Debt Negotiations: Common Mistakes

Avoid these common pitfalls when you are negotiating with creditors to reduce debt.

By , Attorney University of Minnesota Law School
Updated 12/06/2023

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, be sure avoid some common pitfalls. By knowing what not to do, you can increase your chance of successful negotiations.

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.

  • Secured 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 the merchandise.

Some unsecured creditors might 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:

  • They 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.
  • They can garnish wages. If a creditor wins a lawsuit against you, it can garnish your wages.
  • They 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.

Not Knowing Your Creditors' Weak Points

Both secured and unsecured creditors have the following weaknesses. You can use these to your advantage.

  • They might 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.
  • It 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.
  • They have much more to lose. If the debtor cannot settle debts and instead files for bankruptcy protection, the unsecured creditor usually gets nothing.

Using the Wrong Money

Cash 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:

  • Using equity in secured property to pay unsecured debt. (For example, avoid 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 is huge.
  • 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 negotiated.

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

The 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.

Getting Help

If 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. If you need help dealing with debt collectors or would prefer someone else handle the negotiations, consider talking to a debt settlement lawyer.

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