Should You Do Debt Negotiations?

Debt negotiations are methods that debtors can use to help reach a better financial position. These negotiations are generally possible because of two different reasons. First, lenders are often willing to negotiate in order to keep a loan profitable and avoid taking losses or resorting to legal measures like foreclosures. Second, many government and nonprofit programs exist to help debtors seek debt negotiation or renegotiation in order to improve the economy as a whole. Debt negotiations can be very useful and should be one of the first steps that borrowers take when confronted with debt problems.

Temporary Debt Changes

One of the first and easiest types of debt negotiation is temporary alterations to the debt payment plan. This occurs when the lender agrees to make a change to the loan that only lasts a specific amount of time, usually several months to a year. Most often lenders forbear or defer the loan, delaying the necessary monthly payments while not marking the loan as late or defaulted while the debtor pays off other debts and reaches a more secure financial position.

Debt Restructuring

Debt restructuring is another useful method of negotiation and should be pursued by debtors that cannot afford to make their current monthly payments, even if those payments were paused for a time. In a restructure, the lender agrees to permanently change some aspect of the loan to make it easier for the debtor. For instance, the lender may agree to lower the interest rate back to a previous level, making monthly payments lower. The lender may also agree to combine late payments back into the loan to make it easier to pay off.

Debt Settlement

Debt settlement is a type of negotiation that results in a portion of the debt being permanently forgiven by the lender. While this may seem like an attractive option, debt settlement comes with strings attached. Lenders will usually only agree to settlement when the debt has been late for years and caused many financial problems, such as low credit ratings. Also, any portion of the debt the lender forgives will be taxed as income. Debtors must be prepared to pay a portion of the debt in order to win a settlement, such as a third or a fourth of the total debt.

Debt Consolidation

Debt consolidation is a useful option for debtors if the lender does not want to change the loan but does want to give the borrower a fresh start. Consolidation uses a new loan to fully pay off the old debt and replace it with a new chance to keep up on payments, possibly with a lower interest rate that leads to lower total monthly payments. There are refinances, second mortgages and dedicated consolidation loans that can help with this process.