How to Negotiate with Creditors to Avoid Bankruptcy
Money can’t buy happiness, but not having enough of it can definitely make you miserable.
That is never more true, than when creditors are calling you at all hours of the night. While it may seem that your creditors would rather drive you into bankruptcy than negotiate with you, that is rarely the case. In this article we cover some alternatives to declaring bankruptcy, some basic guidelines to navigate alternative solutions, and some general tips to keep you on track throughout the process.
Why is bankruptcy not the solution?
- Because the record of the filing stays on your credit report for 7 to 10 years
- No lender worth his salt will even let you set one toe inside his door for two years after you file.
- When you do find someone to lend you money, not only will the interest rate will be sky-high, the fees and costs associated with the loan will leave you gasping for breath.
- Most important of all, you don’t get rid of your debts COMPLETELY! If you think declaring bankruptcy offers you a loophole to get out of paying money you owe, you’re wrong. Let me explain. A new law passed in 2005, the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” makes it difficult for you to file under Chapter 7 where you are allowed to write-off your debts completely. Instead, you are offered the option to file under Chapter 13 where you have to let a court decide your budget and expenses over the next 3 to 5 years during which you are supposed to repay between 30 to 50 percent of your debt.
- Bankruptcy is a costly affair in itself, what with the fees you pay the lawyers and the costs you incur in filing the procedure.
- Take heart — Money magazine reported sometime ago that 90 percent of all bankruptcies could be avoided with an added monthly income of just $250.
- Forget “stealth bankruptcy” where you leave town under the cover of darkness and think you can begin life afresh in a new state. Your past may never catch up with you (though the chances are slim), but your credit history is remembered forever in your credit reports. So unless you’re ready to live spending cash your entire life and not being able to apply for a loan, insurance or any of the other necessities we take for granted, stay put and deal with your debts. It’s easier in the long run.
So what are your choices?
- If it’s a relatively small amount you owe, take stock of your current situation — your job, your regular income, recurring and essential expenses, and other commitments. Prepare a BUDGET that will allow you to take care of your expenses and tackle the debt bit by bit. You will have to make a whole load of sacrifices till you’re completely out of the red though. Personal treats and unnecessary expenses will just have to be thrown out the window. You’ll have to stop using your credit cards as they tend to get you deeper in debt without you realizing it. Pay off your critical debts first — like the ones on your home and car and those that have legal penalties. Take care of the smaller ones later. Prioritizing will work wonders. Pay more than the minimum each month, or you’ll end up repaying one debt all your life. And you’ll have to be dedicated and put in all your efforts to paying off your debt and starting anew with a clean slate.
- If you own a considerable number of possessions and assets, list them down according to their current market value. Take stock of what you absolutely need and what you don’t. SELL your redundant possessions and generate enough cash to pay back your debt or at least a major part of it.
- If you’ve set aside MONEY FOR THE FUTURE, you can draw from your IRA or 401k to pay off debts that demand immediate clearance. Be very careful though and seek legal counsel when exercising this option; you may leave yourself open to various tax penalties and also end up losing your only financial support for the future.
- If you’ve reached a stage where you are serious about getting out of debt, you can negotiate with your creditors yourself for a DEBT SETTLEMENT. Explain to them that you’re considering bankruptcy in the face of the lack of viable alternatives. Most of them will end up working out a reasonable deal through which you can pay back at least most of the principal simply because they don’t want the entire amount to be a write-off. You can also ask your credit card issuer to give you a card with a lower interest rate. It’s a tough and often humiliating task negotiating with creditors, but it’s the better option to bankruptcy which only leaves you with a bigger headache. Before you settle though, validate your debt.
- If you owe a large amount and feel you’re sinking into the black hole of debt, a budget is not the only change you need to implement. One alternative is DEBT CONSOLIDATION. This option works if you have multiple debts with multiple lenders, all at varying interest rates. You can work with one creditor to take out a loan that is large enough to pay back all your original loans. The advantage here is that you need to pay just one creditor at one interest rate instead of keeping track of how much you owe each of the others. You can also negotiate with your creditor to get a lower interest rate and a longer payment period (though this may not be such a good thing) on the new loan. You’ll need a good credit report to qualify for this option, so make sure your report is accurate. Work at improving it if you can. Debt consolidation has been known to reduce debt by as much as 65 percent at times. This method does have one downside though — if you’re opting for a home equity loan, it generally converts all unsecured debt into one secured debt, with your home as collateral. If you mess up from here, you end up losing the roof over your head. On the other hand, you have extra money to cover basic needs, and the fear of losing your home could incite you to practice thrift and repay your debt at the earliest.
- If you prefer, you can work with CREDIT AGENCIES to cut back on your debt. This is similar to debt consolidation; only here, the agency assumes responsibility for all your outstanding debts. You are required to pay back the agency according to the terms of your contract with them. Credit agencies set up a debt management program that allows you to cut back on your monthly payments, interest rates, and late payment penalties. Make sure participation in these programs does not affect your credit report too adversely. Talk out the issue beforehand with the agency in question.
- If you feel that you are too entangled in the net of debt to take your own decisions, leave them in the hands of a DEBT NEGOTIATION agency. They take stock of your situation, and if you qualify for their program, negotiate with your creditors to work out a convenient repayment plan that works to your advantage. The plan your budget, chart out your repayment options, and set up a time schedule for you to pay back your creditors.
What factors work for/against you?
- If you’re in a tight spot because of a one-off occurrence like the death of the main breadwinner, divorce, prolonged illness, or the loss of a job, your situation is not all that bad. Creditors are often willing to work with you and give you good terms when they realize that you are not a compulsive spendthrift and will work hard at repaying them once you cross your current situation.
- Your creditors know that if you file for bankruptcy and are allowed to do so under Chapter 7, they could end up losing the entire amount.
- If you’re allowed to file under Chapter 13, they will get back 30 to 50 percent of the principal, but over a period of 3 to 5 years. It makes financial sense for them to collect that amount from you in the here and now with some smart negotiation.
- Your creditors may hold the threats of garnishment and seizures (for unsecured debts) over your head, but the fact is that these options are often costly and time-consuming for them to execute. They would rather work with you to get back at least a portion of their money without any major hassles.
- Surprisingly, creditors are willing to negotiate with you if you haven’t been too prompt in your payments lately. They realize they’re in danger of forfeiting the entire amount and are more amenable to a mutually-satisfactory settlement.
- The laws of your resident state, such as the statute of limitations, may have something to do with the willingness of your creditors to negotiate. Once the debt is older than the statute of limitations, it’s almost impossible for creditors to collect.
- Any future earnings, inheritances or windfalls that are waiting in the wings or are distinct possibilities may prevent creditors from reaching a settlement with you.
- The age of your debt also plays a part in your repayment strategy. Some creditors write it off as a bad debt and claim the tax benefits; others try to force legal action on you; and yet others sell off your debt to a collection agency, which means your troubles are far from over.
Additional Advice:
- Get all your agreements in writing.
- Do not consider phone conversations as binding.
- Document all records and paperwork related to the negotiation.
- Use registered mail for all your correspondence.
- Follow up on phone conversations.
- Maintain copies of all your documents.