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.

In conclusion

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.

If you’re up to your neck in debt, then debt negotiation can be a good way to reduce it and get some relief from any lenders that are constantly nagging you and even from annoying debt collectors. But it’s just as important to know what not to do when negotiating with your lenders as what to do – because the more you know the more successful you will be.

There are common mistakes that many people make in debt negotiation that you need to avoid – to maximize your chances for success – and here are seven of them.

1. Not knowing if your debt is secured or unsecured

There are basically two types of creditors – secured and unsecured. Your secured creditors are those where you were required to use some sort of asset such as your car, house, boat or land to secure the loan. If you fail to pay on one of these loans your creditor could then seize your asset.

Your unsecured creditors are those where you were allowed to purchase something without providing an assert as security. The biggest example of this is credit card debt. Others include department store cards, personal loans, personal lines of credit, peer-to-peer loans and gas cards.

2. Failing to understand your creditors’ strengths

A secured creditor is in a better position of strength because it could repossess one of your assets – your automobile or some other valuable property. While unsecured creditors can’t seize any of your belongings there are other things they can do. For example, they can harass you by calling constantly or they can sue you for breach of contract. If they sue and win they could garnish your wages or levy (take money out of) your bank accounts. If you’re sued by a creditor who wins a judgment against you make sure you protect your money by getting your bank balances as low as possible and stopping any direct deposits.

3. Not knowing their weak points

Whether the creditor is secured or unsecured it has certain weaknesses that you may be able to take advantage of. For instance, debt collectors are subject to the rules and regulations of the Fair Debt Collection Practices Act (FDCPA), which limits what they can do to collect from you. Creditors are not subject to the same rules and regulations but many states have laws that limit what they can do. If you’re being threatened by your creditors contact your state’s attorney general’s office to learn your rights.

Another weak point is that it’s expensive to sue. A lawsuit is generally a last resort for a creditor because of the money and time it requires. Plus, lenders are not guaranteed a successful outcome – that they will actually recover any money.

4. Failing to understand that cash is king

When it comes to settling a debt cash is king. You should be able to settle faster and for a lower amount if you can immediately transfer funds to the creditor. However, it’s important to avoid these pitfalls:

• Paying an unsecured debt with secured property such as getting a home equity loan to pay off a credit card debt. If you were to do this and then have problems making payments on the loan your house would be at risk. Ditto car equity loans.

• Using your retirement funds to pay off the debt. If you withdraw money from a 401(k) or a traditional or Roth IRA, you will probably be required to pay a hefty tax and even a penalty – unless you pay back the money within a certain amount of time.

5. Paying too much

It’s usually possible to settle debts for pennies on the dollar. When you’re negotiating with a creditor make sure you start low with the goal of settling the debt for 50% or less of what you owe. But again you’ll need to have the cash available to send to the lender. Very few of them will agree to a settlement like this unless they can get paid immediately.

6. Not writing everything down

While creditors won’t lie to you they can give you conflicting information. This can be especially true if you talk to several different customer service representatives at the same company. Whenever you talk with one of these people make sure you take very detailed notes with the name of the person you spoke to, the date of the phone call, and all details of the negotiations. If you are able to reach a settlement, ask the creditor to send you a letter or email spelling out what was agreed on, the date, the name of the customer service rep and the amount that was negotiated.

7. Failing to understand the big picture

Before you start any debt negotiations take a look at the total amount of your debt and then ask yourself would you really be able to pay one-half of it. The sad fact is that many debtors end all having to file for bankruptcy protection even after they’ve paid thousands of dollars to settle some their debts. If you don’t think you would be able to pay that one half then, instead of negotiating directly with your creditors, hire a professional debt settlement company or, worst case, file for bankruptcy.