How Do I Negotiate My Debt?

Dr. Jay Zigmont, PhD, MBA, CFP®

If you're carrying debt and can't see a way out, you might be considering trying to negotiate your debt. If you're successful, you may be able to settle your debt for less than you owe. And while you may end up with a black mark on your credit, it will certainly be less damaging than if you declared bankruptcy. 

There are debt consolidation companies out there that offer this service, but it's best to approach with caution. Unless you're working with a nonprofit debt counseling service, you may fall victim to an expensive con. And ultimately, you can likely negotiate down some of your debts yourself.

Unfortunately, this doesn't include student loan debt, as it can only be discharged in death, or if you meet certain qualifications (these include total and permanent disability, working in the public service sector for a certain number of years, or working for an employer who will pay them off for you). Similarly, if you owe back taxes to the IRS, you likely can't negotiate that on your own, and will need to consult a tax attorney.

Let's discuss how to approach negotiating medical debt and credit card and loan debt that's been sent to collections.

Medical Debt

Medical debt is a huge problem in the United States, and about 100 million adults owe money for medical and dental care. It's the number one reason Americans declare bankruptcy.

Let's say you receive a bill for $1,000 from the hospital (and this is a small bill; medical services can and do result in six-figure bills). Call the hospital's billing department and ask if they have a financial aid or charity care office. If it's a nonprofit hospital, it likely will. If it's a for-profit hospital, you are likely out of luck. You'll have to fill out forms to see what assistance you might qualify for. These could be run by the state or a nonprofit organization, and you could qualify based on your income.

You also want to make sure the bill is for care you received; billing mistakes are quite common and you don't want to pay for someone else's care, or for more/different care than you received. It's important to note that discussions with the hospital over your bill could take many hours on the phone, but if you can save money on medical debt, it'll be worth it. Plus, nonprofit hospitals must forgive some medical debt to retain their tax-exempt status.   In some cases, you'll be able to work out a payment plan that has you paying a small amount on a large bill over a long period of time. This is preferable to having to declare bankruptcy, even if you're paying $20, $50, $100 per month on a six-figure hospital bill for the rest of your life.

Debt Collectors

If you are behind on credit card or loan payments, after 90 or 120 days, your bills will likely be turned over to a collection agency. Then you'll be fielding calls from debt collectors. This isn't a fun experience, but you may have the opportunity to negotiate.

Just like with medical bills, you want to make sure the debt they're trying to collect is actually yours. Many of these companies buy and sell debts, and you can get them to send you proof that the debt is yours. Then you can negotiate on the basis of making one lump sum payment to get the debt settled. Note: for this to work, you actually do need to have a chunk of money you can send to the company. If you're delinquent on a $5,000 credit card bill, for example, you can try this with $1,500.

It's a good idea to wait until the end of the month to call and negotiate. The collection agents have commissions and quotas to meet, and if it's the end of the month, they'll likely be more willing to cut you a break. Call and offer $1,000 to settle the debt. You'll likely be turned down initially, but wait for them to call you back to negotiate. Eventually, they might call back and say, "I can't do $1,000, but I can do $1,500." You need to get this deal in writing, and don't believe it unless it's in writing.

And do not give them access to debit your bank account for the $1,500. Send the payment via check or money order, because you don't want them to be able to get into your account. You'll end up with a mark on your credit report, saying that the debt was settled for less than what was owed, but again, this is better than bankruptcy and better than being marked as behind on payments every month. You can try this technique to negotiate with any kind of credit account that's been sent to collections.

A lot of people likely don't realize that they can negotiate what they owe to some creditors. While it will take some time and persistence, the money savings can definitely be worth it – not to mention the peace of mind that comes from getting out from under debt.
Jay Zigmont, PhD, MBA, CFP® is the Founder of Childfree Wealth, a life and financial planning firm dedicated to helping Childfree and Permanently Childless people. Dr. Jay is a CERTIFIED FINANCIAL PLANNER™, Childfree Wealth Specialist, and author of the book “Portraits of Childfree Wealth.” Dr. Jay is the co-host of Childfree Wealth Podcast. His Ph.D. is in Adult Learning from the University of Connecticut.

He has been featured in Fortune, Forbes, MarketWatch, Wall Street Journal, New York Times, Business Insider, CNBC, and many other publications.