Other than declaring bankruptcy, your other options in dealing with burdensome debt is to either cut down on unnecessary expenses and practice domestic austerity or try negotiating debt with your creditors. Bankruptcy is an option of last resort in most cases but the threat of filing can be used as leverage in dealing with unsecured debt. In a bankruptcy, unsecured debt is usually discharged meaning that the creditor receives nothing.
Negotiating to reduce your debt is a consideration when you fall behind on your payments and letters and phone calls begin to clog up your mailbox and cell phone. It may become imperative if you are threatened with a lawsuit, foreclosure or you receive a small claims suit in the mail or are personally served if it is a larger debt. If a judgment is issued against you, then your bank accounts are subject to levies and your wages to garnishment. If the suit is over a secured loan like a car, it will be repossessed.
Negotiating debt is generally easier with unsecured creditors like credit card companies. Hospital or medical bills can be negotiable too. As indicated, the threat of a bankruptcy might be used if the creditor refuses to negotiate. However, the older the debt, the more likely the creditor is willing to decrease the amount owed.
When negotiating with the creditor, it is always best to start low or around 15% of the debt but go no higher than 50%. You stand a better chance of negotiating debt at a lower percentage if you have the funds to immediately pay it at that amount or can do so within a month or two. The longer you need to resolve the debt, the less likely the creditor is to substantially reduce the obligation.
If you are going to pay the overdue debt, then try to avoid these serious mistakes:
- Do not use a debt settlement company. They charge substantial fees and you usually end up paying the debt over many months without much savings. Less than 10% of debtors complete these programs.
- Do not use your home equity or other secured property to pay off unsecured debt. If you fall behind on the secured loan, you risk losing the collateral.
- Be realistic about whether you can pay off one debt while still owing thousands on others and end up filing bankruptcy anyway since you will possibly have thrown away a substantial amount of money.
- Do not use retirement funds. You will have to pay a substantial penalty for early withdrawal of these funds.
One other aspect is if the creditor is not the original one from whom you borrowed funds. Debts are sold and bought as part of the debt industry and in many instances, no documents evidencing the debt are transferred or they become lost. If the creditor is a collection agency, ask them to send you proof that you owe the debt such as a signed contract. In many cases, none exists and despite threats of lawsuits and wage garnishments, the collector knows that without such proof it cannot prevail in court. In these cases, ignore the threats and the creditor will eventually give up.
If you fall into arrears on your mortgage, you can try negotiating with the mortgage servicer for a repayment plan over time, though you must be able to make the current payments. Many servicers will consider one since a lender will lose money over a foreclosed home. If foreclosure has begun, ask to extend the time for you to make up the arrearages. If your home does go into foreclosure, most states give you the right of redemption by allowing you to pay off the entire loan. You could also file Chapter 13 bankruptcy if your attorney determines you have the financial wherewithal to do so and it is feasible for your situation.
If you are temporarily laid off, you may ask for a period of forbearance where payments are suspended for a set time, though you will have to make extra payments when they are reinstated.
Otherwise, negotiate for a loan modification to the current market rate or convert from a variable to a fixed-rate mortgage if it brings the interest rate down. Other options are increasing the repayment period, which will reduce the monthly payments or reamortize the loan by adding the missed payments to the principal but only if the new loan is at a reduced interest rate.
If you have any questions about negotiating your debt, do not hesitate to contact DCDM Law, we are happy to help.