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New York and New Jersey have some of the highest costs of living in the country, and these costs continue to increase every day. On top of that, the coronavirus pandemic has put millions out of work. Many people are dependent on credit to pay for homes, cars, education, and other products or services. Given this combination of unfortunate circumstances, it’s understandable that many people will fall behind on their payments to creditors.

Fortunately, there are options available to those who may not currently be able to pay their debts. One option is bankruptcy, a sometimes complex legal proceeding that, in many cases, will result in cancelling most types of debt. Bankruptcy can be difficult to navigate and it can cause major damage to one’s credit score. However, this is not the only option available. In some cases, it’s possible to negotiate with one’s creditors to reduce the amount owed to them and avoid having to file for bankruptcy. The decision as to whether to file bankruptcy or attempt to settle a debt is a complex one, with pros and cons on each side. It’s best to consult an attorney before deciding what to do.

If you decide upon debt settlement, realize that creditors can be savvy negotiators, and they typically have a great deal of experience in conducting negotiations with their customers. Therefore it’s always best to consider hiring an attorney to negotiate on one’s behalf. Experienced attorneys are able to effectively respond to objections by creditors when negotiating, and will have various strategies to deal with different kinds of creditors. They want to make sure their clients get the best settlement possible.

Why Would a Creditor Accept a Settlement?

It’s natural to think of debt as an inescapable obligation, but in practice creditors understand it isn’t always possible to fully collect on debts owed to them. This is especially true of unsecured debt, like credit card debt, where the creditor can’t repossess an asset if a debtor falls behind. 

When a debtor falls behind and the creditor has been unsuccessful in collecting on the debt, it’s common practice for a creditor to sell the debt to a collection agency for pennies on the dollar. Many creditors are willing to accept a settlement from their debtors if it’s for more than they can get from a collections agency. Collection agencies are also willing to settle because they can still turn a profit even if they collect less than what the debt was originally worth.

Additionally, a debtor’s bankruptcy can sometimes make it impossible for a creditor to collect. For example, when a person files for Chapter 7 bankruptcy it initiates the automatic stay, which halts any attempts by creditors to collect on a specific debt. After a debtor’s assets are liquidated and the proceeds are divided among his or her creditors, the remaining eligible debts are discharged and can no longer be collected on by the creditor. If a person is filing for bankruptcy, their assets are often worth far less than their debts. So if a person in this situation were to file for Chapter 7 bankruptcy, the creditor would likely receive nothing at all. Given the choice between a debtor filing for bankruptcy or a negotiated settlement, most creditors will take the settlement.

What Are the Best Debt Negotiation Strategies?

Creditors know that a debtor’s financial problems or bankruptcy filing might make it impossible to collect the entire amount of the debt owed to them. Here are three sample negotiation strategies attorneys will use to convince creditors to accept a settlement:

Mention bankruptcy: Creditors, especially unsecured ones like credit card companies, are aware that they usually get nothing in bankruptcy. A mention of bankruptcy is often enough to bring them to the negotiating table, even if the debtor doesn’t have immediate plans to file.

Start with a low offer: Most debts settle for 40-70% of the original amount due. As in any negotiation, it’s best to start with a low offer to make sure there’s room to negotiate up.

Offer to pay a lump sum: Creditors are often nervous that they won’t be able to collect. If a debtor is already behind on payments, creditors will be skeptical of any plan to pay over time. Thus, they’re usually more willing to settle if they’re guaranteed payment up front in a single sum.

Negotiating with creditors can be difficult. They are very experienced in these matters and will always try to determine whether a debtor has more assets available than what is being discussed in the negotiation. An experienced lawyer will be able to steer this conversation in a direction that will produce better results for their client while avoiding saying anything that may lead the creditor to believe they will be able to collect a higher amount than what is being offered.

Things to Keep in Mind when Dealing with Creditors

In addition to negotiation strategies, there are a few other things it’s important to know when dealing with creditors.

First, it’s a good idea to evaluate the entire situation before starting a negotiation. If a person has multiple debts and no income or assets to pay them, bankruptcy might be a better option. Although bankruptcy lowers a persons’ credit score, it’s still better than letting debts continue to mount. If there’s no way to come to a settlement agreement with all of one’s debtors, it may be best to skip negotiations and go straight to bankruptcy.

Some debts are easier to negotiate than others. Student loan creditors are notoriously difficult to negotiate with because student loans typically cannot be discharged in bankruptcy, which means a debtor has much less leverage in negotiations. 

Secured debts, like a mortgage or car payment plan, are also more difficult to negotiate because the creditor can repossess the house or car. In some cases, it may be possible to come to a modification agreement on a mortgage, which would allow a borrower to pay back late payments over multiple months or at the end of the mortgage. This being said, it’s easiest to negotiate with unsecured creditors whose debts can be discharged in bankruptcy, like credit card companies.

Second, the Fair Debt Collection Practices Act prohibits creditors and collection agencies from using abusive practices to try to collect debts. The law prohibits debt collectors from calling debtors at work, calling early in the morning or late at night, discussing debt with anyone but the debtor or debtor’s spouse, and many other potentially abusive methods. 

With this law in mind, it’s always a good idea for debtors to get the name of the debt collectors they speak with and document the calls. Experienced debt settlement attorneys know the ins and outs of these laws, and can help determine if a collector’s practices are illegal. In some cases, it’s possible to sue a debtor for abusive practices.

Third, debt settlements have tax consequences. The IRS considers any amount of debt forgiven in a settlement to be taxable income unless the debtor’s total debts exceed their total assets. If a debtor’s debts exceed their assets, any forgiveness up to the amount of difference is not considered income. Anything above that threshold could lead to an increased tax obligation. So, if a debtor has $5,000 of debt forgiven, but still owes $15,000 to other creditors and only has $10,000 in assets, the IRS would not consider the debt forgiven as taxable income. However, if that debtor did not owe other debts and still had $10,000 in assets, the IRS would tax the debt forgiveness amount ($5,000) as income.Finally, debt settlements usually won’t restore damage to one’s credit score from late payments or a delinquent account. Creditors can report negotiated settlements to credit bureaus in a number of ways, each with a different impact on one’s credit score. It’s possible to negotiate with a creditor to report the settlement in a less-damaging way or remove delinquent payment reports, but creditors are often reluctant to do this.

Why Hire a Lawyer to Negotiate Debts?

While it’s possible for a debtor to negotiate directly with their creditors, most debtors get better results if an attorney negotiates on their behalf. Part of a creditor’s business is dealing with settlement negotiations, so they are usually very experienced in these matters, whereas most debtors have very little or no experience in a settlement negotiation scenario. 

The amount a creditor is willing to give up in a settlement depends on what they believe the debtor is capable of repaying, so it’s a good idea to hire a lawyer experienced in debt settlements who will be able to convince the creditor that this amount is low. Also, given that bankruptcy is often a debtor’s best leverage in negotiation, having a lawyer conduct the negotiations will make the creditor take the debtor’s threat of filing for bankruptcy more seriously.

Although many debt settlement companies exist, lawyers are a better option. The Federal Trade Commission has warned that many debt settlement companies are scams. Lawyers, on the other hand, are required to follow rules of professional conduct and can lose their license to practice if they don’t put the interests of their clients first. Lawyers can also offer a broader range of options to a person struggling with debt. While debt settlement companies only work on achieving settlements, a lawyer can evaluate a debtor’s entire situation and determine if another option like bankruptcy would achieve a better result.

Who Should I Contact to Help Deal with Creditors?

If you or a loved one is struggling with debt, contact Rosenblum Law for a free consultation. Our attorneys are experienced in dealing with both bankruptcy and debt negotiations, and we can evaluate your situation and find the best way forward for you. Email us or call 888-815-3649 today.