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Ever wish you could sit down with your credit card agency and ask them to cut you a break? Believe it or not, creditors and debt collectors can sometimes be swayed to reduce your interest rate, give you more time to pay, or even forgive chunks of your debt — depending on your financial situation.
When Thomas Nitzsche was laid off during the economic recession of 2008, he found himself saddled with medical debt, credit card debt, and a mortgage for a house he’d bought just before losing his job. Fortunately, he’d worked at a collection agency in the past and knew that creditors and collectors may have some alternatives for individuals experiencing hardship.
Through diligent phone calls and careful negotiation, Nitzsche eventually settled his debts on his own—getting a substantial discount on his hospital bills and credit card debt. He eventually became a debt counselor and financial educator.
Nitzsche’s experience was informed by working in the collections industry. Here are a few of his tips for figuring out when to reach out to your debt servicer and how to have a productive call, as well as some examples from his own experience.
Do Some Soul Searching
To explore whether a DIY debt settlement may be an option, start by honestly assessing your situation. Do you have untapped resources that could come to the table? Nitzsche’s experience was an exceptional outcome, so it is important to keep in mind that your debt repayment journey may not change. Just like a job interview, you will want to be mentally prepared if you hear “no.”
Creditors and their servicers have internal rules about who is eligible for a settlement or other relief, so your circumstances may not fit their guidelines. You also need to have money available, either to stay on top of payments after you’ve convinced your creditor to lower your interest rate, or to settle debt within just a few lump-sum payments. Are you ready?
Know When to Use a Debt Management Plan
“A lot of people get stressed out and think they need to do a settlement or declare bankruptcy, but in reality, they could stick to a payment and get a fresh start if only they could get the interest rates down,” says Nitzsche.
If you have a steady income and don’t feel up to advocating for a settlement—or working out deals with multiple creditors—you can loop in a nonprofit credit counseling agency for certain types of debt, such as credit cards. For a fee, the agency can set you up with a debt management plan, especially if your debt hasn’t yet gone to collections.
Under a debt management plan, the counseling agency works with your creditor (i.e. your credit card company, as opposed to a collection agency) to get you a flat interest rate and a flat monthly payment. They also work with your creditor to prevent your debt from getting sent to a collection agency.
It is equally important to know the downsides or risks to working with a debt management plan. They are designed to tackle primarily credit card debt, so if you have other debt it might not be the right tool. You might have limited access to credit during your repayment period, and if you miss a payment the plan might be cancelled.
Also be careful about companies that charge an up-front free for “debt relief” or “credit repair.” State and federal government agencies have published warnings about red flags of fraudulent activity in this area, especially related to student loan debt relief scams.
Know When to Settle
When Nitzsche got a big tax refund in the mail, he knew he had some money to work with. His debts weren’t huge (but neither was his income), so he decided he was better off trying to negotiate with his creditors for a settlement than paying the full amount over time through a debt management plan.
To minimize negative remarks on your credit report, it’s better to work something out with the creditor as early as possible. You should expect that your credit report will reflect late payments, missed payments, and default—when your creditor marks your account as a bad debt. If you do use a debt settlement company, Nitzsche recommends you do an online search and check the Better Business Bureau to make sure the company is a legitimate business.
Be very wary of fraudulent companies and always do your research before reaching out to work with any debt settlement company. Also be aware that debt settlement companies often charge hefty fees and can take a long time, likely causing more damage to your credit score, Nitzsche says. The settlement itself will also be recorded on your credit report.
Hit the Books
Taking matters into your own hands? Make yourself an expert on your type of debt, Nitzsche urges. Before you call your creditors, determine exactly how much you can afford to pay, and research your options. Many credit card companies have hardship policies, for example. They may be willing to reduce your interest rate or give you more time to pay if you can demonstrate financial hardship.
Get Your Story Straight
Figure out what you’re going to say before you call your creditor, and make sure you have a logical explanation for why you haven’t paid yet, as well as a compelling reason for why they should settle for a lower payment.
“The person on the other end of the phone is still a human being,” Nitzsche says. “Do whatever you can to make your situation more understandable or more relatable.”
Nitzsche, for example, kept his story honest and succinct: “Listen, I’m recently underemployed and I got this tax return. If you’re willing to help me out, here’s what I can pay.”
Pick up the Phone
Before you miss a payment, or as soon as possible after, call your creditor, explain your situation, and ask about your options. “Figure out what’s possible before collections, as opposed to what’s possible after,” Nitzsche says. If your servicer is calling, pick up, don’t ignore it. ‘Out of sight, out of mind’ doesn’t work when it comes to your debt.
Get a call from a debt collector? Do the same thing. Collection agencies may have authority to sue you for the amount you owe if they want to take an aggressive approach, Nitzsche says. If they threaten to sue, ask them what you can do to prevent an escalation.
Keep Things Civil
“Even if you feel like you have to play hardball, it’s important to be respectful,” says Nitzsche. If the person on the other end of the phone threatens to garnish your wages or sue you, stay calm. Tell them you understand their situation but you also understand your rights. Say you’ll do whatever you can, within reason, to prevent lawful escalation, and that you’d be happy to work with them on a reasonable compromise.
When he called his credit card company, Nitzsche was polite, open, and honest about his situation. Eventually he got a rare result: The credit card company agreed to a settlement and forgave a portion of his debt. It is important to remember that the debt settlement will appear on your credit report and may impact your credit opportunities or rates in the future.
“There will be stress regardless of the route you pick,” Nitzsche warns. “It’s just the nature of the beast.” Your success in negotiating for yourself will depend on your resilience through the constant work of fielding phone calls, keeping notes, and sticking to your story and your financial realities.
Disclaimer: The opinions expressed by the interview subjects are not necessarily those of Earnest.