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.