If you are going through some difficult financial times, it is very easy to start to become overwhelmed with debt. You start to see the monthly bills pile up and all of a sudden you have to decide which bills to pay and if putting food on the table is more important than paying a credit card or loan. If you want to avoid bankruptcy, you may have some better options to keep your credit record intact while still getting some debt relief.
Be Upfront & Honest with Creditors
The first thing you need to be is perfectly honest with your creditors. Explain the situation and that you are trying to avoid bankruptcy by working out friendlier terms. In fact, some creditors may have programs available where they offer you forbearance on your debt until you can get back on your feet. For instance, if you can prove financial difficulty, student loans allow you to defer the loan during that period. The loan will continue to accrue interest, which you can pay each month or have folded into your principal.
Negotiate Better Interest Rates
If the creditors allow you to negotiate your debts, you may be able to have any late charges or fees dismissed while also lowering your interest rate. This alone often helps debtors because high credit card debt usually means you are only making minimum payments with very little of that money actually going towards the principle.
If you have a mortgage or some other type of loan, the bank may be able to rework the terms of the loan to better suit your financial status. For instance, you have one year left on a $15,000 loan that requires a $575 monthly payment. The bank may be willing to extend the life of the loan, thereby lowering your monthly payment.
Once the terms have been agreed to, make sure you get the new terms in writing. The last thing you need is to think that you have an agreement and then get a foreclosure notice or a lien against your paycheck because you were not making the proper payments. Regardless of whom the creditor is, you need to protect yourself by having something in writing to back up your new agreement.
Do not waste time negotiating with debt collection agencies. Contact the creditor directly. Even if the debt has gone to collection, there is nothing stopping you from calling up the creditor and working out new terms. In fact, the creditor is often more receptive because they can work out a deal to recover the full balance with you versus paying a significant portion of the debt to the collection agency.
Start Negotiating a Debt Settlement
If a debtor files for bankruptcy, many creditors will receive no repayment. Therefore, creditors are receptive to debt settlement because they would rather receive a portion of what they are due. Being able to avoid bankruptcy also benefits a debtor. There are many ways to negotiate a settlement with creditors.
When debtors cannot repay their bills in full, they should contact their creditors to negotiate reduced repayments. This is how the debt settlement process begins. Debtors who are not successful when doing this on their own can get help from a reputable credit counseling or credit repair organization. The best firms do not charge fees up front but some do charge small monthly fees for their services. A non-profit credit counseling organization is the best choice and it should provide debt counseling and education services to help clients remain debt-free.
Tip: Certain types of debts have statutes of limitations, meaning collection agencies may try to collect on a debt that legally no longer needs to be paid. Learn the statute of limitations on your debts.
A loan workout is a more formal type of debt negotiation or debt settlement. This represents an agreement between the debtor and creditors for debt repayment. It may contain a composition, which involves creditors accepting partial repayments as satisfaction for money due. An extension is an alternative arrangement in which creditors extend the debt repayment period. A workout may combine a composition with an extension, providing a longer period to repay less than the full amounts due.
Debtors who negotiate with creditors in this manner are able to discharge their debts and avoid bankruptcy and all its stigmas. Using a workout discharge does not exempt the debtor from filing for bankruptcy in the future. The voluntary nature of workouts and informal debt negotiation makes these more appealing to many people in debt.