As Martha Stewart would say getting out of debt is a good thing. Close your eyes and just imagine how you would feel if you were to wake up tomorrow morning knowing that you didn’t owe any one a single cent. For that matter just think how much better you’d sleep if you weren’t lying awake hour after hour trying to figure out what to do about those debts. Getting rid of them might be better than a sleeping pill – allowing you to wake up feeling refreshed after a good night’s sleep instead of spending the night tossing and turning.
But is this realistic?
The idea of getting rid of all your debts might sound like heaven on earth but if you owe $7000 or more is it realistic? Could you really get rid of those debts once and for all? And what would it take?
First, the bad news
The bad news is that there are only two ways to get rid of $7000 or more in debts in just a few months. It’s either file for bankruptcy or learn how to debt negotiation
If you don’t mind the paperwork you could file for bankruptcy yourself. Because filing for a chapter 7 bankruptcy is complicated and time-consuming most people choose to hire an attorney to do it for them, which is not as expensive as you might guess. We’ve seen attorneys offering to do a bankruptcy for $500 or less.
But wait.
Before you go online or start thumbing through the Yellow Pages looking for one of those cheap attorneys it’s important to know what a bankruptcy can and can’t do.
What it can do is get rid of most of your unsecured debts such as medical debts, personal loans and credit card debts. However, it can’t discharge student loan debts, alimony, child support, spousal support and certain types of tax debts. Plus, a bankruptcy can’t do anything about secured debts such as your mortgage or an auto loan.
You also need to consider what a bankruptcy will do to your credit. The simple answer is that it will ruin it. Most experts believe a bankruptcy will cause your credit score to drop by 200 points. It will be hard for you to get any new credit for two or even three years after your bankruptcy. A bankruptcy will probably increase the cost of your auto insurance and it might keep you from renting a house or apartment. Since a bankruptcy stays in your credit report for as many as 10 years it could be that long before you could buy a house. And it will stay in your personal file for the rest your life.
Debt negotiation
The second way to rid yourself of those pesky debts is through debt negotiation. While you might be able to get through a bankruptcy and get all or most of your debts discharged in just a few months, it generally takes six months to do debt negotiation and settlement. Here’s how this works. First, you stop making payments on your unsecured debts (think credit card debts) for something between five and six months. This will require some amount of intestinal fortitude because your lenders will probably be hassling you almost continually during those months.
While you’re waiting for those months to go by and fending off your lenders, you need to get all of your financial information together. This would include not only information about your debts but also your assets and your earnings. It’s best to have all this information together and organized – maybe in a spreadsheet – before you contact any of your lenders. You should also be saving as much money as possible so that you will have the cash on hand to pay for any settlements you are able negotiate
Negotiating with your lenders
Now, comes the part where you have to be a good negotiator as your next step is to contact each of the lenders where you have unsecured debts and try to negotiate lump sum settlements for less than you owe. This is where you will need to “sell” your settlement. This means convincing the lender’s customer service representative that you simply can’t pay what you owe by citing the information you put together on your debts and assets. One secret of successful negotiating is to get the other party to name a number first. So what you might want to do is sort of throw yourself on the customer service representative’s mercy asking, “So what’s the least amount you would take to settle this debt?” If he or she fails to give you a number then it will be up to you to suggest something and you should start low. For example, you might ask if you could settle the debt for 30% of what you owe. Its’ very unlikely the customer service rep will agree to this but it puts him or her in a position where they have to make a counter offer. Depending on that offer you might agree to it or come back with a counter to the counter. In other words there may be some back and forth before you arrive at a number that’s agreeable to the both of you.
Get it in writing
If you are able to negotiate a settlement, you need to get the agreement in writing. This should include the payment amounts you’ve agreed and everything the creditor has agreed to do or not do. It should also include the date the settlement was reached, the customer service rep’s name and phone number and any other relevant information. If your customer service rep agrees to prepare this document she or he will fax, mail or email it to you. If he or she refuses to do this, you’ll need to prepare the document yourself, date and sign it and then send a copy to the creditor by Certified letter Return Receipt Requested. . The reason why this is critical is that each of you could end up with different memories of what you agreed to. If this happens, you may have to hire an attorney to help you work out the disagreement or you could end up in court where a judge decides what you need to do.
Finally, you will need to wire the money to your lender or send a cashier’s check. Of course, this means you need to have the cash available to pay the lender. Otherwise, you’ve just wasted a lot of time and effort.
Play the trump card
In the how to debt negotiation if you are unable to settle with a lender based on your finances you may need to pull out the trump card, which is threatening to file for bankruptcy. Despite what you might think you have the upper hand in negotiating an unsecured debt because if you were to file for bankruptcy your lender would get zero, zip, nada and your customer service rep knows this. However, it’s not a good idea to infer or threaten bankruptcy unless you really mean it. If not you could be left owing the same amount of money and with a whole lot of egg on your face.
Most will work with you
If you are honest with your lenders and can show them how awful your circumstances really are and why you honestly cannot pay off the debt, most will work with you. After all, customer service reps are human, too, and most will try to help you as much as they can.
If you can’t pay a lump sum to settle a debt
If you simply don’t have enough money to pay a settlement in a lump sum you may need to try to negotiate a plan whereby you pay off the debt over time. In this case, the credit card company will freeze your account so that you can no longer use your card but you continue to make whatever monthly payments you’ve agreed to until the debt is paid off. While this is not an optimal solution and probably won’t get you out of debt in five or six months it can be a decent alternative.