How to Negotiate Down Debt on Credit Card & Taxes

If you owe back taxes or other debts and are struggling to make your payments, debt negotiation may seem like a good option. If you can persuade your creditors to reduce the amount of your debt, you might be able to afford the payments. However, negotiating debt can be difficult, particularly if you are trying to lower a tax debt with the Internal Revenue Service. Debt reduction also can result in some unpleasant consequences, such as taxation on the amount of the reduced debt and damage to your credit score.

Instructions

1

Choose between settling yourself or using a debt management company. If you negotiate directly with your creditors, you can save on fees. As a direct negotiator, you also can guarantee that you are working in your own best interest, rather than acting as an intermediary working for a fee. However, if you aren't confident as a negotiator or would rather just let someone else do the work for you, you can retain any of a number of different debt management firms.

2

Calculate the payment amount you can afford. It will do you no good to negotiate a lower balance on your debt if you still cannot afford to make your payments, so determine what you can afford and write down the number.

3

Call and ask for a lower balance. Many creditors may offer a lower interest rate on your balance if they understand you are in financial distress, but getting a lowered balance can be difficult. Explain that you are willing to pay a certain amount but that you cannot afford any more. Be willing to make an upfront payment for the entire amount of your reduced payment, based on the calculation of what you can afford.

4

Wait for offers. If your creditors do not agree to your initial request for a reduced balance, wait and see what offers you ultimately get. If you end up falling behind on your monthly payments, at some point your creditors are likely to offer you a reduced balance on your debt in exchange for total payment.

5

Make the IRS an offer in compromise. An offer in compromise is essentially the same thing as negotiating down credit card debt, with the exception that the IRS is a much tougher negotiator. Since the IRS has the power to garnish your wages, attach a lien to your property and levy your bank account, it will typically take what you owe if you make no effort to pay. However, if you can explicitly demonstrate your severe financial need, you may be able to negotiate a compromise on your debt with the IRS.

6

Fill out Form 656 and pay your fee. Form 656 is essentially a low-income certification, with which you demonstrate to the IRS that you cannot afford to pay your tax debt, even on a regular installment plan. The IRS will not consider your offer in compromise unless you include a $150 filing fee and your first proposed installment payment with these forms, which is usually 20 percent of the amount you propose to pay.