Let the Negotiations Begin
If you are at least 4 months (or 120 days) past due your debt, ask your lender to settle the debt for less than the full amount you owe. The lender may settle if they are convinced that this is the best chance they have to getting their money back. The may realize that you have no assets for them to sue you and that your state prohibits wage garnishment.
Additionally, there are federal tax ramifications to settle debt for less. The amount the lender writes off is treated as income to you and may increase your federal tax bill. For example, if you own $15,000 and the lender agrees so settle for $10,000, the lender will send the IRS a 1099 for $5,000 which is treated as income. However, if you are insolvent this may not affect you. You will have to check with a CPA to determine if the IRS considers you insolvent.
If the lender agrees to settle your debt for less, be sure to ask the lender to report your debt as current and remove all negative information related to the debt from your credit report. They may or may not agree to this; however, it doesn’t hurt to ask.
When negotiating with your lender, never be demanding or rude. Never get angry, defensive or confrontational. Remember you must give a little to get a little and to know the minimum that you need to get out of your negotiations and the most you can afford to give your lender.
Additionally, never tell the lender exactly what you want. Start low and work your way up. For example, if you would like your interest rate dropped from 20% to 10%, ask for 6% and work your way up to 10%. Make them think you are open to negotiating and let them make a counter offer. You should plan to go back-and-forth to come to middle ground.