Being seriously in debt can put a cloud over your entire life. The stress of dealing with creditors and collection agencies can actually cause serious physical problems including heart disease and even obesity. It can literally tear families apart. It can be even worse when people refuse to recognize that they’re in trouble with debt. The old saying is true that denial is not just a river in Egypt.

If you find you’re facing a serious problem with debt one good option for getting it under control and eventually paid off is debt negotiation – or negotiating with your creditors to get concessions that would make it easier for you to repay your debts.

Anyone can do it

The first fundamental to understand about debt negotiation is that anyone can do it. All that’s necessary is to pick up the phone and call your creditors. Most lenders are more than willing to work with people that have a true financial hardship and are trying to do something about it.

Write down your objective

The second fundamental thing about debt negotiation is that before you pick up the phone you need to write out your objective or what you want from each of your creditors. There are four different things you could ask for depending on how much you owe each of them. The first is to ask for a reduction in your interest rate. This can be especially helpful when you have a large amount of debt with one creditor at an interest rate of 17%, 19% or even higher. Get that reduced to, say, 12% and you could find it much easier to make your payments.

A second objective might be to get your creditor to let you skip your payments for two or three months. If it agrees to do this you would then have time to develop a budget and a debt management plan and to save whatever amount of money you would need to catch up on your payments.

Third, you might ask to have your monthly payments converted into a debt payment plan. The downside of this is that your credit card company would likely close your account. However, you would now have a fixed payment at a fixed interest rate for a fixed period of time. You could relax knowing exactly when you would have that credit card debt paid off.

Finally, you could try to negotiate debt settlement, which is where you make a lump sum payment for less than you owe to settle the debt. This could be 50% or even 40% of what you owe. If your creditor agrees to this it would then treat your debt as if it had been paid in full. This is really the only way to get debts reduced as other options such as a debt consolidation loan or consumer credit counseling can’t do anything about the amount you owe. All they can do is help you better manage your debts.

What it takes to settle a debt

A third fundamental in debt settlement is you must be able to prove to your creditor that you have a true financial hardship. This means you must be able to show that you owe a lot more then you could realistically expect to repay in two or three years. You will need a list of how much you owe, the last time you were able to make a payment on your debts, your earnings and assets. You must also be able to convince your lender that if it fails to settle you will be required to file for bankruptcy. And while this might seem contrary to having a serious financial problem you do need to have enough money to pay off the settlement.

Debt settlement and your credit score

Another fundamental about debt settlement is that it will damage your credit score. The damage will not be as severe as if you filed for bankruptcy but it will definitely have a negative effect. No one except FICO, the credit score service that most lenders use, knows exactly how much damage it will do but it has been estimated that debt settlement could drop your score by anywhere from 80 to 100 points. What this translates into is that if you had a good credit score you could end up with a poor score, which would make it more difficult for you to get new credit in the future. And if you were able to get new credit it would likely be low-credit, high-interest debt.

Why debt settlement damages your credit score

The major reason why your credit score would take a hit isn’t due to debt settlement. It’s the fact that you probably missed a number of payments on your debts before choosing debt settlement. The other reason is that while your creditor might treat your debt as paid in full so far as you’re concerned that’s not how it will be reported to the credit bureaus. It will be reported as “settlement,” “settled” or “settled for less than full amount.” This will stay in your credit reports for seven years although its importance will decrease as the years go by – assuming you catch up on your payments and continue to make them on time.

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.

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.

Whether it’s called debt settlement, debt negotiation or debt arbitration it all boils down to the same thing – negotiating with your lenders. In fact, debt settlement is one of the objectives you could have in mind when you negotiate with a lender though there are a number of others. But if you were to choose debt settlement there’s only one objective, which is to settle a debt for less than you owe with the lender agreeing to write off the rest of your debt.

 

DIY debt negotiation

 

You can negotiate with your lenders yourself. However, before you do this you should ask yourself a couple of important questions. The first of these is how good a negotiator would I be? And the second and even more important is do I have the cash available to pay off a settlement? If you believe you would be good at negotiating and do have cash available then there’s no reason why you couldn’t negotiate with your lenders yourself.

 

Define your objectives

 

Before you start calling lenders you need to have a concrete goal or what it is you want to get from each lender. We’ve already discussed one of them – debt settlement. Other objectives could be to get a “timeout” or period of three or four months when you would not have to make payments, a reduction in your interest rate or a payment plan where you would have fixed payments for a fixed period of time such as 18 months.

 

Have your information handy

 

No lender is going to settle a debt with you, give you an extended payment plan or agree to reduce your interest just because you say “pretty please.” You need to be able to build a case as to why you need help. So before you call gather up all your information including your budget, your debts and your assets. You need to be able to prove that there are substantial reasons why you can’t make your payments and why the lender should work with you.

 

Dial and smile

 

The fairly obvious next step is to start making phone calls to your lenders. Notice that we said start. The reason for this is it’s unlikely that you will get through to a person with the authority to negotiate with you the first time you call. All the big lenders such as the credit card companies have different titles for the people that could negotiate with you and it may take you several tries before you get to the right person. Be patient and persistent and you will ultimately reach a decision maker.

 

Debt settlement is probably the toughest

 

Getting a lender to settle with you for less than you owe is definitely the most difficult thing to negotiate. The goal of your lenders is to collect everything you owe and not 50% or 60% of it. This is where you need to be a skilled negotiator. What you really need to do is put the fear of God into the manager or supervisor with whom you’re negotiating by either stating or inferring that if you can’t reach a settlement you’ll be forced to file for bankruptcy. While that manager or supervisor may not want to let you settle for 50% or 40% of what you owe, he or she would rather get that than get nothing, which is what would happen if you were to file for bankruptcy.

 

Hiring a debt settlement company

 

If you could negotiate a settlement with a lender yourself why would you hire a debt settlement company? There are several good reasons for this not the least of which is that this eliminates the need for you to have cash on hand to pay for any settlements you negotiate. Second, you just may not feel you would be a very good negotiator. Professional debt settlement companies have debt counselors with years of experience negotiating with credit card companies and other such lenders and are almost always able to get better settlements than you could yourself.

 

How these companies work

 

Different debt settlement companies operate somewhat differently but most of them will advise you to stop making payments on your debts for six months, as this is a way to sort of “soften up” your lenders. During these months you will send the money to the debt settlement company that you would’ve paid your lenders. If the settlement company is on the up and up, it will deposit your money into an escrow account that only you control. When the company successfully settles one of your debts it will then use some of that money to pay for the settlement – assuming you agree to the settlement. In most cases there will not be enough money in your escrow account to pay for all the settlements that the company negotiates in your behalf. When this is the case it will offer you a payment plan that could be anywhere from 24 to 48 months. If you approve all of the settlements and agree to the payment plan all of your debts will have been settled and you’ll no longer have to worry about receiving nasty phone calls from your lenders or from debt collectors. You will have one payment to make a month, which should be a good deal less than the sum of the payments you’ve been making and most importantly you should have peace of mind knowing that you’re debt free and will have a happier less stressful life.

As a general rule people who are wallowing in a sea of credit card debt want only one thing – to get out of it. One possible solution is a chapter 7 bankruptcy. But bankruptcy has some severe downsides. For one thing you might not be able to get new credit for two to three years and when you are able to get it, you could be charged interest as high as 18%. Moreover, a bankruptcy will stay in your credit file for as many as 10 years. You might not be able to buy a house or a new car until those 10 years have elapsed. And a bankruptcy will stay in your personal file for the rest your life.

What are the options?

Besides bankruptcy there are several different options for getting help with your credit card bills. For one thing you might be able to get a debt consolidation loan and pay them all off. This should leave you with a lower monthly payment than the sum of the credit card payments you’ve been making. You’ll also probably have more time to pay off the loan, especially if you use a home equity loan or homeowner’s equity line of credit to pay off those cards. Of course, this does nothing to get rid of those credit card debts. You’re simply moving them from one set of creditors to a new one.

Credit card debt negotiation is no slam-dunk

While you might be able to work with your credit card issuers to get better terms or a partial settlement, working out such an agreement is not easy. You may need to make a dozen or more phone calls before you even reach a person that has the authority to negotiate with you. You may also end up having to wrestle with a bunch of details that don’t seem important to you now such as the impact on next year’s tax bill and to your credit score. Beyond this, there are three key steps to negotiating with a credit card company but they’re not very simple.

Step #1: Make a plan

When you contact one of your credit card issuers it’s important to have a plan. This is because there are five different arrangements you could request – workout arrangement, forbearance, lump-sum settlement, debt settlement and a debt management plan.

The most popular

Of these five different arrangements, the most popular is probably where you negotiate a lump sum payoff for less than you actually owe. Of course, you will need to have the money available to pay for any settlements you are able to negotiate. For example, if your credit limit was $3000 but you had a balance of $5000 including late fees and interest you might be able to get them eliminated if you agree to pay off your balance. Of course, this varies from creditor to creditor. If you are able to successfully negotiate a settlement make sure you get confirmation in writing the amount you have agreed to pay. Do understand that this will have a negative effect on your credit score – depending how your lender reports this to the credit bureaus.

Workout arrangement

If you’re not familiar with the term “workout arrangement” it’s where the credit card issuer or bank agrees to lower your interest rate and minimum monthly payment or eliminate them altogether. It often will also stop charging you punishing fees such as late fees and over-limit charges. It’s also possible to ask the company to forgive past fees, which would further reduce how much you owe. Of course, it may or may not do so. The downside if you request this is that your line of credit will probably be cut off so you will have to give up your cards. And again, there will be an impact your credit score.

Forbearance

In the event your financial situation is short-term such as being unemployed for several months you could request forbearance. This is much like a workout arrangement as your credit card provider would stop assessing late fees and lower or even eliminate your interest rate for a period of time. It might also let you stop making payments for a few months until you’re back on your feet. As you might guess this offers a short timeout from having to make full payments but doesn’t include forgiveness of any of your debts.

A debt management program

If you’re not comfortable with the idea of negotiating directly with your credit card companies you could go to a nonprofit credit-counseling agency for help. When you choose this option, you will be assigned a debt counselor that will work with you and your lender to get your debts restructured so you could afford them. In most cases, the counselor will be able to negotiate to reduce your interest payments and drop or reduce any punitive fees you’ve ben charged However, you will still have to pay the total amount you owe. Plus, all your credit card accounts will be closed. The good news is that a DMP (debt management program) won’t hurt your credit score. However, closing down those credit card accounts could very well damage it.

Debt settlement

In debt settlement you stop paying your creditors for months until they are willing to accept a lower payment. You do this either by negotiating directly with your creditors or by hiring a debt settlement company. As you might guess when you stop making payments this will do considerable harm to your credit history. Although of course, paying a part of what you owe is much better than paying nothing.

Step #2: Take a hard look at your debt and income

Before you start making phone calls to your credit card companies take a good close look at exactly whom you owe. You need to know how much of it is garbage like late fees, over-limit fees, and so forth. Once you separate these from your actual credit card balance, you may be shocked. You also need to take a hard look at your fixed expenses and income and determine how much you can afford to pay. The important thing is to not over extend yourself. You need to be able to buy groceries and pay your rent or mortgage payment before you pay those credit card bills. And don’t forget to build in some slack to cover those little unexpected expenses that can suddenly pop up. It’s important to have an emergency fund in your budget to cover these things.

Step #3: Begin making phone calls

Now, you should know exactly how much you can afford to pay so it’s time to hit the phone and see what help you could get. You may have to make a number of calls and talk with a bunch of different people. While you may have been told that the credit card companies won’t be willing to work with you until you are behind in your payments, it’s better is ask for help as soon as you see that you’re in a financial bind. In the event it’s a short-term issue you might call the credit card company, explain what’s happened and ask to be given forbearance. On the other hand, if your problem is long-term such as the death of your spouse or partner or a divorce, you may need debt settlement or debt management help from professionals.

Find someone with the authority to work with you

Just keep in mind that the customer service representatives that answer your initial calls probably won’t have the authority to help you. Tell whoever answers your initial calls that you need to speak with the department that handles debt settlement or workout arrangements. Or you might ask for the company’s credit manager. Once you reach a person that can work with you, get his or her name, phone number (with extension) and ID number (if he or she has one). After the call be sure to write down a summary of you conservation with the time and date. Put all of this in a notebook along with any correspondence between you and the credit card provider. Always be honest and upfront. Tell the credit manager or whomsoever that, “I’m having a problem but I do want to pay you. How can we work this out?”

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.

Are you trying to work your way out of debt? Well, good for you. There are very few emotions better than the feelings you’ll get when you become debt free. However, make no mistake about it. The road to debt freedom has its potholes and its detour signs. And no matter what some people might want you to believe, if you have $7500 or more in debts you have a long road ahead of you. There is just no quick way to get this amount of debt paid off quickly and painlessly.

Debt negotiation can be a good option

If you’ve never before run into the term debt negotiation it’s where you contact each of your lenders and negotiate lump sum settlements for less than you owe. If you’re reasonably good at negotiating you should be able to get your debts at least cut in half. Of course, you will need to have the cash available to pay for those lump sum settlements, as very few lenders will agree to settle with you unless you can promise to send in the money immediately.

Get everything in writing

If you are able to successfully negotiate a debt settlement be sure to get everything in writing. This should include the name and phone number of the person with whom you spoke, the date, the amount you settled on, any fees you agreed to pay and any other terms or conditions. If the lender’s customer service representative won’t provide you with this information, you’ll need to write the letter yourself and then send it to your lender – – certified and return receipt requested.

The pros and cons

There are three definite pros to debt negotiation. First, as you have read it’s a way to get debts slashed by as much as 50%. Second, it can lead to debt consolidation if you choose a debt settlement company because once all your debts have been settled you will have a repayment plan and would be making just one payment a month. And last but not least you would get all of your creditors and debt collectors off your back.

The biggest con of debt negotiation is that you must have the money available to pay for your settlements. This is a sort of Catch 22. You need to have the cash on hand to pay for your settlements but if you had that much cash you might not be in trouble with debt in the first place. The second con is that you need to be a pretty good negotiator because you’ll be up against some real professionals.

Consumer credit counseling

One proven option to debt negotiation is consumer credit counseling. There are consumer-credit counseling agencies in just about every city of any size. If you can’t find one locally its easy to find one on the Internet. Just make sure you choose one that’s a nonprofit and charges very little for its services.

With consumer credit counseling you’ll have a debt counselor that will review your finances and help you develop a budget. He or she will then contract your creditors to determine if they would be willing to settle for the payments you could afford to make – depending on that budget. Your debt counselor may try to negotiate a reduction in your interest rates to help you get your debts paid off faster. He or she may offer you a debt management plan (DMP). If you accept your plan you would then make payments directly to the credit-counseling agency each month and it will then distribute the funds to your creditors. Assuming you stay with your DMP you should be debt-free in about five years.

 A debt consolidation loan

The second proven alternative to debt negotiation is a debt consolidation loan. There are two types of these loans – secured and unsecured. If you have a decent credit history you might be able to get an unsecured loan, which means you wouldn’t have to offer any collateral to secure it. Unsecured loans are also often called signature loans or personal loans.

If your credit history isn’t so good, you may be required to take out a secured loan such as a home equity loan or a homeowner’s equity line of credit (HELOC). As a general rule secured loans have lower interest rates than unsecured loans because the lender is taking less of a risk. If you were to default on a secured loan your lender could repossess whatever it is you put up as collateral. In comparison if you were to default on an unsecured loan your lender would be basically out of luck.

The pros and cons of a debt consolidation loan

Debt consolidation loans can be a useful tool in debt management because they require just one payment a month vs. the multiple payments you’re probably making now. Second, your debt management loan should have a much lower interest rate than those of your current debts, which should translate into a lower monthly payment than the sum of the payments you’re currently making.

The biggest con of a debt consolidation loan is that it does nothing to reduce your debts. If you owe a total of $8000 to three different lenders and consolidate them into a single loan you would still owe the $8000 – just to a different lender. Also, you might have a much lower interest rate but you will pay more interest over the course of the loan because it will have a longer term. For example, HELOCs are generally for 7 or 10 years while home equity loans could be for 20 years or longer.

Which one of these options is best?

Fortunately or unfortunately there is no one best way to pay off debts. Each of these three options has, as you have read, its own pros and cons. If you’re struggling under a load of debt the best thing you can do is just pick one of these alternatives and get going. The longer you put off repaying your debts the more interest you will be charged and the larger your debts will grow.

Several lenders such as Discover Financial Services and Wells Fargo recently announced they are modifications to their student loans. For example, Wells Fargo has said it will lower the interest rates for certain borrowers and starting in February will extend their repayment periods. It believes that these moves will save their borrowers thousands of dollars in interest rates over the life of their loans. And Discover Financial Services has announced plans to modify its program beginning next year and may also lower its interest rates and forgive the debts of those borrowers that are in dire financial straits.

Why not more modifications?

Lowering interest rates and extending repayment rates are a bitter pill for lenders to swallow. There are several reasons for this. First and foremost is their concern that once people learn about these modifications, those that are less troubled will claim distress or worse. They could purposely withhold payments to get a better deal. Second, lenders are reluctant to be honest about the true nature of the loans they have on their books.

You may have already gotten relief from your federal student loans by switching to Graduated Repayment, Extended Repayment or one of the three Income-driven Repayment programs. But if you’re still struggling, what can you do about those private loans? Here are five things you could do about negotiating modifications in your loans.

First, you’ll need to make an airtight case that you’ve tightened your budget to the point where there are no more discretionary expenditures you could eliminate. You may also have to show that you’re earning as much as you can. Be prepared for the fact that your lender might require you to provide bank and credit card statements to verify your spending.

If your problem is in temporary don’t settle for temporary solutions

Lenders are adverse to permanent measures. In the event that you are permanently in dire financial straits that are permanent in nature such as a disability or a lower-paying job, try for a permanent solution such as a permanent reduction in your interest rate. If your customer service representative can’t or won’t help, try escalating the issue to a supervisor or manager.

Watch out for how they want to structure the modification
Your lender might offer you what’s called a hybrid restructure. This is where your interest rates are reduced for a few months or years. This means your payment will go down for a while and you will pay less interest overall but then eventually return to what it was initially. Make sure you determine whether or not you can live with the higher payments when that temporary restructuring ends. If not, you should reject the offer.

Beware the fees

If your lender does agree to make modifications to your loan it will probably try to collect as much as it can in fees. These fees are actually just another form of interest in this context. They also mean that you will have to give up more cash, which is something that’s probably already in critically short supply.

Be ready for a counteroffer

What financial institutions want more than anything else is what’s called principal recovery. So you might want to begin your negotiations by offering to do just that. For example, suppose you could afford to make 10 years’ worth of payments at the 15-year rate, which would be about $322 a month on a $30,000 debt. If you divide the $30,000 by 1 20 months that’s $250 a month. So why not start negotiating at that level but then “settle” for the $322? Your lender may not be happy about that, as it will earn 5.28% on its loan rather than 10%. But you’ll pay about $8,686 in interest opposed to the $17,574 you would have paid – or roughly half of that.

As you might guess this is not a great solution for the lender. But if you’re headed for default then agreeing to a kind of crummy deal like this today beats the expense, time and uncertainty of dragging the matter through the courts.

Be persistent

Were sure you’ve heard the old saying that if not you’re not at first successful try, try again. This is most certainly true when it comes to negotiating a modification to a private student loan. The first customer service representative you talk with is most likely a “gatekeeper.” In other words, his or her job is to basically say “no” to any modification you request. Or the customer service rep may simply not have the authority to help you. Whichever the case you will need to try to escalate the matter to that person’s supervisor or manager.

Be courteous

Finally, be courteous. No matter how frustrated you might get, don’t lose your temper. The people with whom you are negotiating are humans too with their own feelings and problems. Losing your temper and cursing or belittling them will get you nowhere. There’s also the old adage that “honey attracts more flies than vinegar.” If you’re polite and courteous with your customer service representative or manager you will get much further than if you are rude or short tempered with that person.

While our overall economy is getting better this doesn’t mean that we still don’t have problems. As an example of this unemployment increased in 30 states this past July. California’s unemployment rate was 7.4%, Alabama’s was 7%, Georgia’s was 7.8% and Nevada’s was 7.7%.

While there are more reasons than just unemployment to account for today’s consumer debt, it certainly is a big factor and helps explain why the average American household now owes $15,480 in total debts and why the average American is carrying $7115 in credit card debt alone. As you can imagine if the average is $7115 many people are carrying much more than this – to the point where they are likely drowning in debt.

Why have we become such a debt-ridden society?

Unemployment is certainly one big reason why so many Americans have fallen into debt. However, some of this problem is “self administered.” It’s just very easy to get into trouble with debt these days. Credit cards can be extremely easy to get and buying things on the Internet has become so simple and “painless,” that many of us just haven’t handled our credit sensibly. An even sadder fact is that a new study found that only 53% of Americans completely understand the terms of their credit cards. The rates on credit cards are often as high as 20% so if people are not careful they can quickly become snarled in debt. Beyond this, it’s hard to believe that so many of us are signing on to high-interest credit cards without knowing just what we’re getting into.

For that matter in 2012, the Securities and Exchange Commission ordered the Study Regarding Financial Literacy Among Investors. What this study found was that Americans know painfully little about how money works, including compound interest, which is capable of turning a reasonable amount of debt into a huge amount of debt faster than most people would imagine.

What to do if your debt has spun out of control

Debt can be like a quicksand pit. With quicksand you would feel as if you were just up to your ankles one minute, only to be up to your waist the next minute and then finally in over your head. While your debt might not yet be over your head right now it can spiral out of control very quickly. If this happens there are options available to help though some of them are definitely better than others.

Five options

Let’s say for the sake of an example that you have $25,000 in unsecured debts or those not secured by an asset such as your house or your automobile. In this case there are five options beginning with the one that would have the least impact on your credit score down to the one that would do the most damage.

The least damaging — find a way to catch up

The best option is to find a way to catch up on your debts. The easiest way to do this is probably to take on a second job. If you were to earn $10 an hour and worked 20 hours a week you would net around $160 or about $640 a month. That alone might be enough to help you catch up on the payments you’ve missed.

Second – get credit counseling

This is something you might do in conjunction with getting a second job. There’s probably a credit-counseling agency near where you live. The best ones are local and nonprofits. Some charge nothing for their services while others charge very little. When you go to one of these agencies you’ll have a counselor that will review your finances and help you develop a budget to pay off your debts. He or she will also work with your lenders to get your interest rates and maybe even your monthly payments reduced. If you’re in really bad straits the agency may develop a Debt Management Plan for you. This is where you send it a single payment each month and it then distributes the funds to your creditors. This can be an excellent choice for people who just can’t stay on a payment schedule.

Third — Apply for a Debt consolidation loan

The reason why we rank credit counseling and developing a plan to get caught up ahead of this option is because the first two options don’t require you to borrow any money. While a debt consolidation loan does have its advantages it does mean borrowing money. The two types of a debt consolidation loan are secured and unsecured. An unsecured loan is basically a personal loan that is made to you based on your credit history. These are sometimes called signature loans because all you have to do is sign for one. Secured loans are those where you are required to put up some asset as security. For most people that asset will be their homes in the form of a home equity loan or homeowners equity line of credit (HELOC). Secured loans generally have lower interest rates than an unsecured loan but has the risk is that if you fail to make your payments, the lender might repossess your house and you could find yourself out on the street.

Fourth — choose debt negotiation

This has become a popular option ever since the Great Recession. This is where you negotiate with lenders to settle your debts for less than you owe. The biggest advantage of debt negotiation is pretty obvious. It’s a way to get rid of all your creditors and for less than you owe. Some people are able to do debt negotiation themselves while others have turned to for-profit debt settlement companies. The benefit of both of these is essentially the same in that you get out of debt for less than you borrowed.

There are some substantial differences between DIY debt settlement and using a professional debt settlement company. The biggest of these is that DIY debt settlement doesn’t cost you anything. There are no upfront fees, no maintenance fees, and no other fees of any kind. This could be a good option if you consider yourself to be a relatively good negotiator and aren’t afraid to take on pros that work for your creditors.

How to do DIY debt negotiation

Assuming you believe you have what it takes to negotiate and settle your debts the first thing you will need to do is quit making payments for about six months. The reason why I say “about” is because after six months, many creditors will sell your debt to a third party such as a collection agency. It’s also because very few creditors are willing to talk settlement until you are six months behind in your payments. This means there is a very narrow window where your creditors would be willing to talk settlement before they sell off your debt.

The first time you call a creditor to begin debt negotiation you may be stymied. That’s an old golf expression that means there’s something between your ball and the hole that makes it impossible for you to hit directly to the green. In the case of debt negotiation a stymie is a gatekeeper or person that doesn’t have the authority to settle with you but will stall and try to prevent you from speaking with a person that does have the authority. You may have to make a number of phone calls and work through a number of different layers before you get to the right person. When you do finally reach someone that could settle your debt you need to be honest about your financial situation and lay it out in as much detail as possible. You essentially have to “sell” the idea of settling. In addition to being honest about your finances you will have to be a bit threatening that if a settlement cannot be reached you will have to file for bankruptcy. This means your creditor would get nothing. Finally, you’ll need to have the money available to pay off the settlement. In fact, this can be a very important bargaining chip that if you can reach a settlement number that’s acceptable to both you and your creditor, you will pay for it immediately either via cashier’s check or with a wire transfer.

This begs the question where would you get the money to pay for the settlements. If you are unable to borrow it from a friend or relative and if you don’t have enough in savings, you may have to take a more drastic action. For example, you might have to sell your house and downsize to a smaller one. Ditto your automobile. Or back to option #1, you might have to get a second job and save up those extra earnings during the six months you’re not making payments on your debts. Do you have an IRA or a 401(k)? If you have a 401(k) you could borrow from it and when you pay interest on the “loan” you would be basically paying interest to yourself. But be aware that if you don’t pay the money back to your 401(k) before six months it will be treated as ordinary income and taxed accordingly. And it’s about the same if you withdraw money from an IRA.

Hire a for-profit debt settlement company

If you don’t feel you could do DIY debt negotiation you could hire a for-profit debt settlement company. The way these companies work is that they will handle all the debt negotiations for you. You will send it a payment each month while it’s settling your debts that will be deposited in an escrow account. Once the company has settled your debts to your satisfaction it will use that money to pay your creditors. If there is not enough money in your escrow account to pay for all your settlements, you will be offered a payment program. Depending on the amount of debt you had, it may take you anywhere from two to four years to complete the program.

There are several advantages to using a for-profit debt settlement company. For one thing, it relieves you of all the stress and pressure associated with debt negotiation. Second, once you choose a debt settlement company it will get all those creditors and collection agencies off your back. Finally and maybe most important you’ll save money because a good debt settlement company should be able to get your debts settled for around 50% of what you actually owe.

However, there is no free lunch and it does cost money to use one of these companies. The ethical ones will reveal all their charges upfront, giving you the option of either hiring it or changing to some other option for debt relief.

The fifth and most damaging option — bankruptcy

The ultimate solution to getting out of debt is to file for a chapter 7 bankruptcy, which would get almost all of your unsecured debts discharged or eliminated. This would include credit card debt, medical debts and personal loans. However, not even a chapter 7 bankruptcy will get rid of child support, spousal support, alimony and student loan debts and it will have a seriously negative affect on your credit score. While no one knows for sure how much it would decrease your credit score many experts believe it could be as much as 180 to 200 points. A bankruptcy will remain on credit reports for either seven or 10 years. It’s very difficult to get new credit for two to three years after a bankruptcy and many landlords will not rent to a person that’s had a bankruptcy. However, filing for bankruptcy is really the only way to completely rid yourself of your debts without having to borrow money or pay back any of the money you borrowed.