Negotiating with Lenders and Debt Collectors

Lenders and collectors negotiate more often than most borrowers realise. A lender would usually rather lower your rate for a year than see the account default, and a collector holding an old debt would often rather take part of it now than chase the rest for years. This chapter covers how to ask for a hardship arrangement before you fall behind, your rights when a debt collector contacts you, how settlement works and what it costs, and how to avoid the companies that sell "debt relief" and leave people worse off.

Before you call: know your number

Every negotiation goes better when you know exactly what you can pay. Before calling anyone, write down your take-home income, your essential costs (housing, utilities, food, transport, insurance, minimum payments on secured debts) and what is left. That remainder is what you can honestly offer. Offering a payment you cannot keep is worse than offering a smaller one you can, because a broken arrangement usually ends the lender's willingness to help.

Call early. Options are widest while an account is current or only slightly behind. Once it is charged off and sold to a collector, the original lender's hardship programs are gone.

Hardship programs: ask before you fall behind

Most card issuers and many lenders have hardship or payment-assistance programs for borrowers facing a job loss, illness, divorce or another setback. They are rarely advertised. Common terms include a lower interest rate for six to twelve months, a reduced minimum payment, waived late fees, or for some loans a short pause. In exchange, a card is often frozen or closed during the program.

A lower rate changes the arithmetic more than people expect.

Paying $180 a month on $6,000 at 27.0% takes 63 months and $5,215 in interest. If the rate is cut to 9.0%, through a hardship program or a nonprofit debt management plan, the same payment clears it in 39 months with $930 of interest. Most hardship rates are temporary, so the gain in a real program is smaller, but the direction is the same.

A simple way to ask:

"I'm calling about my account. I've had a drop in income because of a job loss, and I want to keep paying. I can pay a set amount each month. What hardship or payment programs do you have that would lower my rate or my payment?"

Then ask four questions before agreeing: how long the terms last, what happens to the rate afterwards, whether the account will be closed, and how the arrangement will be reported to the credit bureaus. Ask for the terms in writing.

When a debt collector contacts you

Once a debt goes to a third-party collector, federal law gives you specific rights. The Fair Debt Collection Practices Act and the Consumer Financial Protection Bureau's Regulation F apply to collectors and debt buyers. They generally do not apply to the original lender collecting its own debt, although many states have their own rules that do.

The validation notice. A collector must send you a notice, in its first communication or within five days after it, that names the creditor, states the amount and explains how to dispute the debt. If you dispute in writing within the validation period, roughly 30 days after you receive the notice, the collector must stop collecting until it sends you verification. Disputing is worth doing whenever the amount, the creditor or the debt itself looks wrong, and debts that have been sold several times often have gaps in their records. Send disputes in writing and keep a copy.

Limits on contact. Collectors may not call before 8 a.m. or after 9 p.m. your time, call you at work if they know your employer does not allow it, or call so often that it amounts to harassment. Regulation F presumes a collector is calling too often if it calls more than seven times in seven days about one debt, or within seven days after a phone conversation about it. You can tell a collector in writing to stop contacting you; after that it may only confirm it is stopping or tell you about a specific action such as a lawsuit. Stopping contact does not make the debt go away.

Banned tactics. Collectors may not threaten arrest, misstate the amount, pretend to be lawyers or government officials, or discuss your debt with your family, neighbours or employer, beyond asking how to reach you.

Old debts. Every state limits how long a creditor can sue over a debt, often three to six years depending on the state and the type of debt. A collector may not sue or threaten to sue on a debt that is past that limit. In some states, making even a small payment on an old debt can restart the clock, so check your state's rule before paying anything on a debt that is years old. Separately, most negative information, including collections, can stay on your credit report for up to seven years from the original delinquency, whether or not you pay.

If a collector breaks these rules, you can submit a complaint to the CFPB, the Federal Trade Commission or your state attorney general, and you may be able to sue for damages.

Settlement: paying less than the full balance

A settlement is an agreement to accept a lump sum, or a short series of payments, as payment in full for less than the balance. It is mostly available on accounts that are well past due or already charged off. What a creditor will accept varies widely with the age of the debt, who owns it and whether you could be sued.

How to approach it:

• Start lower than your limit, and be prepared for several rounds over weeks.
• Get the agreement in writing before you pay, stating the amount, that it satisfies the debt in full, and how it will be reported.
• Pay in a way you can trace, never by giving a collector ongoing access to your bank account.
• Keep the paperwork permanently. Settled debts are sometimes resold and collected again.

A settlement has two costs beyond the payment. The account will usually be reported as settled for less than the full amount, which is better than an unpaid collection but still negative. And forgiven debt is generally taxable income: if a creditor cancels a large enough amount, it sends you and the IRS a Form 1099-C, and you may owe tax on the forgiven part unless an exclusion applies, most often that you were insolvent (your debts exceeded your assets) just before the cancellation.

Some borrowers ask for a "pay for delete", removing the account from credit reports in exchange for payment. Collectors are not required to agree, credit bureaus discourage the practice, and accurate information can lawfully stay on a report, so treat it as a request, not a plan.

"I'm calling about this account. I'm not able to pay the full balance, but I can make a one-time payment to resolve it. If you can accept that as payment in full and confirm it in writing before I pay, I can send it within two weeks."

Debt settlement companies and other traps

Companies that offer to negotiate your debts for a fee usually ask you to stop paying creditors and save into an account until there is enough for settlements. In the meantime late fees and interest grow, your credit suffers, and creditors may sue. Under the FTC's Telemarketing Sales Rule, companies that sell these services by phone may not charge fees until they have actually settled a debt and you have made a payment under that settlement. A company that asks for money up front, guarantees results, or tells you to stop communicating with your creditors is a warning sign.

Two better first calls are your creditors themselves, using the steps above, and a nonprofit credit counseling agency, which can review your budget and, where it fits, set up the debt management plan described in chapter 6. If debts are far beyond what you can repay, or you are being sued, a consultation with a bankruptcy or consumer attorney is worth having before you agree to anything; many offer a first meeting at low or no cost.