Negotiating with your creditor and debt collector is often a practical approach. It can lower your outstanding debt and stop harassing calls. But you must be careful and avoid some common mistakes if you try to negotiate with your creditors. You can improve your chances of successful debt negotiations by knowing what to avoid and what to do instead.
The most common mistakes people make during debt negotiations with creditors
Being confused about Secured vs. Unsecured debt
Debt can be classified into two categories as either secured or unsecured.
- Secured debts - Creditors have collateral deposited against the debt, such as a particular asset (a car, a boat, a piece of land, etc.). The creditor may take over the ownership of the collateral if you fail to pay the debt. The best examples of secured debts are mortgages, car loans, boat loans, etc.
- Unsecured debts - These creditors let debtors buy products on credit without providing any kind of collateral. This creditor cannot take back the items or services from the debtor if they don't pay. A few examples of unsecured debt are credit card debt, payday loans, medical bills, utility bills, etc.
Some unsecured creditors may threaten to repossess goods. They also attempt to trick the debtor into believing they are secured, creditors. But if you know what type of debts you have, they can’t fool you.
Not doing proper research on debt and creditor policies
One effective strategy for preparing for debt negotiation is to conduct thorough research and gather relevant information. This includes understanding the details of your debt, such as the outstanding balance, interest rates, and any applicable fees or penalties. Research the creditor's policies, negotiation practices, and any potential options for debt relief or repayment plans.
As per Sai Blackbyrn, CEO of Coach Foundation, by gathering this information, you can approach the negotiation process with a clear understanding of your financial situation and options. This allows you to develop a well-informed negotiation strategy and set realistic goals.
Another crucial aspect of preparation is assessing your financial capabilities and limitations. Take a close look at your income, expenses, and overall financial position to determine how much you can realistically afford to pay or offer as a settlement.
Not anticipating the creditor's rights
Because they can reclaim valuable property, secured creditors are in an unquestionably stronger position. But unsecured creditors also have a few other rights:
- They can call and write about their outstanding debts, such as credit cards or medical bills. The debtor must maintain their composure until all conversations are concluded because the creditor may still call during that time and demand payment.
- They are able to file a lawsuit. Creditors may take legal actions against the debtor, such as filing a lawsuit for contract violations. Some people will file a lawsuit even while talks are ongoing. Once more, the debtor must maintain their resolve and keep negotiating.
- They may garnish your wages legally if you are unable to pay off your debt. If you lose a lawsuit, your salary may be garnished by the losing party.
- They can seize bank accounts. A creditor may withdraw money from your bank accounts if it prevails in legal action against you. To save money, you should stop all direct deposits and get your bank balances as low as possible.
Not understanding the weak points of your creditors
The following flaws apply to unsecured creditors as well as secured creditors. You can benefit from using these.
- They might be covered by laws governing debt collections. The Fair Debt Collection Practices Act (FDCPA), which restricts the methods debt collectors may employ to recover debts, applies to negotiations you have with a debt collection agency. Although the FDCPA does not apply to creditors, many states have laws restricting creditor collection methods.
- Suing is costly for creditors. Due to the time and money involved and the lack of certainty of success in court, creditors typically view litigation as a last choice.
- Creditors without collateral are considerably more vulnerable. They are significantly less able to negotiate than secured creditors. Unsecured creditors rarely have the right to take back possession of the property.
- They stand to lose a lot more. The unsecured creditor typically receives nothing if the debtor cannot pay their debts and instead files for bankruptcy protection.
Lacking behind on negotiation techniques
Practicing negotiation techniques and role-playing potential scenarios can help debtors become more comfortable and effective in the negotiation process, reducing the likelihood of making common mistakes.
As per Roy Lau, Co-founder of 28 Mortgage, debtors can increase their chances of achieving a favorable outcome in debt negotiation by building confidence and improving negotiation skills. For example, a debtor can practice active listening, which involves paying close attention to the creditor's needs and concerns, clarifying any misunderstandings, and responding appropriately.
In doing so, the debtor can build rapport with the creditor and show a willingness to work collaboratively toward a mutually beneficial solution.
Negotiating or settling debts under pressure
Usually, consumers attempt to negotiate with a creditor when they have no other options. They chat with a pushy collector or contact the original creditor to avoid the repossession of their car or garnishing of their wages. Due to the pressure and lack of preparation, the debtor becomes significantly disadvantageous in this scenario.
Agreeing on unflattering terms is expected if you are weak while negotiating debt. Without having enough time to consider the real consequences, you may deal with and sign the settlement agreement with a creditor.
Not maintaining communication with the creditor
One effective strategy for preparing for debt negotiation is to build a relationship with the creditor by staying in communication and providing regular updates on your financial situation.
According to Ben Lau, Founder of Featured SEO Company, this can help establish trust and goodwill with the creditor, making negotiations more productive. For instance, if you proactively communicate a change in your financial situation, they might also agree to a new repayment plan.
Also, be honest about what you can afford, show genuine interest in resolving the debt, and respond to their requests. It can help avoid common mistakes such as being seen as uncooperative or unreliable.
Considering each creditor separately
Due to pressure, an error occasionally occurs. Frequently, the creditor with the highest balance and most aggressive representatives receives more attention (and funding) than others who could be of more priority. Due dates, payment amounts, and other considerations might sometimes make one debt appear more urgent or more straightforward to manage at the time.
Not knowing about the collection laws
When interacting with debtors, creditors are required to follow the strict rules. As a debtor, you should examine collection laws to help spot instances where creditors don't abide by the law to preserve your rights. The FDCPA restricts the methods debt collectors might use to collect debts. For example, New York has stringent debt collection rules that shield borrowers from harassment by creditors.
Not asking the collectors to validate debts
Occasionally, debt collectors or creditors will contact people about a debt they don't owe. People frequently agree to pay off that debt without validating it. So, whenever a creditor contacts you regarding a debt, ask for a debt validation letter. The creditor must send the letter with information about the original creditor, the total amount owed, and any other pertinent details. People should dispute the debt before initiating the debt settlement negotiations if the information provided does not match the facts they already possess.
Using the wrong source of money to settle the debt
When negotiating a debt, cash is the best mode of payment. A creditor will be more keen to accept a debt settlement offer and for a smaller sum if a debtor can transfer money right away. The debtor must keep in mind these things also:
- Utilizing a home equity loan for debt settlement or paying off an unsecured loan can be risky. The house may be in danger if the debtor later experiences financial difficulties making the additional mortgage payment.
- Taking out money from the car loan can also be risky, as the vehicle will be forfeited if the debtor cannot make the additional loan payment.
- Using retirement accounts to settle the debt can be challenging in other ways. If the money is taken out as a loan, the debtor will be required to repay the loan and a substantial tax. You must also consider that saving from debt settlement can be taxable income, as the IRS normally considers canceled debt of $600 or more taxable. You must also face these tax consequences if you pay income taxes per IRS rules. The debt settlement will also be added to your credit report, negatively affecting your credit score.
Paying to the creditors more than usual
Bargain well and pay as little as possible whenever you initiate a DIY debt settlement negotiation. It is expected to get a 40% debt settlement with good debt negotiation skills. Most unsecured creditors will accept a settlement for pennies on the dollar. Creditors may negotiate for a small amount of money to resolve the debt. This is particularly valid for commission-based third-party debt collectors.
Choosing monthly payments instead of making a single lump sum payment
A common mistake is accepting monthly payments rather than a single lump sum payment during debt negotiations. Missing payments results in default on the negotiated agreement and additional costs, such as late fees.
Accede to postdated checks and automatic withdrawals
Agreeing to a negotiated debt payment through automatic bank account withdrawals or postdated checks may look wise. But, practically, you'll be doing wrong.
Even after the debt has been settled, some creditors or debt collection companies may still make automated withdrawals from bank accounts. Alternatively, they may deposit the post-dated checks too soon. As a result, incur extra debt in overdraft penalties.
So, don't initiate an autopay facility or allow postdated checks. Send a check through certified mail or money order to the creditors. When sending a check for a lump sum amount or the final monthly installment, make sure to write paid in full on the document. Creditors can't collect a debt once it has been paid in full. Also, keep copies of your check for future reference.
Not keeping records while negotiating debts
Most debtors provide contradictory facts. Debtors must keep thorough records of their conversations, including who they spoke with, when, and for how much.
Not utilizing a professional help
You already know how challenging it may be to deal with creditors if you have ever been the victim of creditor harassment. It won't be simple to bargain with them and acquire the outcomes you want. For these reasons, you need a skilled debt relief attorney or a professional debt settlement company on your side. They will be familiar with the law and capable of defending their rights.
An attorney for debt relief can assess your circumstances and advise you on the best course of action to help you pay off your debts. Reputed debt settlement companies can guide you through the debt settlement process. They negotiate on your behalf and give you the best settlement possible with more considerable savings.
Though they may charge additional fees to settle your debts, they can suggest your future course of action. With proper help, you may remove the negative impact of settling debt from your credit reports and credit score.
Not seeing the actual picture
You may be able to pay some—but not each of your debts after repeated negotiations. Eliminating your unsecured debts should be your ultimate objective in debt negotiations. But you may also try to reduce your debt burden to a point where you can pay off the remaining balances within a certain time.
Even after paying thousands of dollars to resolve their debt, many debtors may still decide to file for bankruptcy protection. For these reasons, many consumers choose a debt management plan. They consider it as one of the smart financial choices that can reduce their financial burden.
The debt management plan has another advantage. You may determine the monthly payment at an affordable rate based on the consumer's budget. It won't hurt your credit score, unlike if you settle the debt.
With proper help you can
- Lower your monthly payments
- Reduce credit card interest rates
- Waive late fees
- Reduce collection calls
- Avoid bankruptcy
- Have only one monthly payment