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How to Negotiate With Creditors

Getting into Debt

When tough economic conditions occur, one of the first casualties people often suffer is their credit rating. Maintaining a solid credit history can be difficult during downturns in the economy, and when finances are limited, many people allow their credit to suffer first.

Many people continue to attempt to maintain their credit rating at the cost of other life necessities, which can have a dramatic impact on their well-being. Regardless of whether a person has given up trying to maintain their credit worthiness or they are struggling to maintain it, understanding how to best negotiate with their creditors can go a long way toward making a bad situation bearable.

What Type of Debt Do You Have?

All debt is a type of legal promissory note in one form or another, and the first step is to understand whether the debt is secured or unsecured. Secured debt is guaranteed by an asset such as a car or house whereas unsecured debt is simply a promise to pay. In a default, creditors have the legal right to repossess the assets used to secure the note, unlike unsecured debt.

Creditors facing default in unsecured debt, such as a credit card, cannot take the assets purchased with the card. Both secured debt and unsecured debt creditors have options available to them when attempting to collect an outstanding debt and it is important for consumers to understand what these options are.

Secured and Unsecured Debt

Secured creditors can simply take the property that was purchased by the loan or promissory note or promissory letter while unsecured creditors have a more complicated route they must follow.

Unsecured debt creditors will usually call on the phone and send correspondence in the mail in order to get the consumer to repay the loan. If this doesn't work, creditors must file an action in court if they wish to escalate the collection of the debt. Once they obtain a judgment, creditors can garnish wages and even levy bank accounts if ordered by the lawsuit.

Negotiating with Creditors

When attempting to negotiate with a creditor, it is important for the consumer to understand the limitations of the creditor and understand their own options. While creditors can sue to collect a debt, this is expensive and usually not worth the time and expense unless there is a large sum of money due. Even then, if the consumer cannot pay, there is little to be gained from a lawsuit.

Another pitfall for the creditor is the possibility that the consumer will simply file bankruptcy, which generally means the unsecured creditor receives nothing. While some creditors will use threats and scare tactics to frighten consumers into repaying the debt, consumers should understand that they also can bargain from a position of strength.

When negotiating to lower or eliminate debt, consumers should understand that many creditors will eventually wind up taking much less than the original amount of the debt, especially if there has been no activity on the account for a while.

Many consumers can negotiate to repay less than half of what the original debt was by simply out-waiting the creditor. It is important for consumers to always get the settlement deal in writing and make sure there is a provision for re-establishing the consumer's credit rating regardless of the amount paid.