NEW YORK (MainStreet) — What if I told you that you could save 20% or more on your outstanding debt? Sound too good to be true? It's not. In fact, there’s a whole cottage industry dedicated to helping people bring down the total of their outstanding debts. However, as with any negotiation, there's a right way and a wrong way to go about it. To get the maximum reduction of your outstanding debt, read on for tips on negotiating your debt down from seasoned professionals.
You Don’t Need an Agency
Nearly everyone has turned on the radio or television and heard promises to reduce your debt dramatically -- for a fee. John Heath, directing attorney with LexingtonLaw, points out that such agencies are entirely superfluous.
"They generally charge quite a bit of money, and what they do tends to be things you can do on your own," he says. While they might have more experience than you do at negotiating down debt, they don't have any magic powers. "A lot of people know more about their own finances than an agency," he says.
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The collection agency's ability to divine your finances brings up another point.
"One of the biggest mistakes people make is not being up front and truthful," he says. Collection agencies tend to be less eager to make deals with people who can pay but claim they can't.
Know How Much You Can Reduce Your Debt By
Heath believes that you can reduce your overall debt by 10 to 20% through negotiation. However, Mike Sullivan, director of education with Take Charge America, is far more bullish on what you can expect when negotiating with a collection agency.
"You want to assume they paid between 10 and 20 cents on the dollar," he explains. "If you settle for 50% of the amount owed, that’s almost always a good deal for the collection agency."
"That's an extreme case," says Heath. "Creditors tend to be pretty savvy, and they have some idea of what your finances are like from your credit report."
He believes that 50% is a reduction only available for people with some kind of real financial hardship. Still, it won't hurt to start negotiating at where Sullivan suggests -- about a third of your total debt.
Be Careful About Admitting to the Debt
Every state has a statute of limitation on the collection of debt. Sometimes this is the "seven years" that most people think is the gold standard for accounts dropping off of your credit report. In other states, it's not. However, once you make a payment -- or even admit that you owe the debt -- the clock can start over again. Sullivan suggests that you never admit to owing the debt.
"Tell them 'I see that you think I owe this. I disagree,'" he says. Then ask for debt validation. Treat the debt as a problem that you want to go away, rather than as "legitimate" debt.
Get It In Writing
When you do finally come to an agreement, make sure that you get it in writing. Sullivan suggests coming to a verbal agreement, then requesting a written agreement in the mail. "Only when you get that written agreement should you actually send them a check," he says. Otherwise, there's a good chance the account will get passed to another agent, who will attempt to collect the rest of the debt -- and you’ll have no recourse.
"A lot of these people are just frankly paid to harass you into making a payment," Sullivan says.
Make Sure You Can Honor Your Agreement
Heath states that it's important to be able to honor any agreement that you make. "In some cases you can make the debt go away with a single payment," he says. Other times you're going to have to make an installment deal. Regardless of the plan you work out, you have to make good on it.
"Creditors aren't very forgiving if you make a deal and don't honor it," he says. So what happens if you flake? "They're going to come for the full amount, plus collection fees," he says.
Finally, note that all of this advice only applies to third-party collection agencies. Sullivan points out that when it comes to original creditor, your chances of getting a reduction are slim to none. Still, if you've got old debt hanging around and you're trying to clean up your credit report, negotiation can help you to get some blemishes off of your credit report.
-- Written for MainStreet by Nicholas Pell