General Debt Negotiation Strategies

Here are some strategies you can use when negotiating with most types of creditors or debt collectors.

Regardless of the actual likelihood of a bankruptcy...

filing in the near future, hinting to the creditor that bankruptcy is a likely future event may cause the creditor to lower its settlement offer. In Chapter 7 bankruptcy filings, and in most Chapter 13 bankruptcy filings, the entire amount owed to the average unsecured creditor is discharged - meaning most unsecured creditors get nothing. Unsecured creditors (such as credit card companies) know this, and most would rather settle the debt for pennies on the dollar than wind up with nothing if the debtor files for bankruptcy protection.

It may take some time to get there...

but most unsecured creditors will settle for around 30 to 50% of the debt. Therefore, you should start with a lower offer (around 15%) and negotiate from there.

Creditors are more likely to settle...

if funds can be transferred right away. Debtors who are able to amass a sum of money before negotiations, and then can offer to transfer funds immediately to the creditor, are more likely to get a lower settlement offer. As the saying goes, “a bird in hand is worth two in the bush,” and creditors are more willing to take an offer of cash today rather than have to wait from multiple smaller payments over time. 

After several negotiations...

the debtor may be able to settle some but not all debts. The debtor’s goal in the negotiations should be to eliminate all debts or, if that isn’t an option, to eliminate enough debt that the debtor can pay off the remaining debt in a reasonable amount of time. If the debtor isn’t able to

do this, the debtor isn’t in any better a position than before starting negotiations.

Tips for Negotiating with Particular Types of Creditors


Negotiating with Mortgage Companies

Home loan modifications can help some debtors ease expensive monthly mortgage payments and free up funds for other living expenses. However, despite the availability of programs like HAMP and others, it’s not always easy to do this.

Although it would seem logical that most mortgage companies would choose to work with homeowners to modify loans rather than go through the foreclosure process, that is not often the case. Debtors can work with mortgage lenders to try to modify loans or use programs such as the Making Home Affordable Program (HAMP), but generally negotiating mortgages with large national lenders is incredibly difficult. The lenders often require the debtor to complete multi-page documents and submit the same information time and time again. Also, the lenders usually tell the debtor to fall behind in monthly mortgage payments in order to “qualify” for the modification.

All of this creates a bit of a trap for the debtor and causes overdue fees and interest to pile up. If the modification does not go through, the debtor is left with a demand that all of the late mortgage payments, fees, and interest (collectively called “arrearages”) be paid immediately. Foreclosure looms if the debtor cannot make this payment.

The debtor is better off trying to negotiate a home loan if the loan is owned by a small local bank. It is easier to negotiate when the debtor can sit across from a real person and talk about the real likelihood that the modification will be approved.

Negotiating Car, Motorcycle, Boat and Other Secured Loans

As with home loan modifications, it is easier to negotiate these types of secured loans if the loan originated from a small local bank. Otherwise, the debtor should use these general negotiation strategies: lead with bankruptcy, have cash on hand to make payment soon, and keep an eye on the big picture.


Negotiating Student Loans

It is very difficult to negotiate student loan debt, due mainly to the fact that student loans are rarely dischargeable in bankruptcy. However, there are government programs that allow you to reduce your monthly payments in certain circumstances, put off paying loans for a period of time, or even cancel the loans altogether. 


Negotiating Back Taxes

Negotiating back taxes is generally more successful if the taxes are several years old. However, there are several pitfalls to avoid. 


Negotiating With Credit Card Companies

Credit card negotiations use all of the general negotiation strategies listed above. These are the easiest debts to negotiate, although they still take some time and patience to get to a reasonable settlement amount. 


Negotiating Unsecured Bank Loans

For unsecured bank loans, use the same negotiation strategies as with credit cards. Also, it is worth noting that the laws that govern banks and the laws that govern credit unions are not identical. Debtors should utilize the same debt negotiation strategies for each, but should keep in mind that credit unions may be able to cross-collateralize debt and make it more difficult for debtors to settle the debt for 50% or less. 


Negotiating With Local Merchants

If you owe money to a local dentist, attorney, auto mechanic, or other service provider, you can negotiate in the same manner as any other unsecured debt, such as credit card debt or unsecured bank loans.

Above all make sure you get your negotiated transactions in writing in case you need to prove you settled the debt one day.  You never know if you might need to prove satisfaction of the debt to a new creditor or even a credit bureau company.