The ABCs Of Debt Negotiation

If you’re a small business owner, your day is just never over. You might lock up and walk out at 5 PM or 6 PM but you’ll probably then spend the evening worrying about your business – especially if you’re facing a huge stack of debt. You’ll be asking questions of yourself like, “how am I going to pay repay all that money?” Or “what will happen to my business if I can’t repay my debts?” Or “what will I tell my employees if I have to file for bankruptcy?”

As the British would say, “stay calm and carry on”

The answer to your debts is not to just sit around and stew over them. You can take some positive actions to keep your business out of bankruptcy and to sleep better at night. The answer is debt negotiation.

Yes, you can negotiate your debts

Most creditors will be willing to negotiate with you. But before you reach for that phone there are things you need to do first. This includes:

  • Writing out a detailed list of your debts
  • Choosing the debts you need to have restructured first and the concessions that you want from each of your creditors
  • Reviewing your budget
  • Assembling all your financial information

Your list of debts

Your detailed list of debts should include the names of your creditors, the amount you are required to pay each month, interest rates and your outstanding balances. You should also note how far behind you are, your payments and the total amount that is past due. It’s also important to divide your debts into two columns – Unsecured and Secured. In the case of a secured debt, you should write down whatever asset you used to secure it. If you have unsecured debts such as credit card debts, write them down in order of their interest rates with the debt that has the highest rate at the top of your list down to the one with the lowest rate.

Choosing which debts to negotiate first

Now that you’re organized and have all of this information you can decide which debts to negotiate first as not all of them are created equal. You need to determine which ones are the most important because they would have the most severe consequences if you are unable to restructure them successfully. You’ll probably want to first negotiate your secured debts to avoid having one or more of your assets repossessed. As an example of this it could be tough to continue running your business if the power company was to turn off your electricity.

Why review your budget

It’s also critical to review your budget so that you’ll know what payments you can afford to make on your debts. The key word here is affordability. When you contact a creditor your primary goal should be to negotiate terms that will be affordable given your budget. If you are more than 120 days past due on one of your debts you might actually try to negotiate a settlement. This is where you ask your creditor to let you settle the debt for less than the full amount you owe.

Debt negotiating basics

When you begin debt negotiation with a creditor there is some basic rules you should follow that will increase your chances of getting a deal that will make the both of you happy. The first of these is to never put all of your cards on the table. You should always hold a little back when you tell a creditor creditors how much you could afford to pay on the debt each month, the number of months that you need to make interest-only payments and so on. If you don’t let the creditor know your bottom line right away, you will give yourself some time to negotiate. In some cases you might luck out and the creditor except your initial offer. In most cases, he or she will respond with a counter offer. Depending on the circumstances you might want to either counter the counter offer or just accept it, as you would still be better off financially than you were before.

Second, know your exact bottom line or the minimum you need to get out of your debt negotiation and the most you can afford to give the creditor. Never agree to more than that.

Know you have to give a little to get a little

Make sure you understand that a successful debt negotiation is when both of you leave the bargaining table with something. As an example of this, in exchange for getting a creditor to lower your monthly payments you might have to give it a lien on one of your other assets. Just keep in mind that your primary goal is to give as little as possible but to get as much as possible.

When you have an edge

The harsh fact of debt negotiation is that whoever has the edge will have the stronger bargaining position. This means the other person will have to give a little to have any chances of getting something. In most cases it’s your creditor that will have the edge or stronger position. This will certainly be true of those of your creditors where you have secured debts because if you can’t work out a deal with them they know they can always repossess your collateral.

Avoid being demanding, getting angry or being confrontation

Which do you think would attract more people a cup of vinegar or a cup of clean, filtered water? The overwhelming majority of people would likely choose the cup of clean, filtered water. And the best path to debt negotiation is by being that cup of water – by remaining calm, polite and cool. If you lose your temper, get confrontational or are too demanding your creditor is most likely to just cut you off. If the time comes when you feel you’re about to lose your temper, end the negotiation and then call back and resume it later after you’ve had the opportunity to calm down and clear your head.

Assembling the financial information

You may have to reveal very detailed financial information in order to successfully restructure a debt. It’s always dangerous to share information about your assets with your creditors. However, if you feel you’re between a rock and a hard place you may not have any option but to share this information with them.

Even if not, you should have all your financial information on hand. This should be copies of your loan agreements, a list of your debts, your monthly payments and any assets you could offer up as collateral if necessary.

If you are able to successfully negotiate a debt

Whenever you are able to reach agreement with a creditor, ask for it to be put in writing. If for some reason your creditor refuses to do this, write out the agreement yourself, date and sign it and then send a copy to the creditor. The agreement should include:

  • Its duration
  • Any deadlines
  • All payment amounts
  • Applicable interest rates
  • The amount of the fee you would read to and under what circumstances you will pay each fee
  • Everything the creditor has agreed to do or not do.
  • When you and the creditor would be considered in default of the agreement and what the consequences of this default will be.

Get an attorney

Before you sign any agreement that you have negotiated with a creditor, especially if a lot of money is involved or an asset that you don’t want to lose, get an attorney to review the agreement. It’s important that you are adequately protected and that the agreement doesn’t have the potential to create even more problems for you in the future.