Let’s face it, creditors don’t want to lose money because they are in the business of making money. If you are struggling to pay off your debt, even after cutting expenses, living on a budget, and making more money, then it’s time to contact your lenders to determine if a deal can be worked out so you pay them back.
There is no guarantee that creditors will work with you but it never hurts to try. However, the sooner you contact them when you realize there is a problem, the more they are apt to work with you.
Don’t wait until you have missed 5 payments to contact your lender. Contact them if you will miss the first payment.
Your lender may not give you everything you ask for, however, they may make some concessions that will give you a little breathing room to help improve your finances.
Prepare to Negotiate
Before contacting your lender to lower your interest rate and/or monthly payment, it is vital that you do some upfront planning first.
You should first create a detailed list of your debts; decide what debt you want to negotiate and what you want to ask for. You also need to take a look at your budget to determine what type of payments you can handle.
If you don’t feel comfortable negotiating with your creditors, you may seek an attorney or CPA to handle it for you. Hopefully, you have a relationship with an attorney or CPA that will charge you very little money to accomplish this.
Another option is to find a nonprofit credit counseling agency to help you. You can also ask a family or friend for help.
List Your Debt
Unsecured or secured debit
You should also list if the debt is secured or unsecured. If the debt is secure, list what asset was used to secure the debt (car, house, etc.). For your unsecured debt, list them from high-interest rate to low-interest rate.
Now next to each debt, record the new payment you would like for each lender to agree to. Then leave a space for the negotiated payment when you finally negotiate with the lender.
Remember to check against your budget to determine if your desired payment can be accomplished. It makes no sense to negotiate for a lower payment to then find out, that you still don’t’ have enough money to make the payments.
Prioritize Debt
All debts are not created equal. Some debts are more important than others, regardless of interest rate or the amount of payment. Secured debts are a high priority because creditors could end up taking your asset (collateral) used to back the loan.
You should prepare to negotiate with your creditors the following debts first.
- Mortgage
- Car loan
- Past due rent
- Court-ordered child support
- Past due federal taxes
- Past due state taxes
- Federal student loans
For unsecured debts, typically credit cards start with the highest interest rates because these debts are costing you the most money each month.
Let the Negotiations Begin
During negotiating with your creditor don’t agree with temporary changes because you will find yourself back into the same hole. Your goal is to get a permanent change.
Keep in mind that if you can’t live up to the negotiated agreement, most creditors will not negotiate with you again. So make sure the agreement your reach, you can live with it.
If you are at least 4 months (or 120 days) past due to 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 get their money back.
They 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 the 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 to settle for $10,000, the lender will send the IRS 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.
Stay calm when negotiating with lenders
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 counteroffer. You should plan to go back and forth to come to the middle ground.
What Lenders Require
Some lenders may require they review your financial information before they agree to anything. They make ask to see your household budget, list of all your debts, list of your assets with approximate values, and copies of your loan agreements. Remember to only list assets you own free and clear.
WARNING: Keep in mind that you may not want to share information about your assets with your lenders because they may decide to sue you to collect on your debt.
Your lender may demand that you sell your asset(s) to pay off the debt. By giving them this information, you have made it easier for them to go after you.
However, if you really want to work out an agreement, you may have no option but to share this information. But keep in mind, it may backfire on you.
Also, keep in mind that a secured creditor may require that you increase your collateral using your assets. If you don’t have any assets, the creditor may decide you are too much risk to work with you. They may decide to take back the collateral you used to secure your loan.
A lender may require you have a cosigner for any new agreement. You may want to find ahead of time a friend or family member willing to cosign for you. The cosigner will be responsible for the agreement if you default on the agreement. So be careful.
If you default on the agreement, this could ruin your relationship with the friend or family member especially if you promised to never default on the agreement. You should ensure that your cosigner can live up to the agreement and make them aware of the risks of cosigning.
Your lender may ask you to make your request in writing. If this is the case, be sure to send via certified mail with a return receipt so you know it was received by the lender.
Whenever you speak to a lender representative be sure to keep a record of who you spoke to, the date of the discussion, what was asked for, how the lender responded, and the details of the agreement (if reached).
Contacting Creditors
The first time you contact your lender to request a reduced payment, be sure to have a good explanation as to why you need a reduced payment. It may be because you lost your job, nonpayment of child support, too much credit card debt, illness, etc.
Explain to the lender with confidence that you are working diligently to solve the problem by activities such as living on a strict budget, getting a second job, and/or taking a money management course.
Stress to the lender that you want to continue making payments on your debt but in order to do so, you need a new agreement. Be very specific as to what you want but be prepared to negotiate.
Don’t show all your cards at once. If you want a $100 reduction in your monthly bill, ask for $150 and work your way down to $100, if possible.
If the first person you speak to isn’t budging to working with you, call back later to speak to a different representative or ask for a supervisor or manager. A supervisor or manager will have more decision-making authority and may be able to agree with your request.
Some lenders may refuse to negotiate with you directly and ask that you contact a credit counseling agency for them to negotiate on your behalf.
Get it In Writing
If you are successful in negotiating better terms for you repaying your debt, be sure to get it in writing. If the lender refuses, write the agreement yourself, date and sign it and send a copy by certified mail to them.
The agreement must include deadlines, payment amounts, duration of the agreement, interest rates, fees, etc. Having an agreement in writing is vital should problems arise in the future.
If your agreement involves a lot of money you may want to have a consumer lawyer review it to make sure it’s in your best interests.
Be sure not to hire a lawyer until you know exactly how much it will cost you. Most lawyers charge $100 to $500 per hour depending on where and the size of the law firm.
If you cannot afford a lawyer, you may get help from the Legal Aid Society in your area, which is a law firm for poor people.
You may want to visit a law school that has a legal clinic where a lawyer or law student can review your agreement for free. Another option is to contact your local or state bar association to find a consumer lawyer who does pro bono work for consumers with financial problems.