Negotiating With Your Creditors: How to Pay Your Debts When Money Is Tight

payingdowndebtRealizing that you can’t pay your debts is a terrifying prospect, and it’s tempting to bury your head in the sand and hope that the situation somehow resolves itself. As scary as it sounds, you need to get in touch with your creditors and inform them of your situation so that they can be more receptive to the prospect of negotiating your debt repayments. Here are some tips for negotiating with your creditors:

Work out your budget

Before you can enter into any negotiations with your creditors, you need to know exactly how much money you can offer them. Look at your budget and see what areas you can cut back on to give you a bit more to play with. Once you’ve established what you can afford to pay, set this as the maximum that you’ll offer as token payments to your creditors.

Don’t be intimidated

Creditors will frequently try to make you pay more than you can afford and you may feel as though you’re being pushed into a corner with no other option but to agree. In this scenario, you need to stick to your guns and be adamant that you can only give them a certain amount (as you’ve determined from your budget), with this being your absolute limit. Don’t let creditors bully or intimidate you into agreeing to a payment plan that doesn’t fit your budget and creates more problems for you in the long-term.

Make token repayments

In line with this, you may want to make token repayments to your creditors for whatever you can afford. This lets your creditors know that you’re not a hopeless cause who has no intention of repaying their debts. If they can see that you’re making an effort to get back on track, they may be more lenient when it comes to negotiating your repayments.

Think about lump sums

If you’ve got any savings that you can easily access without taking financial penalties, think about using them to offer up a lump sum repayment. Although it may not be the full amount that you owe, some creditors will accept an up-front payment of around 75 percent of the total repayment if you can offer it all at once.  A lump sum can put you in a better position for negotiating how much of the debt will ultimately be repaid. You may be able to offer as little as 50 percent of your total debt, but these types of negotiations usually only happen with old, bad debts.

Be patient

Negotiation is rarely an instantaneous process, and you should be prepared to go through multiple rounds of making and receiving offers and counter-offers before you can agree on a repayment plan or settlement. This can be very frustrating, but most successful negotiations with creditors go through this process before a result is achieved.

Get it in writing

Whatever you agree with your creditors, make sure that you get it in writing as confirmation. It’s also advisable to document every telephone conversation in case your creditors try to change your agreements at a later date.

Dealing with creditors can be a nerve-wracking experience but it helps if you can enter into negotiations with a calm state of mind. Examine your budget to get a concrete idea of how much money can be offered as token payments, and don’t be talked into increasing this amount. Many creditors try to do this, but it’s essential that you hold firm and inform them that offering more money is out of the question. If you’ve got savings that can be used, factor it into the equation, because it increases your bargaining power. Above all, don’t panic, because creditors will prey on your fear and try to use it to their advantage.

(photo credit: alancleaver_2000)

  • Mac

    If one is successful with negiotiating a lower payment with a creditor, I wonder how will this affect your credit rating? I would assume it would go down, but I don’t have a clue of the scale of the impact. Negotiating is a far better method than defaulting on a loan though!

    • Sally Aquire

      I read that it would probably lower it but I didn’t include that info in the post as nowhere seemed to give any definite idea of how much you could expect to see it lowered by so it would all have been a bit too vague!

      • Mac

        Actually, just signed up for a free trial @ Experian to find out my credit score (7 days free as long as you call & cancel before they’re up), and they have a tool that will allow you to estimate how your credit score would be affected if you modify your credit.
        Such as % of avail credit, # of hard inquires, # of loans, declared bankruptcy?, delinquent accts?, mortgage?. You can change your credit however you want and it’ll estimate the score based upon what you entered.

        Kind of neat to see the effects of a few changes to your financial situation. Though there’s no option to choose “negotiated a lower payment with my creditor”. Probably a bit too specific!

        • Sally Aquire

          That sounds really useful. Shame negotiation with creditors isn’t included though as it’d be interesting to see how much credit scores would be affected!

  • David/Yourfinances101

    I think the two best pieces of advice are to not run away from your debts (confront them) but also, know your rights and don’t be intimidated.

    • Sally Aquire

      Definitely agree!

    • Winston

      Debt collectors could be the nastiest people you will ever encounter in life. Although by laws, they can’t threaten you in anyway, but based on what I have seen on TV and online, there are a small groups of individual debt collectors that use illegal methods to solicit payments.

  • Gina

    I also would recommend that if you do pay off the debt in full, KEEP YOUR RECORDS!!! I had a collector looking for payment on a student loan that had been paid off about 10 years ago! Luckily, I kept my records and had it all cleaned up, but if not, it could have been a disaster!