Negotiating for Lower Debt

A couple of weeks ago I wrote about debt consolidation, one method to help you get your debt under control. In the most common scenario, you get a large loan to pay off your bills and then just pay off that one loan. Well, what if you were actually able to lower the amount that you owe every month? Sounds too good to be true, right? Yes and no: it's possible and debt negotiation can be effective, but there are pitfalls as well.

Debt settlement is the process of negotiating your debt with your creditors so you owe less overall. The thinking is that a creditor would rather have something from you than to have you default on the loan. So actually being broke can put you at an advantage in negotiations. A major caveat is that in most debt settlement scenarios you need to pay off your debt in full. So if you owe $20,000, you could potentially only pay out $15,000--but all at once. Chances are if you can't afford to pay your bill on a monthly basis, you can't pay a lump sum either, even if it is attractively cheaper. However there are other options.

A credit counseling company can negotiate that your debt is lowered on a monthly basis in addition to the amount of the overall debt, so your monthly burden is lower and you can get out of debt sooner. Credit counseling can also lower your interest rate and cut out late payments on your bills. Sounds great but:

1. As with debt settlement, a credit counselor can charge hefty fees for the negotiation, so you'll need to weigh the costs of using a debt negotiator vs. paying it out yourself.

2. There are some seriously unscrupulous credit counseling companies out there (read: scams). They promise to lower your bills but what can happen is that you pay below the amount you were paying previously, except the creditor charges you for a default for not paying the full bill! In effect, the credit counselor has done nothing.

In short, be careful when selecting a credit counselor and make sure the company is part of the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA).

Generally, the quickest way to get out of debt is to settle for the complete amount of your bill to avoid the problems with issue #2. Given that creditors don't exactly want to be undersold on the amount of debt you owe, it has to be a pretty dire situation for the settlement to work. In other words, if you're current on your bills and wake up one day and say, "You know, I'd rather my debt was a lot lower..." (and who wouldn't?) then you're not really in the driver's seat. Instead, you have to have defaulted on bills and prove that you will default in the future (you can't just default on your bills so you can reach a settlement agreement). If you're over three months overdue, creditors will be much more likely to listen to your case.

Basically, you need to be a very hard luck case--close to bankruptcy--to settle your debts in this manner. The trouble is that desperate times lead to desperate measures and you don't want to hire a debt settler in a panicked state. Make very sure of the fees and if the settlement company is a legitimate enterprise before signing on the dotted line...

Have you ever thought about using debt settlement or credit counseling or know someone who's had a good/bad experience? Let us know in the comments. Personal stories can be very helpful to those mulling over the decision of whether or not to hire a debt negotiator.