Avoiding calls from creditors isn’t a smart long-term strategy, and sooner or later you’ll have to face the debt you owe. While creditors are motivated to get paid, they also know that recouping some of the balance is better than recouping nothing. This is why most are willing to negotiate with consumers.
Use these tips to try to nail down a plan with creditors that may lessen the blow to your credit.
Be Proactive
If you’re having a financial hardship, be proactive and contact the creditor before a payment is late to explain your situation and ask them for help in working out a plan. It’s best to avoid your account going into collections because once it does, there will be greater damage to your credit scores.
Be Honest and Explain the Facts
Creditors tend to understand that a difficult situation — life change, medical emergency, job loss — can force you to avoid paying bills. If this is the case, call your creditor and succinctly summarize the situation as honestly as possible, and then explain how you plan to move forward.
The sooner you confront your debt, the more likely the creditor will negotiate.
Write It Down
When you make the call to the creditor, be sure to take notes. It’s a good idea to record the call date, creditor’s name and any other pertinent information so you don’t forget helpful details.
The Negotiation
Your best-case scenario for paying off debt is to pay as little as the creditor will accept. Many times the best strategy is to offer a lump sum as a one-time payment.
Start off lower than you can afford because the creditor will likely counteroffer. This is the art of negotiation, and when it’s all said and done, you’ll most likely wind up meeting somewhere in the middle.
How much will creditors settle for? Debt Settlement firms often advertise that they see results of 30% to 50% of the balance. Given that you might start your negotiation below 30%. For example, if you owe $5,000, offer $1000 to start, which is 20%. Assume the creditor will counteroffer with $2,500 or $3,000.
You can also negotiate lower interest rates, lower minimum payments, and a change in payment due dates.
Have an Affordable Number in Mind
Only agree to a payment or payment plan that’s sustainable for your income and budget. You should decide what that is ahead of time, whether it’s a one-time payment or a payment plan.
Overextending yourself will only result in you defaulting on the agreement, which will bring you right back to the place where you started.
The Settlement Agreement
Once you and the creditor complete your negotiations and have an agreement, you’ll need to get the terms in writing. Request a settlement agreement be sent to you right away. Not only will this protect you in the short term, it can help prevent creditors from coming after the remaining debt later.
If it’s possible, have an attorney involved in the process to protect your financial interests.
It’s important to remember that settling a debt is different than paying off the original amount in full. While settling a debt will reduce your balance to zero, the fact that you settled instead of paying off the entire balance will negatively impact your credit scores. And while the activity will remain on your credit report for up to seven years, settling is always a better option for your credit profile than paying nothing.
There’s also one other thing to consider: If the amount of forgiven debt is $600 or more, you may owe the Internal Revenue Service. If this situation applies to you, you’ll receive a 1099-C tax form from the lender, and you’ll be responsible for paying the taxes on the forgiven debt.
Follow Through
Honor the terms of your agreement with creditors to avoid additional damage to your credit scores. Make your payments on time, or meet your agreed-upon payment deadline.
Request Late Payments Be Removed
Because payment history is 40% of your credit score, even one late or delinquent payment mark can hurt. Ask the creditor if they would consider removing late payments from your accounts once the settlement is paid.
Late or delinquent payments can happen, so be aware of your situation with monthly monitoring. Stay on top of your debt, and work to correct any credit-damaging missteps as soon as possible.
