If you’re faced with a mound of debt then negotiating with your creditors can be a good way to achieve debt relief. It can stop those nagging calls from your lenders or, worse yet, from nasty-tempered debt collectors. If you do decide to bargain with your creditors there are some common mistakes that you definitely don’t want to make as they could dramatically decrease the odds that you’ll be able to negotiate favorable settlements.

Not knowing if the debt is unsecured or secured

Secured debts are those where you were required to provide an asset as collateral. The most common of these are mortgages and auto loans. These cannot be negotiated. So your first mistake would be to call your mortgage holder or auto loan provider and try to negotiate. In comparison, credit card debts, medical debts, personal lines of credit, finance company loans and installment loans can all be negotiated, as can many other types of unsecured debts.

Not understanding your creditors’ weak points

When you try to negotiate with a creditor – especially if your goal is to settle the debt – it’s important to understand that creditors do have weak points. For example, they have much less negotiating power than do secured creditors. Also, they have a lot more to lose if they don’t settle and you file for bankruptcy. In this case they would literally get nothing.

If you’re negotiating with a debt collector its important to know that it’s subject to the Fair Debt Collection Practices Act. This limits what it can and can’t do to collect debts. As an example of this, it’s not allowed to call you early in the morning or late at night nor is it allowed to call your employer unless you give it permission. While creditors can sue you it’s unlikely that they will. This is because it’s expensive. Lenders generally see law suits as a last resort because of the money and time required. Also, no lawsuit guarantees that the lender will actually recover any of its money.

Not knowing their strong points

Unsecured creditors are not in the same position of strength as a secured creditor but they do have certain strengths. For example, it can call you repeatedly and make your life miserable even during the negotiation process. An unsecured creditor can sue you for breach of contract. The more unsavory ones may even file suit against you while negotiations are still ongoing. A creditor can garnish your wages but only if it wins a lawsuit against you. If it’s successful it can take the money out of your paycheck and also from your bank accounts.

Paying too much

The majority of unsecured creditors will settle for pennies on the dollar but only if you’re a relatively tough negotiator. Many debtors think they’ve gotten a good deal if they can settle a debt for 80% of what they owe. If you’re smart you’ll start at 40% and then with a little back and forth should be able to settle the debt for 50% or less of what you owe. Be sure to take notes of all the conversations you have with a lender. Then when you arrive at a settlement figure get it in writing. If the lender refuses to send you a letter summarizing the settlement then you will need to write it. State the agreement as clearly as you can with the settlement number you’ve both agreed to and send the letter to your customer service contact. Be sure to keep a copy for your file.

Choosing the wrong debt settlement company

Many people choose to use a debt settlement company to handle the settlement process for them. While there’s nothing wrong with this it’s important to choose the right company. The Federal Trade Commission (FTC) has cracked down on many of the debt settlement scamsters but there are still fraudulent companies out there so it pays to be careful. If a company contacts you this is a red flag. Legitimate companies just don’t do this. The good debt settlement companies belong to the American Fair Credit Council and are certified by the Better Business Bureau. They’ll also have many online reviews the overwhelming majority of which will be favorable. Reputable debt settlement companies never ask for any fees before they settle your debts. If you’re talking with a company that does want any payments up front this is a really big red flag.

Have you ever read the story of Dr. Jekyll and Mr. Hyde? It’s about Dr. Henry Jekyll, who’s a very nice person. and the evil Edward Hyde who actually lives within Dr. Jekyll.. The story was written by the Scottish author Robert Louis Stevenson in 1886 and is really about a “split personality” of what we might now call schizophrenia. Unfortunately, credit cards can also be Dr. Henry Jekyll and Edward Hyde. They can be Dr. Jekyll or great tools for building a credit history and earning nice rewards in the form of cash back, points or airline miles. But if you don’t use them sensibly they can quickly turn into Edward Hyde and become evil things.

One of the biggest problems with credit cards – that can turn them into an evil presence – is making what you believe to be smart moves when they’re actually the opposite. Following are five “facts” about using credit cards` that conventional wisdom says would be smart but that are really terrible.

1. Having just one credit card

You might think that it’s very smart financially to have just one credit card. And it’s not a terrible idea because carrying one card could help you keep your debt in check. But despite what you might think it’s not a good idea in one sense and that’s in building a good credit score. There are five factors that influence your credit score and one of them, which accounts for 30% of it, is credit utilization or how much credit you’ve used versus the total amount of credit you have available. This is sometimes expressed as your debt-to-credit ratio. Let’s suppose that you have total credit card limits of $20,000 and have charged up only $2000 of it. In this case you would have a debt-to-credit ratio of just 10%, which would be very excellent. On the other hand, if you had charged up $10,000 then your credit utilization would be 50% and this would be very bad.

Take a minute and do the math. If you find you have a poor or bad debt-to-credit ratio it might be because you have used up too much of the credit available on that one card. You could fix this very quickly by opening several more cards, which would increase the total amount of credit you have available and just about instantly improve your debt-to-credit ratio. Of course, you should put those new credit cards away in a drawer somewhere and not use them.

2. Canceling credit cards

You think it would be a good idea to cancel credit cards because this would surely keep you from racking up more debt. But it’s a bad idea for the same reason as having only one credit card and that’s credit utilization. If you have $10,000 in credit available but have used up only $2000 of it your utilization ratio would be 20%. However, if you were to cancel several of your cards so that the total amount of credit you have available drops to $5000, your debt-to-credit ratio would immediately jump to 40% and that would be bad.

3. Never using your cards

Conventional wisdom would have you believe it’s smart to never use your cards as this would keep you from racking up any debt. However, the truth is quite the contrary. When you never use your credit cards you’re not building a credit history. Potential lenders want to see that you’re using credit and using it sensibly as this means that you’re making your payments on time and not carrying large balances from month to month. One good way to use credit cards without running up debt is to use them to automatically pay some of your bills. This is a double win because it would show you’re paying your bills on time, paying off your balances at the end of the month and using credit wisely.

4. Applying for too many cards at once

It’s good to have multiple credit cards – to show that you’re using them wisely then wouldn’t it be smart to open them all at once? Well, no. There are two problems with this idea. First, every time you apply for a credit card the issuing bank will make what’s called a “hard inquiry” about your credit score and this will actually ding it by two points. So if you were to apply for four new credit cards, your credit score would drop by eight points. While that may not seem like much it could be enough to drop you from having “good” credit to “poor” credit. The second problem is that when a potential lender sees you’re applying for multiple cards simultaneously it can make you look as if you were desperate. And very few creditors want to lend money to desperate people.

5. Keeping your credit limits low

You may think that having a low credit limit on your card is a good thing because it keeps you from overspending on that card. However, this is not necessarily true. When you’re approved for a card with a low limit it’s actually not a positive as it implies that lenders just don’t feel good about lending you more money. If your credit card does have a low limit you should use it for about six months to a year, pay all your bills on time and use no more than 30% of your credit limit. You would then have a strong credit history and could go online and request an increase in your credit limit. It’s almost certain that you will get it, which will not only help your debt-to-credit ratio but will show potential creditors that one lender was comfortable lending you more money.

If you have a personal line of credit, some medical bills and a couple of credit card bills you would be a candidate for debt negotiation. However, you might not be a really good candidate.

The warning signs

There is some warning or danger signs that you’re headed for trouble with debt. When this is the case you might be a very good candidate for debt negotiation.

For example, are you receiving calls from your creditors? Are you letting your bills pile up in a corner and gather dust? Have you taken cash advances from one credit card in order to pay other bills? Do you have to prioritize which bills you’ll pay this month because you can’t pay them all? Or maybe you’re using your credit cards for everyday purchases such as gas and groceries?

If you answered “yes” to several or all of these questions then you might be a very good candidate for debt consolidation.

Negotiating with your creditors

What you don’t want to do in negotiating with a creditor is just call and just ask for help. Many creditors will be willing to work with you but only if they know exactly what it is you want. In other words you need to be specific. For example, if you have high interest credit card debt you might try to negotiate a reduction. If you were able to get credit card debt at 19% or higher negotiated down to, say, 12% your payments would be lower and it might be easier for you to make them.

Although most people don’t realize this it’s also possible to negotiate a timeout of two, three or four months during which you would not be required to make payments on a debt. If you were able to do this you have time to organize your finances and maybe get caught up on your payments. Of course, some lenders will continue to charge interest on your accounts so it’s important to learn whether this would be true before you agree to a timeout.

Try converting credit card debts into payment plans.

If you have a lot of credit card debts you might be able to get them converted into payment plans. You would most likely have to give up those credit cards but in turn you would have a fixed payment and a fixed term – or amount of time before you would be debt free. This could make it easier for you to pay on those credit cards and might increase your peace of mind.

Offer lump some payments.

Short of declaring bankruptcy the ultimate way to pay off debts is through debt settlement. If you have the cash available you could contact each of your lenders and offer to make lump sum payments to settle your debts but for much less than their balances. If you’re a reasonably good negotiator and can prove that you’re having a serious financial hardship you might be able to settle your unsecured debts for as little as fifty cents on the dollar.

Get some counseling

Before you rush off to try to negotiate with your creditors you might try consumer credit counseling. There are numerous credit counseling agencies available on the Internet and there may be one where you live. Whether you choose an online or local agency you will have a debt counselor that will review your finances and probably recommend a debt management plan. This would consolidate your debts because if your lenders approve your debt management plan you will no longer be required to pay them. You will pay the credit-counseling agency once a month and it will distribute the appropriate funds to your lenders. When you sign up for a debt management plan you will probably be required to give up your credit cards and not take on any new debt of any kind until you complete your program, which generally takes about five years.

Stay calm and consider your options

No matter how deeply you’re in debt don’t panic. As you have read there are solutions available and debt negotiation is one of the best of them. Define what it is you want from each of your creditors before you start contacting them. Be prepared to have to make multiple phone calls before you get through to people that have the authority to negotiate with you. State what it is you want and always be polite and civil.. Treat the customer service reps you talk with politely and no matter what’s said keep your anger in check. Always remember the old saying that honey attracts more flies than vinegar

If you want to reduce your debt load one good way is to negotiate with your creditors. This can also provide relief from those annoying phone calls from debt collectors. But before you pick up the phone and start calling your creditors there are some pitfalls to avoid. Understanding these pitfalls or mistakes will help you know what not to do and can then increase the odds that you will have some successful negotiations.

Mistake #1: Not understanding if your debts are unsecured or secured

There are basically two types of creditors – unsecured and secured. Secured creditors are those that have an interest in one of your assets such as your house, car, boat, etc. In comparison, unsecured creditors are those where you were not required to provide an asset to secure the loan. The most common type of unsecured creditors is credit card issuers but others include stores such as Target, Home Depot, etc.

The reason it’s important to know this distinction is because some unsecured creditors may try to get you to believe they are actually secured creditors and threaten to repossess whatever merchandise you purchased from them. When you know that the debt is unsecured, you won’t be taken in by this tactic.

Mistake #2: Not understanding your creditors’ strengths

Of course, secured creditors have the top position of strength because they can always take back whatever asset you used to secure the loan. But make no mistake about it. Unsecured creditors also have strengths.

As an example of this they can harass you by calling and demanding payment. Unsecured creditors could sue you for breach of contract. In fact, there are unsecured lenders that will actually file a lawsuit even when you’re negotiating with them. However, try to stay calm and continue in your negotiations.

Unsecured creditors could garnish your wages if it succeeds in its lawsuit against you. They can also levy your bank accounts – again if it wins a lawsuit against you. This means they could take money out of your checking accounts. In the event a creditor wins a lawsuit against you try to keep your bank balances as low as you possibly can and stop any direct deposits to your checking account so as to protect your funds.

Mistake #3: Not understanding their weaknesses

Just as your creditors have strengths they also have weaknesses and it’s important to know what they are.

As an example of these, both unsecured and secured lenders are subject to the laws that pertain to debt collection. If it’s a debt collection agency you’re negotiating with understand that it comes under the regulations of the Fair Debt Collection Practices Act (FDCPA). This act restricts what a collector can do in trying to collect from you. While your creditors are not subject to the FDCPA there are many states – and yours may be one of them – that have laws that limit what they can do in trying to collect from you. And, of course, it’s very costly for creditors to sue you. They generally see this as a last option because of the money and time required and because even winning a lawsuit is no guarantee that they will be able to get any money from you.

Creditors with unsecured loans have even more weaknesses. For one thing, they have much more to lose. If an unsecured creditor is not able to settle a debt with you and you file for bankruptcy instead, it would get nothing. This means unsecured creditors have less bargaining power.

Mistake #4: Not using the right money

When it comes to debt negotiation cash is king. In fact, if you don’t have the cash available to transfer it immediately to a creditor it probably won’t even negotiate with you. You should also not use equity in your home or some other secured property to pay off an unsecured debt. An example of this would be using a home equity loan to pay off credit card debt. When you use the equity in your house it puts your home at risk. It’s also a mistake to use money from your retirement account to pay off unsecured debt. If you were to do this you would likely be assessed a sizable tax for having withdrawn the funds. And, of course, if you take out the money as a loan you will have to pay it back.

Mistake #5: Paying too much

Your unsecured creditors will likely settle with you for much, much less than your balances. This means when you start settlement negotiations you should begin with a very low offer but with the goal of settling the debt for 50% of your balance. For example, if you owe $5000 on a credit card you might start negotiations by offering a lump some payment of $2000 but with the goal of settling the debt for $2500.

Mistake #6: Not documenting everything

When you begin negotiating with a creditor you’ll need to have all the appropriate documents at hand to prove that you’re having a financial hardship. This would include bank statements, credit card statements, paycheck stubs and so forth. When you get into negotiations you’ll need to take very good notes including the date of the phone call, the name of the person with whom you spoke and anything that the two of you agreed on. When you arrive at a settlement figure be sure to ask for a letter or email with the date and the details of the settlement. If the creditor refuses to do this it will then be your responsibility to write the letter or email and send it to your creditor. That way you would have a paper trail proving the debt had been settled and for how much.

What’s the total amount of your debt? Do you owe $10,000 or more in credit card debts, plus an auto loan and a personal line of credit? That could add up to $40,000 or more. Have you missed some of your payments or maybe more than some? Are you receiving phone calls from your creditors or, worse yet, from a debt collector? This could literally make your life a living hell. For that matter the stress of being deeply in debt can cause physical problems. You could develop diabetes, headaches, stomach problems or even heart disease. The really awful part of being stressed out by your debt it that this could actually shorten your life.

What is debt negotiation?

Have you ever negotiated the price of an automobile, your rent or the cost of a major appliance? Then you know what negotiation is. You put out a number, the company with which you are negotiating comes back with a counter offfer, you make a counter to that counter offer and so on until the two of reach agreement on a price.

Negotiating with one of your lenders such as a credit card issuer isn’t much different than this except you might negotiate on things other than just a number. For example, if you’re having a tough time making your payments and have a real financial hardship you might be able to negotiate a period of two, three or more months during which time you wouldn’t make any payments. This would give you time to get your debts organized and, hopefully, save enough money to get caught up on that debt.

Here’s where a number does come in. You could try to negotiate a reduction in your interest rate or rates. If you have high-interest credit card debt at 19% or higher you might be able to negotiate it down to, say, 12%. This would reduce the size of your monthly payments to the point where it might be much easier for you to make them.

A third thing you could negotiate is to have your credit card debts converted into payment plans. The downside of this is that you would most likely have to give up your credit cards but, in turn, you would have a fixed payment for a fixed period of time after which you would have all those debts paid off.

The ultimate — negotiate settlements

Finally, the ultimate would be to negotiate to settle your debts by offering lump sum payments for less than their balances. A big number here is 50%. That’s because this is
what your goal should be – to settle your debts for 50% of what you owe. You will have to be a pretty good negotiator to pull this off if and here’s the big if – if you can convince your creditors that if they refuse to settle you will be forced to declare bankruptcy, which would leave them getting nothing. And, of course, you would need to have the cash available to pay any settlements you were able to negotiate. In fact, this is an absolute must. Very few if any lenders will negotiate with you unless you can promise an immediate payment. This is one of the main reasons they would be willing to negotiate with you.

How your life would be after debt negotiation

If you don’t think that successfully negotiating your debts would have an amazing effect on your life, stop and close your eyes for a minute. Think how you would feel when you woke up in the morning free of the fear that you will be receiving calls from an angry debt collector or credit card company. Imagine how less stressful your life would be if you didn’t have to face that burden of debt every day, wondering how you would ever be able to get rid of it. Think how good it would feel if you knew you could pay your bills every month without having to give them a second thought. Your family life could improve significantly as there would no longer be any fights over your debts.

Wait, there’s more

You would feel calmer, more easy-going and could spend more time on the really important things in your life – your kids, your partner and your job. You could use some of the money you saved through debt settlement to build an emergency fund. That way when you next hit an unanticipated expense such as an illness or a big car repair, the money would be there so you wouldn’t go immediately into panic mode. You should even be able to start saving for your most important goal in life whether it’s a cruise down European rivers or early retirement.

Has it ever occurred to you that you could contact your lenders and negotiate with them over your debts? You actually could negotiate your unsecured debts. These are debts where you were not required to provide any collateral. For most Americans their biggest unsecured debts are credit card debts. Medical debts, personal loans, department store cards, gas cards, installment loans and loans from finance companies are also unsecured debts that can be negotiated. So, too, are cell phone bills from providers you’re no longer using.

What can be negotiated?

If your biggest problem is credit card debt you could negotiate with the banks that issued them and wring out concessions that would make easier for you to repay them. In fact, there are four things you could negotiate:

• A reduction in your interest rates
• Skipping payments for several months
• Converting the debt to fixed payment plans
• Settling the debts for less than owed

Of these four options the most popular by far is settling the debts for less than their face amounts or what’s called debt settlement. If you were to choose this option you would contact each of your creditors and offer to make a lump sum payment to settle the debt but for less than what you owe. You might begin by offering to settle for 30% of the debt’s face amount with the goal of eventually settling for 50%. In the event the creditor accepts your settlement offer it would then treat your debt as paid in full.

Where to get the money to pay for your settlements

Of course, you would need to have the cash on hand to pay for the settlements you were able to negotiate. Let’s say for the sake of the example that you owed $20,000 on your credit cards. If you were able to successfully negotiate that down to $10,000 you would need to have $10,000 to pay your lenders. Since you probably don’t have it just sitting around where would it come from?

A second job

Probably the simplest answer to this question is to get a second job. Depending on your skill set you might be able to get a part-time job as an independent contractor where you could earn $20 an hour or more. If you were able to work 20 hours a week at $20 an hour this would be $400 pretax or $1600 a month. Save that money for, say, five months and you would have around $5000 post-tax that you could use to begin settling your debts. Keep this up and you would be debt-free in less than a year.

If you don’t have marketable skills

If you’re not an accountant, an engineer, a software developer or have some other marketable skill the best part time job you could get would probably pay only $8 to $10 an hour. If you were to work the same 20 hours a week at $10 an hour it would take you about 10 months to have $5000 post-tax to begin settling your debts, which probably wouldn’t be an acceptable option. If this were the case the best way you could settle your debts would be to hire a debt settlement company.

Why a debt settlement company?

If you were to hire a settlement company such as National Debt Relief you would not be required to get a second job or find some other draconian way to save money. Instead, you would send the company every month the money you would have paid your creditors. A reputable debt settlement company will deposit this money in an escrow account over which you would have total control. As soon as a sufficient amount of money was your escrow account, the debt settlement company would begin negotiating with your lenders. When it reached a settlement with one of them it would contact you and ask that you release enough money from your escrow account to pay the settlement.

Debt settlement doesn’t happen overnight

If you owe $7500, $10,000 or more, it could take several years settle all your debts. During this time you would continue to send money to the settlement company, which would be added to your escrow account. Your debts will have been consolidated in that you will no longer be paying your lenders but will be sending one payment a month to the debt settlement company. Reputable debt settlement companies won’t take any of its fee until it has satisfactorily settled all of your debts. The best ones, such as National Debt Relief, charge a flat fee, which will range from 15% to 25% of your debt, depending on how much you owe. This may seem like a lot but if you owed $20,000 and the settlement company’s fee was 25%, it would cost you $5000, which actually could be less than if you were to pay off those credit card debts yourself over a five-year period.

Make sure you choose a reputable company

There have been a number of scam artists plying their trade in the debt settlement industry. While the Federal Trade Commission has gotten rid of many of these scamsters there are still some lurking out there. If you contact or are contacted by a debt settlement company that requires an upfront fee, you can just about bet the company is a scam operation. Honest and ethical debt settlement companies never require upfront fees. They are Better Business Bureau accredited and most likely belong to the American Fair Credit Council, which is the watchdog of the debt settlement industry. If you contact a debt settlement company and it’s a member of these organizations, you will know that it’s a reputable company and can be trusted to treat you honestly, will get your debt settled, save you money and charge only a reasonable fee.

Your phone number and address are very important ones to remember. But there’s another one that’s almost equally important. It’s your credit score. And the reason why it’s important is because that three-digit number rules your credit life. Do you want to buy a refrigerator or a new car? Do you need a new credit card or personal loan? Whether or not you’ll be able to get one of these and at what cost will depend solely on your credit score. FICO scores are the ones most used by lenders. They range from 350 to 800. If you have a good credit score of 700 or higher you should be able to get just about any credit you would want – and at a very good interest rate.

If you’re struggling to pay your bills

Are your debts weighing on you like a millstone? Do you feel as if you’re falling further behind on your bills every month? One way to deal with this is through debt negotiation. But this raises the question of what effect this would have on that all important credit score?

It all depends

Unfortunately the answer to this question is that it all depends – that is it depends on the type of debt negotiation. For example, you could negotiate to get the interest rate on your credit cards reduced, to skip your payments for several months or to convert your credit card debts into repayment plans. None of these would have much of an impact on your credit score if any. However, there is a fourth subset of debt negotiation called debt settlement, which would definitely affect your score.

What is debt settlement?

Debt settlement is simply where you offer to pay off a debt in a lump sum for less than you actually owe. If the lender accepts your offer it will then treat the debt as if it had been paid in full – but only to you and not to the credit bureaus (more on this later).

Why would any lender agree to settle?

First, not all lenders will agree to settlement offers. Some will insist that you pay the debt in full. However, others will negotiate with you – if you can convince them that it’s in their best interests. This is a polite way of saying they must be convinced that if they fail to settle you’ll be forced into bankruptcy, in which case they would get nothing. In short, this is the old half a loaf is better than none.

How to negotiate with your lenders

Whether your goal is to settle a debt or to get the interest on a credit card reduced you need to be a relatively good negotiator and you need to have your ducks in a line. This means you need to be several months behind in your payments and have all your documentation at hand – your debts, your payments, how late you’ve been on your bills and your earnings – as you will need this in order to convince the lender that you are in dire straits financially and not because you said “pretty please.” Lenders like the credit card issuers are not in business to give away money by settling with you for maybe 50% of what you owe.

How debt settlement will affect your credit score

There are two ways that debt settlement will affect your credit score. One is direct, the other indirect. The indirect part is what happens to your credit score when you fall behind in your payments, which is necessary for lenders to negotiate with you. Your credit reports don’t actually recognize missed payments. They only recognize late payments. As you might guess, the later your payments the more damage will be done to your credit score although no one can say exactly how many points it will drop. Then there is the direct effect. When a lender settles with you it will then treat the debt as paid in full so far as you’re concerned but that’s not how it will be reported to the credit bureaus. It will be reported as “settled,” “settlement” or “settled for less than the full amount.” This will stay in your credit report for seven years though as the years go by its effect will diminish.

Maybe it doesn’t matter

If you have reasonably good credit and settle more than one of your debts, your credit score will definitely be effected. However, if you’ve been unable to make payments on some of your debts for four, five or even six months, your credit is already pretty well trashed so you have very little to lose. Keep in mind that your goal is to get rid of some or even all of your debts so that if you have to sacrifice your credit score temporarily, it could be worth it. Of course, this is not something you would want to do if you want to make a major purchase such as an automobile or an automatic washer-dryer. In this case you would be better off choosing some other option such as consumer credit counseling

It’s not for everyone

As you can see debt settlement is not for everybody. If you’re just two or three months behind on your bills you might be better off with consumer credit counseling or maybe a debt consolidation loan. But if you’re five or six months behind and believe you will never be able to catch up then debt settlement could be your best option.

Feeling overwhelmed by your debts? Wondering how you’re going to get caught up or if you will ever be able to get caught up on your bills? One solution to this problem that’s been used successfully by many people is debt negotiation.

Debt negotiation can mean several different things

The Merriam-Webster online dictionary defines negotiation as, “a formal discussion between people who are trying to reach an agreement.” However, debt negotiation can mean several different things. One of the most popular forms of debt negotiation is called debt settlement, which is where you settle a debt for less than you owe by making a lump sum payment. In return for this payment the lender must agree to treat the debt as if it had been paid in full.

Debt negotiation can also mean negotiating to get your interest rate reduced, to skip a few payments or in the case of a credit card debt to convert it into a repayment plan.

What’s your goal?

If you think debt negotiation would make sense for you the first thing you need to do is define your goal. Is it to settle a debt, to get your interest rate reduced or to convert the debt into a repayment plan? You might have a different goal for each of you creditors depending on the creditor, how much you owe and how far behind you are. The important thing is to know what you want from each of them before you pick up the phone. Just keep in mind that your overall goal is to lower the amount of money you owe so you’ll be able to get out from under that cloud of debt.

Be like a Boy Scout

You know the Boy Scout motto is “be prepared.” This ought to be your motto before you call any of your lenders. You need to be prepared by having all your documentation at hand. This typically includes a list of your assets, your earnings and your debts with the name of each creditor, the amount you owe and the last time you were able to make a payment. You will need this information in order to “sell” any lender on negotiating with you. In other words you must be able to prove that you have a financial hardship.

Lead with bankruptcy

Whether you really believe you’re on the verge of filing for bankruptcy or not it’s always good to use this as a threat to convince the lender that it would be in its best interest to negotiate with you. However, this works only with unsecured debts, as secured debts such as your auto loan can’t be discharged through bankruptcy. Bankruptcy also can’t discharge student loan debt although if yours is a private student loan, you might be able to negotiate with your lender.

Try for 50%

When your goal is to settle a debt try for 50% of what you owe. Most lenders will want to settle for 30% to 40% but if you’re patient and persistent you should be able to settle an unsecured debt for 50% of what you owe.

Make sure you have the cash available

One of the top debt negotiating tools is promising to pay for the settlement immediately. Most lenders are not terribly anxious to settle for 50% of your debt but you might be able to get this if you promise to make an immediate payment. This means either wiring the money to the lender or sending it a cashier’s check. Of course, you need to have the cash available to make the payment,

The downside of debt settlement

Although debt settlement can be a great way to get your debts under control, it does have a downside. Few lenders will be willing to negotiate with you unless you are four months or more behind in your payments. Missing those payments will be reported to the credit bureaus and will have a distinctly negative effect on your credit score. If it has been this long since you made a payment. You might even be sued before you can contact the lender and start negotiations.

If you don’t have the cash

If you’re in serious trouble with debt it’s likely you don’t have several thousands of dollars just sitting around waiting to pay off your settlements. When this is the case, debt settlement should not be your goal. Keeping in mind that your overall goal is to get your debt reduced, you might try for a reduction in your interest rates. If you were able to get the interest rate on a credit card debt reduced from, say, 19% to 9% you would not only have a lower monthly payment but would also get the debt paid off much quicker. If you fail to get the interest rates on a credit card reduced try getting the debt converted into a repayment plan.

If you can do this it will help keep your debts from continuing to spiral out of control as the credit card company will most likely chose your account. But you will have a fixed interest rate and a fixed term to to pay off the debt and this should help reduce your overall debt.

If you’re struggling with debt, it’s likely because you did something wrong. Maybe you took out an auto loan you couldn’t afford or abused your credit cards. Or maybe it wasn’t really your fault. It could be because you lost your job or had a medical emergency. But the odds are that it was your fault. The good news is that you can find relief from your debts, learn a lesson and never get in trouble with debt again.

What type of debts do you have?

Some people believe that there are good debts and bad debts. Good debts are things like student loans and home loans. They are considered to be good because they represent investments that grow in value instead of depreciating. On the other hand, personal loans, auto loans, medical bills and credit card debts are said to be bad debts because all they do is suck money out of your budget. And they never increase in value.

Despite what these people believe, there are really only two types of debts. They are secured and unsecured. Your auto loan is a secured debt because your car secures it. If you were to default on your loan the seller could repossess it. A home mortgage is also a secured debt. Unsecured debts are those where you were not required to provide any collateral. Credit card debts are unsecured debts, as are personal loans, payday loans, revolving loans and medical debts.

Why is it important to understand the difference between these two types of loans? It’s because there’s not much you can do about secured loans. However, if what’s giving you nightmares are unsecured debts such as credit card debts or personal loans there are ways to get relief.

Dealing with unsecured debts

There are a number of different ways to deal with unsecured debts especially credit card debts. You could pay only the minimum every month, which would at least keep you afloat. However, over the long haul this isn’t much of a solution because of what it would cost you. As an example of this if carried an average daily balance of $3000 at 15% APR and made just a minimum payment of $60 a month, it would take you approximately 16 years to pay off that debt. And you will pay $3641 in interest. This means you’ve turned your $3000 purchase into one costing you $6641.

You could also just stop paying on your unsecured debts, as you were not required to provide any collateral or asset your lenders could seize. Of course, this would pretty much trash your credit history and your credit score.

Make a plan for repaying your debts

A third option is to make a plan for paying off your debts. There are two schools for doing this. The first school uses what’s called the snowball method. It’s where you put your debts in order from the one with the lowest balance down the one with the highest. You focus all of your efforts on paying off the debt with the lowest balance while continuing to make the minimum payments on your other debts. You should be able to get that debt paid off fairly quickly, which then frees up money you use to begin paying off the second death and so on. The financial advisor Dave Ramsey created this method for paying off debts. Its proponents say it’s the best way to handle unsecured debt because as you pay off one, you build up more momentum to pay off the next – like a snowball rolling downhill. However, there is a second school of financial experts that say you should first pay off the debt with the highest interest, as this will save you the most money.

If you choose one of these programs and stick with it you will find debt relief but it could take three, four or even five years.

Pick up the phone

A faster way to get relief from your unsecured debts is to pick up the phone and call a debt negotiation company. These companies are often called debt settlement or debt arbitration companies. Regardless of what they’re called they all operate about the same way. You sign a contract and they will then negotiate with your lenders to get your debts paid off for less than you owe. These companies typically settle debts for about fifty cents on the dollar by offering lump some payments. Most lenders will agree to these settlements under the theory that it’s better to get half a loaf than none.

Once you sign up with a debt negotiation company you won’t have to pay your creditors anymore. Instead, you’ll send the money to the debt negotiation company where it will put it in a trust account that you manage. It will then use these funds pay off the settlements it negotiates in your behalf.

The advantages of using a debt negotiation company

There are several advantages to hiring a debt negotiation company. For one thing, it will almost instantly eliminate all those annoying phone calls from creditors and debt collection agencies because the debt negotiation company will take full responsibility for handling your creditors. Second, hiring a debt negotiation company will consolidate your debts in that instead of having to pay multiple creditors every month you’ll send just one check to the debt settlement company. And the amount of that check will be much less than the sum of the payments you’re currently making.

Finally, it might take you 24 to 48 months to pay off the debt negotiation company but you’ve actually achieved almost instant debt relief, as you’ll no longer have to worry about your debts. You’ll know your debt problems have been solved, the burden has been lifted off you and you can now move on in life feeling happier and much less stressed out.

At least in theory debt negotiation is a very simple thing. If you’re swimming in debt you just contact your lenders and negotiate some kind of a concession that would make it easier for you to repay it. The most prevalent of these is debt settlement, which has become so popular the term is almost synonymous with debt negotiation.

How debt settlement works

The way this works is that you contact your lenders and offer lump sum payments for less than you owe. If your lenders settle with you they will agree to treat your debts as paid in full. In many cases unsecured debts such as credit card debts can be settled for fifty cents on the dollar or even better. Sounds like a pretty good deal, huh? Well it can be. But before you rush off to start contacting your lenders it’s important to understand that debt negotiation has both pros and cons.

The pros

You just read the biggest pro of debt settlement, which is that you get your debts paid off for much less than you owe. Let’s suppose for the sake of the example that you owe $50,000 in unsecured debts. Can’t you just imagine how much better your life would be if you could settle them for $25,000 or even less?

Another pro of debt settlement is that once you get all your debts settled you would no longer be receiving phone calls from angry lenders or debt collectors.

Last but not least, you would be debt-free which should certainly take a lot of the stress out of your life, leaving you happier and maybe even healthier. Stress can cause many physical problems including heart disease, obesity, diabetes and stomach disorders. When you eliminate the stress of trying to deal with an overwhelming amount of debt you could actually feel better and live longer.

The cons

Unfortunately, there are some definite cons to debt settlement. For one thing you’ll probably have to stop paying on your debts for at least six months before you contact your lenders. The reason for this is because very few lenders will talk debt settlement until you’re this far behind in your payments. When you stop paying on your debts this will be reported to the credit bureaus and will have a seriously negative effect on your credit score.

Second, you need to be a fairly skilled negotiator, as you will be going up against people with years of experience negotiating with borrowers. If you don’t believe that you would be good at this and if you don’t feel you think quickly on your feet, then debt negotiation might not be for you.

Have you been good about keeping records of your debts and earnings? Do you have bank statements for the last year? Have you kept your credit card statements? Do you have mortgage or rent payment records? This is important because you’ll need this information to build a case with your lenders as to why they should settle with you. You will also need to have payroll stubs and any other information related to your earnings. No lender will agree to settle your debt for 40% or 50% of what you owe because you say pretty please. You need to have information proving that you are having a serious problem with debt so that your lenders will agree to work with you.

How much cash do you have available? Probably the biggest downside of DIY debt settlement is that you do need to have the money available to pay for your settlements. There is no point in contacting a lender and offering to settle a $4000 debt for $2000 unless you have the $2000 available to immediately send the lender either by wire or in the form of a certified check.

Finally, when you settle a debt it will be reported to the credit bureaus as “settled,” “settlement” or “partial payment accepted.” This will not only have an adverse affect on your credit score it will stay in your credit reports for seven years

Other possible concessions

While debt settlement is the most popular form of debt negotiation there are other concessions you could ask from your lenders that would help make it easier to repay your debts. You could ask for a sort of “timeout” where you would be allowed to skip your payments for two or three months, which would give you time to develop a plan for repaying your debts. A second alternative is to ask your lender to reduce your interest rate. If you have a credit card at 20% interest and could get it reduced to, say, 12% you’d probably have a much easier time repaying the debt. Finally, you could ask for a payment plan. This is where your lender agrees to let you pay off your debt with a fixed monthly payment for a fixed amount of time. For example, going back to that $4000 debt you might be able to get the credit card company to let you repay it at the rate of $200 a month, which means you would have the debt paid off in 20 months. However, spoiler alert – when a credit card provider does agrees such a payment plan your card will most likely be cancelled.

Get going now!

The important thing is to do something — whether it’s debt settlement or requesting a payment plan. If you do nothing those debts are only going to get worse as will your life. So choose one of the options described above and get started. Believe it or not you’ll feel better when you do.