Debt Settlements: Is Debt Negotiation for You?
Before you contact your creditors to negotiate debt, it is advised that you do the following:
Step 1: Develop Your Own Debt Management Plan. To get started, you must become very familiar with your personal finances. You must work out a livable budget. By livable, it is meant that your budget should be one that your family can realistically stick to. This means that your budget should provide for the following:
- It must allow you to pay your secured creditors first (car and house payment). Do not skip paying a secured creditor, or send in less than what you owe, just so you can send a payment to an unsecured creditor. It doesn't matter if a bill collector has threatened to file suit next week if you don't send in a check -- do not pay an unsecured creditor when you need to pay a secured creditor.
- Set realistic estimates of what you need for your monthly living expenses, such as food, utilities, fuel, etc. Some people set these amounts too low and it gets them in to trouble later on. If you intend to negotiate with your creditors for an alternate repayment plan, then you need to make sure you can stick to that plan before you present it to your creditor. Don't get your creditor to agree to an alternate repayment plan and then not be able to live up to your end of the deal because you discovered you need $380 each month for groceries instead of $300.
- You must cut out all the fat from your budget. You can't expect a creditor to negotiate with you for alternate repayment plans or a reduced settlement if you aren't willing to make sacrifices yourself. Visit the Budgeting section of this website to find tips on developing a budget and cutting your expenses. By examining your personal finances, you might realize that you can easily free up $300 each month or as much as $600 each month to pay towards your debt or to use to negotiate for reduced settlements.
Some people discover that they can pay off their debts without bankruptcy, credit counseling or debt negotiation if they cut back on their expenses and refinance. Ideally, this is what you want to do. It is the best way to get out of debt without damaging your credit rating.
Step 2: Assess the Risks of Debt Negotiation. If Step 1 did not free up enough money to pay down your debt or you're already in over your head in debt, you need to carefully consider both the positive and negative aspects of debt negotiation before taking the plunge. Please read the entire section about debt negotiation before you contact a creditor or debt collector so you will be aware of both the positive and negative aspects of debt negotiation.