Communicating and Negotiating with Creditors

When financial problems occur, your first instinct is to bury your head in the sand and hope the bills will go away. The unfortunate thing is that even if your income has suddenly dropped or ceased, the bills keep arriving.

The worst thing you can do is not communicate with each creditor about your situation. It is better for you to contact your creditor first by telephone or letter before the creditor calls you. The longer you wait to contact the creditor, the more serious the situation will become. Always make the first call.

Prior to calling the creditor, review your finances and evaluate what payments you can pay. Put your proposed payments on paper so you can review your finances with the creditor. Don’t pay something you can’t afford. Once you have made a commitment to pay, it is important that you stick to the terms of the agreement. If you don’t, the creditor will find it difficult to trust you in the future. Any agreement that you make with the creditor, put it in writing and send it certified mail with a return receipt. Request that the creditor send you a confirmation of your agreement.

Many times when a creditor feels that it may not be paid in full, it will settle for a dollar amount less than the balance. Usually the creditor’s settlement offer is more than you can afford. When going through a financial crisis, you must make a realistic determination of how long you think you will be going through it. Be sure you keep enough cash for your basic essential living expenses.

Once your financial crisis is over, negotiate with each creditor to settle the unpaid account. If you are not comfortable doing this, ask a friend or relative to negotiate on your behalf. Your credit report is already ruined. You have nothing to lose by trying to settle your accounts for less than the balance. As part of the negotiation, ask the creditor to remove any negative entries or correct the entries to read “paid in full.”

SAM’S STORY

Sam contacted my office in a panic. He had just been served papers for a lawsuit from a credit card company that he owed money to. Sam owned his own business and was incorporated, though he was not an officer. Sam showed no assets of his own. The business was not doing well and he had several unexpected emergencies that drained his cash flow. All of his credit cards fell behind.

When Sam and I went over his situation he didn’t realize how much he owed until we reviewed his credit report.

As Sam and I reviewed his credit report and sorted through his file of collection letters, we discovered two other pending lawsuits that needed to be addressed immediately.

Because time was of the essence in responding to these three law suits, Sam and I devised a plan. Sam had $5,000 in accounts receivable that he knew he would have within 60 days. With the three lawsuits pending, I contacted all three attorneys and offered a settlement for each creditor. One of the lawsuits was for $5,000 and was settled for $2,300. The second lawsuit was for $3000 and was settled for $1200. The third lawsuit was for $3,500 and was settled br $1,500. Sam saved a total of $6,000 with these settlements and the lawsuits were withdrawn.

The remaining creditors that Sam owed were also offered less money. Some of the creditors took his offer, while other creditors did not.

It is going to take Sam a long time to get back on his feet; however, by negotiating with his creditors he was able to avoid a bankruptcy

A SETTLED ACCOUNT ON MY CREDIT REPORT

Q. I paid off a bank loan for less than the amount owed. The bank agreed to this and listed my account as settled on my credit report. What does this mean? Would another credit grantor view this as a negative entry?

Any time you pay off a debt for less than the amount due, the creditor will report to the credit bureau that the account was “settled.” This entry could be viewed as a negative entry by a potential creditor who would see that you did not pay your obligation according to the original terms of your contract.

When you are negotiating with a creditor and offering to settle your ac count for less money, make it part of the settlement that the creditor re ports the account as “paid in full” to all the credit bureaus. If they agree to do this, get it in writing before you make any payment. Trying to go back after you have paid the account and get the creditor to change the “settled” entry could be difficult.

THE CREDITORS WON’T LISTEN

Q. I’m on a very tight budget and the bill collectors keep calling. I explain my situation to them, but it doesn’t seem to make any difference. What can I do?

One thing you need to remember when you are faced with past due bills and cannot make the payments required, is to have a plan. The first thing you must do is write down a list of your essential bills. For example, house or rent payment, food, electricity, water, transportation etc. These bills must always be paid first. Too often, when a person falls into trouble, the most persistent creditor will intimidate you into paying its bill rather than paying your essential living bills. Remember, your credit report is already damaged, so don’t hurt your family by not keeping enough cash to pay your essential bills. Your credit rating is not going to be improved. The best thing to do after your essential bills are paid is to then analyze what you have left and distribute what you can to the creditors.

The second option would be to try to negotiate a payment plan with your creditors that you can live with. After you know how much you need to pay all your essential bills, add up your nonessential bills—credit cards, charge cards, medical bills, etc. Can you pay 2 percent of each bill per month to each creditor? If you can, write down each creditor’s name with the proposed monthly payment. Make this offer to each creditor. Some may accept it, and some may not; however, send the proposed payment to each of the creditors each month anyway. Most creditors will deposit your checks. Once you can increase the payments, do it, but only after your essential bills are paid.

If you are unable to pay anything towards your nonessential creditors now, pay something when you can.

SETTLING FOR LESS

Q. I’m on Medicaid with medical bills. The credit card companies are indicating they are willing to take less money for payments. Why are they willing to do that?

Your medical bills must be quite large for the creditors to be so eager to take less of a payment. Their fear is that you will file for bankruptcy. Any outstanding bill that is owed when filing for a bankruptcy must be named. Most of the time the creditor will not receive anything if the item is discharged through a bankruptcy.

By being willing to take smaller payments the creditors are happy to receive something from you instead of nothing at all.

Keep the arrangements you have made with the creditors. When your income has increased, apply more money towards your monthly payments to bring the balance down.

I CAN’T MAKE MY CAR PAYMENT

Q. I can’t make my car payment this month. Several things happened this month and lam running short of funds. Will the bank repossess my car if I miss a payment?

A bank can repossess your car if you are one day late making your payment, however, this doesn’t happen very often. The bank really doesn’t want your car.

First, contact the lender who financed your car. Explain your situation. Some lenders will allow you to defer one payment per year. That means that the lender will allow you to miss one payment and add the missed payment to the end of your contract. For example if you had a 48-month contract, it would be extended to 49 months.

Other lenders may allow you to make interest-only payments for a specific period of time. The principal is added to the end of your contract and is due with your final payment.

Occasionally the lender will consider allowing you to refinance your car. The contract would be longer so you would be paying more in interest; however, the monthly payments would be lower.

If none of these options are workable, sell the car. Take the money and pay off the loan. Use whatever you have left to purchase an inexpensive car. This would be better than a repossession.

A repossession on your credit report would make it more difficult to qualify in the future for another car. Always try to preserve your credit rating.

PAY OR BE CHARGED OFF

Q. Six months ago I was laid off my job. I have not been able to make my credit card payments. I have explained my situation to the creditors but they keep calling me daily. Several companies indicated that they would accept a discount on my balance if I pay them by the end of the month. If I don’t agree my accounts will be charged off. Why are the creditors now willing to work with me?

After trying to collect on an account for six months, most creditors will automatically charge off the account. A charge-off is a bad mark on your credit report. Even after charging off an account, most creditors will turn the account over to a collection agency.

As your account becomes close to the six-month period when it will be charged off (but rarely before), many creditors are willing to settle the ac count for less. They figure collecting something is better than nothing.

It always amazes me how unrealistic a creditor’s offer to settle is. If you can’t make a small minimum payment, how could you pay a large lump sum? Should you come into any extra cash, it is better for you to make the offer based on what you could pay, after paying essential living expenses.

If the creditor doesn’t accept, move on to another creditor with the same offer who will accept it.

SETTLING WITH THE IRS

Q. I owe the IRS $20,000 in back taxes. These taxes are from three years ago. The balance keeps going up because of interest and penalties. Will the IRS negotiate with me to settle this tax bill?

The IRS has an Offer In Compromise program to allow taxpayers to pay their tax bills off at a reduction. The IRS has its own criteria on what it will accept.

You hear stories of the IRS accepting ten cents on the dollar; however, unless an offer is made you will never know what it will accept. The IRS will look at your earning ability, what your income currently is, how likely it is that you can ever pay the tax bill off, and your current financial statements.

If you contact the IRS directly, it will mail you the necessary forms to complete for you to make an offer in compromise. Tax attorneys, accountants, and enrolled agents can work on your behalf to make an offer. If the IRS accepts your offer, be prepared to pay it in full. Make sure you understand all the requirements that you are agreeing to for this settlement.

MEDICAL BILLS

Q. My doctor is threatening to turn my account over to a collection agency. I have tried making small payments but still owe a bill of $800. I have a small amount of money set aside. Should I offer to pay the bill for a less amount of money?

If your doctor’s office is threatening to turn your bill over to a collection agency, I would immediately make an offer. Explain to the doctor your hardship. Offer to pay the doctor three payments of $100 each to set- tie the account in full. If the doctor agrees, get a letter stating your agreement before you make any payments.

When a bill goes to collection, depending on the arrangement with the collection company, the doctor may only collect 30 to 50 percent of the balance. The collection agency would keep the difference.

Many times a doctor will waive 20 percent of the bill if the remaining balance is paid by your insurance company. It never hurts to negotiate; it can save both you and your doctor months of frustration.

RE-AGING AN ACCOUNT

Q. My son became very ill and I was unable to work. Several of my credit cards became delinquent. The creditors are calling me daily. Two companies indicated that they would reduce my interest rate, bring my account current, and remove any delinquencies if I would mail them three post-dated checks spaced 30 days apart. What does this mean?

Many times creditors will offer to re-age an account by accepting three post-dated checks in return for a lower interest rate. Bringing your account current could be a blessing in disguise. This agreement benefits you only if you can afford it. By the creditor offering to remove any delinquencies from your account your credit report will be greatly improved. It is important that you get any agreement you make with the creditor in writing to make sure it holds up its end of the bargain.

If you know you can’t afford the three payments, don’t send anything. It would be a worse situation if your checks bounced.

Many creditors will offer to re-age your account to help you get back on track. Once you take a plunge downhill, it is hard to bring your accounts current. Re-aging an account is the best way to do it if you can afford to.

I MISSED THE PAYMENT ARRANGEMENT

Q. I fell behind in several of my credit card payments. I had to make special payment arrangements on several of my accounts. Unfortunately, I was able to make only two of the arranged payments and fell behind again. I am afraid to contact the companies to try and make new arrangements. Should I just leave it alone and wait to see what the companies’ next move is?

Never wait to see what a company is going to do. Lack of communication will only expedite any action a company may take. Contact the creditor immediately. Prior to contacting it, make sure you have another payment plan to offer.

Explain that you set the payments too high for the income you have to support them. Make a new offer of payments that you can afford.

Most of the time creditors will work with you. The creditor wants to see monthly activity on your account. As you get closer to paying the account off, try to negotiate for the creditor to remove any derogatory information that is being reported on your credit report. If the company agrees to re moving the derogatory remarks from your credit report, get it in writing. Should the company fail to keep its promise, submit the letter to the credit reporting agencies for them to update their records.

DEBT MANAGEMENT SERVICES

Q. Are there any companies or resources that can help me with my debts and be an intermediary for me with my creditors?

There are several resources available to individuals who need to man age their credit. Self-help books can help you budget and manage your credit. My book, The Insider’s Guide to Managing Your Credit, offers strategies for getting out of debt, as well for managing your bills. The In ternet is another resource.

Consumer Credit Counseling Service is a nonprofit organization that evaluates your income and expenses and makes suggestions for budgeting and debt repayment. If your situation calls for further service, CCCS also will intervene with your creditors to help reduce your debt, lower your in terest rate, and act as a mediator between you and your creditors.

If you want assistance from CCCS, refer to the white pages of your telephone directory, or call its national toll-free number, 800-388-CCCS(2227).

Next: Collection Agencies

Top of page  •  Home