies, which promise to lower balances by negotiating with creditors on your behalf. Sure, they charge a fee—but, you don’t have to talk to the creditors. And, of course, most assume that those in the debt settlement business have special relationships and strategies that allow them to achieve better results than you would get on your own.
With the right approach, you may be able to successfully negotiate with creditors on your own, and may have a wider range of options than you would through a debt settlement company. For example, you may be able to negotiate to skip a payment or two, freeze late fees, or pay off the debt with a partial lump-sum payment. However, most people who attempt to negotiate directly with creditors and debt collectors make the same mistakes.
- Two Common Mistakes in Creditor Negotiations (and how to avoid them)
- Does Negotiating with Creditors Really Work?
Two Common Mistakes in Creditor Negotiations (and how to avoid them)
Mistake # 1: Negotiating under pressure
Too often when a consumer attempts to negotiate with a creditor, it’s a desperation move. He or she has picked up the phone and become embroiled in a conversation with a high-pressure collector, or has finally reached out to the creditor because a negative outcome such as automobile repossession or wage garnishment is looming. In that situation, the debtor is at a significant disadvantage, both because of the pressure and because these conversations often take place with little warning or time to prepare.
The Pitfalls of Negotiating Under Pressure
When you negotiate from a point of weakness or without adequate time to think through the full consequences of the promise you’re making, it’s easy to commit to something that isn’t realistic for you, or to commit too much to a creditor who isn’t actually among your highest priorities.
How to Avoid Pressure-Related Mistakes
Preparation is key to a successful negotiation. Often, the collector will be tasked with pushing you as far as he or she can without regard to what’s workable for you. Knowing what you can realistically promise without creating a crisis elsewhere is critical. If you get an alarming notice that seems to require an immediate response, take the time to do some math before you pick up the phone. And, if you’re caught off guard on the phone, tell the creditor you’ll have to crunch some numbers or talk to your spouse before you can commit to a plan, and schedule a call back.
Mistake # 2: Thinking about one creditor at a time.
This mistake sometimes happens because of the pressure described in # 1. Often, the creditor whose representatives are the loudest, most persistent, and most aggressive get more attention (and more money) than others that may be higher priority. Sometimes, it’s simply a function of due dates, payment size, and other factors that make one debt seem more urgent or easier to deal with in the moment.
The Pitfalls of One-off Negotiation
The danger of negotiating in a vacuum is that when the call is over and the arrangement made, other creditors are still calling—and there may not be enough left in the budget to satisfy the ones who matter most.
How to Negotiate Strategically with Creditors
Before you begin negotiating with creditors, put them in order of priority. Of course, you want to keep all of your bills as current as possible, and don’t want anything going to collections or worse. Still, the consequences differ depending on the debt. For example, when looking at the big picture, most people will deem making the payment on a car that’s necessary to get to work more important than a credit card debt, since losing the car could jeopardize income. It’s important to keep those priorities in mind when calculating what you can afford to pay to each creditor, and when.
Once you’ve prioritized your debts and listed outstanding balances, past-due balances, and any balances that have reached the crisis point, figure out how much money you have to negotiate with and start applying to the highest priority debts. Of course, you may be able to negotiate an extension or partial payment with one or more of those creditors, but start at the top when you negotiate and don’t commit funds to a lower-priority creditor or debt collector until you’re confident the highest priority debts are under control.
Does Negotiating with Creditors Really Work?
Negotiating with creditors isn’t a long-term solution for everyone and there may very well be significant tax consequences as a result. Generally, it’s most helpful when you’re recovering from a short-term loss of income that has resolved or is about to resolve, or when you have a pool of money to work with to negotiate settlements, but not enough to pay creditors in full. Whether you’re negotiating for a short-term reprieve while you get back on your feet or to pay off old debt, preparation and prioritization are key.
If your financial challenges are ongoing and negotiation is no longer an option, or is simply keeping creditors at bay one month at a time without moving you any close to a real resolution, it’s time to consider other options. If you’d like to learn more about how Chapter 7 or Chapter 13 bankruptcy may provide the relief you need to build a better financial future, call 877-328-1497 to schedule a free consultation, or fill out our online contact form.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.