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Ask Farnoosh: Negotiating Debt Payments

Ask Farnoosh Negotiating Debt Payments

Mark asks: I’m looking to settle (close out) some debts with lump sum payments. Are there any tips to negotiate these transactions to work a little more in my favor?

Debt got you down?

If overextended borrowers can’t see a light at the end of the tunnel after calculating loan payments, they may be relieved to know that they can negotiate to pay a fraction of what they owe to creditors. It’s called debt settlement. But the process comes with caveats.

If you choose to work through a debt settlement firm, do your homework. Yes, they will negotiate on your behalf, but you may end up paying hefty fees for the service.

Want to go it alone? It’s doable, but it helps to be strategic, says Bruce McClary of the National Foundation for Credit Counseling, a non-profit that negotiates better borrowing rates and payment plans for clients through a debt management program.

For the fastest deal, it’s best to save up and offer a lump sum payment to close out the debt once and for all. “And be prepared to have a discussion about the financial reasons why a lump sum settlement is going to be best for you and the creditor,” says Bruce.

No matter how you choose to proceed, know that the record of “settling” the debt will remain on your credit report for typically seven years. It may not impact your credit score, but the report could raise flags to future lenders and qualifying for a new loan or credit card could be challenging.

That said, if this is your best bet for becoming debt free, keep reading. I have some more tips here to help ensure the settlement goes well.

Know Your Debt Details

If you’re going to try to strike a deal for yourself on your own, it’s important to know all the details of your statement, including how long you’ve had the balance, when the last payment was made and your overall payment history. “The more you know, the better your negotiation position can be,” says McClary.

Be Reasonable and Get it in Writing

You obviously would prefer to settle for pennies on the dollar, but realistically that won’t happen. “It’s unreasonable to ask for more than 75 percent of the balance to be forgiven,” says McClary. Instead, offer a 70 or 75 percent settlement and work your way down to an agreement from there.

Once a deal’s been made, documentation is key. Get it in writing as soon as possible. The letter should include what the creditor has agreed to, when they need the payment, how much they’ll accept and that the debt will be reported to the credit reporting agencies as being “settled in full.”


Once you make the payment, make sure it actually goes through. Send a follow-up letter confirming receipt of payment after everything is processed, says McClary. Next step: check your credit reports to be sure the status of the credit account is correctly updated. “If it doesn’t show the new information then you need to go back to the creditor and tell them to quickly send updates to the credit reporting agency. If that doesn’t work, send copies of the agreement and letter to the credit reporting agencies.” All the reason to keep everything in writing each step of the way.


Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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