Strategies for Negotiating With Creditors

With the right negotiation strategies, you might be able to reduce your debt.

One of the many ways to get control of debt is to negotiate with creditors in an effort to lower the overall amount due. When successful, debt negotiation might be an option for avoiding garnishment, bank levies, foreclosure, and bankruptcy.

But before you start talking to creditors, make sure you understand some of the key negotiation strategies. Read on to learn general negotiation strategies as well as strategies to use when negotiating with particular creditors.

General Debt Negotiation Strategies

Here are some strategies you can use when negotiating with most types of creditors or debt collectors.

Lead with bankruptcy. Regardless of the actual likelihood of a bankruptcy filing in the near future, hinting to the creditor that bankruptcy is a likely future event might cause the creditor to lower its settlement offer. In Chapter 7 bankruptcy filings, and in most Chapter 13 bankruptcy filings, the entire amount owed to the average unsecured creditor is discharged—meaning most unsecured creditors get nothing. Unsecured creditors (such as credit card companies) know this, and most would rather settle the debt for pennies on the dollar than wind up with nothing if the debtor files for bankruptcy protection.

Aim for 50% or less. It might take some time to get there, but most unsecured creditors will settle for around 30 to 50% of the debt. Therefore, you should start with a lower offer—around 15%—and negotiate from there.

Have cash on hand to make payments soon. Creditors are more likely to settle if funds can be transferred right away. Debtors who are able to amass a sum of money before negotiations, and then can offer to transfer funds immediately to the creditor, are more likely to get a lower settlement offer. As the saying goes, “a bird in hand is worth two in the bush,” and creditors are more willing to take an offer of cash today rather than have to wait from multiple smaller payments over time. (If you need help drafting a settlement offer letter, use Nolo's eForm Offer to Settle Debt With Reduced Lum Sum or talk with an attorney.)

Know the big picture. After several negotiations, the debtor might be able to settle some but not all debts. The debtor’s goal in the negotiations should be to eliminate all debts or, if that isn’t an option, to eliminate enough debt that the debtor can pay off the remaining debt in a reasonable amount of time. If the debtor isn’t able to do this, the debtor isn’t in any better a position than before starting negotiations.

Tips for Negotiating With Particular Types of Creditors

Sometimes your negotiation strategy will depend on the type of underlying debt. Here are some tips for negotiating debts with particular types of creditors.

Negotiating With Mortgage Companies

Home loan modifications can help some debtors ease expensive monthly mortgage payments and free up funds for other living expenses. Call your servicer to ask about modification options.

Negotiating Car, Motorcycle, Boat and Other Secured Loans

As with home loan modifications, it is easier to negotiate these types of secured loans if the loan originated from a small local bank. Otherwise, the debtor should use these general negotiation strategies: lead with bankruptcy, have cash on hand to make payment soon, and keep an eye on the big picture. (For details on negotiating car loans and leases, see Negotiating With Car Loan Lenders and Car Lease Companies.)

Negotiating Student Loans

It is very difficult to negotiate student loan debt, due mainly to the fact that student loans are rarely dischargeable in bankruptcy. However, there are government programs that allow you to reduce your monthly payments in certain circumstances, put off paying loans for a period of time, or even cancel your federal student loans altogether.

Negotiating Back Taxes

Negotiating back taxes is generally more successful if the taxes are several years old. But there are several pitfalls to avoid. (To learn more, see Nolo’s article When You Can’t Pay Your Income Taxes.)

Negotiating With Credit Card Companies

Credit card negotiations use all of the general negotiation strategies listed above. These are the easiest debts to negotiate, although they still take some time and patience to get to a reasonable settlement amount. (Learn more about negotiating on credit card debt.)

Negotiating Unsecured Bank Loans

For unsecured bank loans, use the same negotiation strategies as with credit cards. Also, it is worth noting that the laws that govern banks and the laws that govern credit unions are not identical. Debtors should utilize the same debt negotiation strategies for each, but should keep in mind that credit unions might be able to cross-collateralize debt and make it more difficult for debtors to settle the debt for 50% or less. (Learn more credit union's ability to cross-collateralize in Credit Union Cross-Collateralization.)

Negotiating With Local Merchants

If you owe money to a local dentist, attorney, auto mechanic, or other service provider, you can negotiate in the same manner as any other unsecured debt, such as credit card debt or unsecured bank loans.

Getting Help

If debtors understand these basic concepts before making that first call to a creditor, debt negotiation can 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 lawyer.

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