No one knows for certain how many people chose debt negotiation last year, but it’s clear that it has become one of the top ways to manage debt. There are two reasons for this. The first is that debt negotiation is the only way to get debts paid off for less than their balances. The second is that it’s a sure way for people to achieve debt relief in just two to four years.
The way debt negotiation works is simple — at least in theory. It’s just contacting a lender and offering a lump sum payment for less than the debt’s balance. If the lender accepts the offer, you send the payment, and the lender treats the debt as paid in full.
If you decide that debt negotiation is for you, there are mistakes people commonly make that you need to avoid.
Not understanding which type of debt you have
There are two types of debt — secured and unsecured. It’s important to understand which type you have. Secured debts are those where you were required to put up some type of collateral to get the loan. The two most common types of secured debt are mortgages and auto loans. These debts cannot be negotiated.
Unsecured debts are where you were not required to put up any collateral. Credit card debts, medical debts and personal lines of credit are all unsecured debts. These debts can be negotiated.
Misunderstanding your creditor’s weaknesses
Whether your debt is secured or unsecured, your lender has weaknesses. The first is that it may be subject to collection laws. For example, if you’re trying to negotiate with a collection agency, it must adhere to rules set down in the Fair Debt Collection Practices Act (FDCPA). While creditors are not subject to this law, many states have similar laws governing debt collection practices.
A second weakness is that it costs a lot of money and time for a creditor to sue you. This is the last resort as creditors know this, plus they could sue and still not collect any money.
Unsecured creditors know if they push too hard you could fill for bankruptcy, and they would then get nothing.
Failing to understand the creditor’s strengths
Secured creditors have the most strength because they could repossess something of value like your automobile.
While unsecured creditors can’t repossess anything, they do have other positions of strength. They can harass you with letters and phone calls and they can sue you for breach of contract. Some will even file suit while you’re negotiating with them. If a creditor files suit and wins, it can garnish your wages and even take money out of your bank accounts.
Using the wrong money
Cash is king in debt negotiation. Creditors are more likely to settle quickly and for less money if you can immediately transfer funds to them. However, don’t use your equity in a secured property to pay off an unsecured debt. For example, you shouldn’t use the equity in your home to pay off credit card debts. Also, don’t use your retirement funds to pay off debts. Do this and you’ll pay a big tax on the money you withdrew, or you’ll need to find some way to pay back the funds very quickly.
Paying more than necessary
Another common mistake made in debt negotiation is paying too much. The secret lenders don’t want you to know is that most unsecured debts are settled for pennies on the dollar. Start your negotiations low with the goal of settling the debt for 50% of its balance. Remember this is an unsecured debt so that the worst the creditor can do is sue you, which it really doesn’t want to do.
Failing to take notes
Debt negotiation usually takes time and is a complicated process. The first customer service representatives you speak with may not have the authority to negotiate with you — regardless of what he or she may say. You could talk with multiple people during the negotiations and even get conflicting information. Always take notes when you talk with a lender. If you can reach a settlement, ask for a letter detailing the amount you will be paying; the customer service representative’s name, email address and phone number (with extension number if appropriate); the date and any other important details. If the customer service rep refuses to provide such a letter, then you must write it yourself, and mail it as registered, return receipt requested.
You could negotiate your debts and save a great deal of money. Just make sure you don’t make any of the common mistakes you’ve read in this article. Understand that lenders have strengths and weaknesses, use the right money, and always take good notes. Do this and it’s almost certain you’ll be successful.