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Debt Settlements:  Alternate Repayment Plans

Most people think that they have to sign-up with a credit counseling service in order to get an unsecured creditor to lower their interest rate or accept an alternate repayment plan.  This couldn't be further from the truth.  If creditors will accept alternate payment arrangements submitted to them by credit counseling services, they will also accept them directly from consumers.  In fact, working directly with a consumer saves a creditor the 8% to 10% cut typically paid to the credit counseling service.  If a creditor will not accept your offer of an alternate repayment plan, it will probably not accept it from a credit counseling service either. 

If you can't pay your debts because you have lost your job, become ill, or if you're considering filing bankruptcy, then many of your unsecured creditors will quickly lower your interest rate and monthly payments either on a permanent or temporary basis to keep you from defaulting on the debt.  But not all of them will work with you.  You will typically get a different response from various types of creditors and collectors.  

Medical debt:  Medical debt collectors are probably the most aggressive type of collector, often filing suit for trivial amounts of money and within a relatively short period of time after the debt was incurred.  Medical debt collectors are accustomed to easily obtaining summary judgments in court and putting liens on debtors' homes as relatively few debtors put up much of a fight.

Credit card issuers and large-retailers.  There are two basic types or organizations who will negotiate debt:

Group 1 consists of those who will eagerly accept you into their hardship program the moment you inform them that you're in financial trouble and need some relief.  They will work with you to keep you paying by either lowering your interest rate or reducing your monthly payments or both.

Group 2 consists of those who will refuse to work with you unless you (1) have been paying only the minimum required each month for at least the last six months; (2) paid less than the minimum, paid late or didn't pay at all 2 or 3 times over the last six months; or (3) have completely stopped paying (defaulted) on the account. Usually, you have to go three straight months without making a payment to get their attention.

If none of the three situations in the paragraph above describe your present situation, then Group 2 is unlikely to work with you unless you present them with evidence of your impending financial collapse, such as a terminal illness or permanent disability, death of a major wage earner in your household, or proof of a permanent and substantial loss of income that might result in your filing bankruptcy.  
The IRS.  Not only will they work with you, but recent federal legislation requires them to help you work out a payment plan that doesn't cause you economic hardship.  The IRS regularly accepts reduced settlements that allow you to pay as little as 10% of what you owe as payment in full (called offers-in-compromise).  The IRS will even help you write out an offer-in-compromise if you ask them.

Student Loan Administration.  Both federal and state governments are quite willing to work out an affordable repayment plan, defer your debt or give you a temporary forbearance.  There is no reason to let a student loan obligation progress to the point of collection or default.  Just call your loan service provider and work out an agreement if you can't pay.

Bill collectors.  Bill collectors will accept repayment plans, but only if their intimidation tactics failed to get you to pay in full as quickly as possible.  Collectors don't like to accept repayment plans because the default rate is so high -- many people stop paying after two or three months.  You can negotiate more effectively with a bill collector if you over him a lump sum payment.  Learn more about Handling Debt Collectors.

Next topic:  Reduced Settlements
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