Negotiating with creditors is often a good way to reduce your debt
load and get some relief from nagging creditor calls. If you decide to
bargain with your creditors, however, be sure avoid some common
pitfalls. By knowing what not to do, you can increase your chance of
Here are some of the most common mistakes people make when negotiating with their creditors:
Not knowing if your debt is secured or unsecured
There are two main kinds of debt: secured and unsecured.
creditors. These types of creditors have an interest in some sort of
asset (car, boat, land, and the like). If you don’t pay the debt, this
creditor is allowed to take the property.
- Unsecured creditors.
These types of creditors allow debtors to purchase goods on credit
without any security (Home Depot, Target, and the like). If the debtor
does not pay, this creditor cannot go to the debtor’s home and take back
Some unsecured creditors may try to
convince the debtor that they are actually secured creditors and will
threaten to take back merchandise. If you know if the debt is secured or
unsecured, you won’t be fooled by this tactic.
Not knowing the creditor’s strengths
Secured creditors have an obvious position of strength because they can repossess valuable property.
Unsecured creditors have other positions of strength:
can call and send letters. Even during the negotiation process the
creditor may continue to call and demand payment, so the debtor must
stay strong until all negotiations are finalized.
- They can sue.
Creditors can sue debtors for breach of contract. Some will start a
lawsuit even while negotiations are pending. Again, the debtor should
stay strong and continue to negotiate. (Learn more about creditor lawsuits.)
- They can garnish wages. If a creditor wins a lawsuit against you, it can garnish your wages. (Learn about wage garnishments.)
can levy bank accounts. If a creditor wins its lawsuit against you, it
can take money from your bank accounts. You should get bank balances as
low as possible and stop all direct deposits in order to protect your
funds. (Learn about property levies.)
Not knowing your creditors’ weak points
Both secured and unsecured creditors have the following weaknesses. You can use these to your advantage.
may be subject to collections laws. If you are negotiating with a debt
collection agency, it is subject to the Fair Debt Collection Practices
Act (FDCPA), which limits the tactics collectors may use to collect
debts. While creditors are not subject to the FDCPA, many states have
laws that limit creditor collection tactics. (To learn more, see our Illegal Debt Collection Practices topic area.)
is expensive for creditors to sue. Creditors generally see litigation
as a last resort because of the time and money it requires, and because a
lawsuit does not guarantee the creditor will recover any money.
Unsecured creditors have even more weaknesses.
- They have far less negotiating power than secured creditors. Only in rare situations can unsecured creditors repossess property.
have much more to lose. If the debtor cannot settle debts and instead
files for bankruptcy protection, the unsecured creditor usually gets
Using the wrong money
is king when it comes to debt negotiation. If a debtor can transfer
funds immediately, the creditor is more likely to settle quickly and for
a lower amount. However, the debtor should avoid the following:
equity in secured property to pay unsecured debt (for example, paying
off unsecured debt by getting a home equity loan). If the debtor later
has problems paying the increased house payment, the debtor’s housing is
at risk. Car equity loans are the same. If the debtor cannot pay the
increased car payment, he or she will lose the car. The comparative risk
- Using retirement funds to pay debt. The debtor will
have to pay a hefty tax for withdrawing the funds, or will have to pay
back the funds if taken out as a loan.
Paying too much
Most unsecured creditors will eventually settle for pennies on the
dollar. The debtor should start low and aim for 50% or less as the
overall settlement amount. (If you want to send a written offer to settle to the creditor, get Nolo's eForms Offer to Settle Debt With Reduced Lump Sum Payment or Offer to Pay Debt in Installments.)
Not taking notes during negotiations
Most creditors give conflicting information. Debtors need to take
detailed notes about who they talked to, when, and what amount was
Using a debt consolidation company
These businesses charge a hefty monthly fee, and there is no guarantee that any debt will actually be settled.
Missing the big picture
debtor should look at all debt and then examine the real likelihood of
being able to pay one-half of that debt. Many debtors may still end up
filing for bankruptcy protection even after paying thousands to settle
debt. (To learn more about bankruptcy, see our Bankruptcy topic area.)
debtors understand these basic concepts before making that first call
to a creditor, debt negotiation may be very worthwhile and assist in
relieving financial burdens.
(To learn more about negotiating with creditors, see our Debt Settlement & Negotiation area.)