Everyone has had financial emergencies, when a huge spending shock breaks your budget or spending plan into pieces. If you have more than one emergency in a short time, such as if you lost your job, your outstanding debt balances might start to spiral out of control.
Even in extreme circumstances, it is still possible to keep your personal finances under control. With some ingenuity, and a little bit of luck, you can start slashing loan balances and keep your credit rating in one piece.
What It Means to Negotiate Debt
If you are already getting behind on your bills, you will need to split all of your balances into two parts:
- The Principle. This would be the amount you borrowed (for credit cards), or the amount of service used (for things like utilities).
- The Finance Charge. This is “Everything else” – the interest fees, late charges, service charges, and everything else.
When you get behind on your bills, the Finance Charge is what will start growing out of control (particularly with credit cards).
If you want to protect your credit rating, there is nothing that can be done about the Principle for now. Debt negotiation focuses on lowering the Finance Charge, and protecting your credit score. By working with your creditors, you may be able to get some of the late fees and interest charges reduced or removed from your total balance.
To Err Is Human
Everyone falls behind on their bills at one point or another. Debt Negotiation leverages this fact – if you call your creditor to explain the situation, the person on the other line has likely been in exactly your situation before, and usually can offer you some room to breathe.
Believe it or not, creditors like negotiating these finance charges. They prefer to be paid in full on the due date, but they would much rather hear from you and adjust some finance charges to not getting paid at all. Imagine if you loaned $20 to a friend, and that friend was not able to pay you back on the day you agreed. You would much rather get a call or text from him or her explaining the situation than if they started avoiding you.
Companies are the same way. If you are not able to pay your bill one month, they do not know if a payment is coming next month, or if you are on the verge of declaring bankruptcy. If they are forced to use a collection agency to go after you to get their money, they want to add on as many finance charges as possible to pay for the extra effort. If you let them know your situation (and that they will get paid) sooner, they will usually drop some or most of those extra charges.
How to Negotiate
“Debt Negotiation” is not the same as “Debt Settlement”, “Debt Consolidation”, or any other debt management service that you might have seen advertised. The process of negotiating your debt has two basic steps.
Step One: Make Your Payment Plan
If you know you will be behind on your bills, you first need to prioritize which will get paid, by how much, and when you will send your payment. Negotiating your debt means that you will need to talk to your creditors directly. Every person you owe will want to be paid first, and you cannot promise that to everyone.
By having a strong plan, you will be able to tell your creditor what your situation is and when you expect they will be paid.
Step Two: Call Your Creditor
To rephrase, “Call your creditor as soon as possible”. You need to be in contact with your creditor as soon as you know that they will not be paid the full amount by the due date. This is where you negotiate the finance payments.
Ideally you will call them before the due date, especially before the late charges are applied. The longer you wait to call, the less likely your negotiation will be successful. Also notice that the word is “Call”, not “Email” or “Live Chat”. Remember – when a debt collector wants to get a hold of you to put pressure, your phone will be ringing. You want to put that pressure on your creditor – it is much easier to say “no” by email than over the phone.
Step Three: Know What You Are Asking
When calling your creditor, you will need to be very clear on what you are asking for. You are not asking for a reduction in principle (we will cover this later), only asking for the late fees and extra interest payments be deferred while you get money together. These are things that whoever you speak to over the phone can usually help you with (or at least their manager).
When calling, try to use the term hardship, and ask if they have a hardship assistance program. Many larger creditors have a procedure in place specifically for hardship assistance, which includes waiving late fees and lowering interest payments.
Regardless of whether such a program exists, your main ammunition is your payment plan (giving them specific progress points to hold you to), and the fact that the person on the other line is human. Explain what caused the hardship, and that you do have a plan to pay the debt. You absolutely should NOT get angry at them, or try to fight their decision – if things are going poorly with one representative, you can try to call back and talk to someone else.
Benefits of Debt Negotiation
Earlier, we showed that getting one or two months behind on your bills can be addressed by putting off some bills until next month, and paying the rest in full today. We also estimated that there would be some damage to our credit by doing this, along with a pile of late fees and interest charges.
In that scenario, there was no communication with the creditors, we just tried to see which bills had the highest fees and highest risks. We could potentially get our total loss much lower, or even zero, if we simply reached out to those last remaining creditors and asked for an extension.
Lower Cost
The most obvious benefit of debt negotiation is pure cost. Talking down your late fees and interest payments will reduce the total amount you need to pay off.
Cheap and Easy
Negotiation your debt takes some time and planning, but can be accomplished with little more than a phone call. This makes debt negotiation by far the cheapest debt management solution out there.
Preserved Credit
This is another huge bonus – talking to your creditors means they are far less likely to mark you as delinquent on any payments, and keep bad marks off your credit score.
In our previous scenario of paying off most of our bills and leaving others for next month, simply calling up our creditors to negotiate the late fees could have eliminated the problem entirely by cutting out the late fees and interest.
The bottom line is that if you get behind on your bills, call your creditors as soon as possible. Even if you cannot pay a dime this month, simply opening the lines of communication will save lots of money in the long run.
Starting The Discussion
Watch this great video from Bank of America showing how start the negotiation process with your creditors.