Can You Negotiate with Creditors to Avoid Bankruptcy?
Many people will do almost anything to avoid filing for bankruptcy. They often fear taking a huge hit to their credit score and want to avoid the stigma that is attached with wiping out debts using a Chapter 7.
As experienced Plantation bankruptcy attorneys, we think fears about bankruptcy are largely overblown. Nevertheless, it is sometimes possible to negotiate with creditors if you have fallen on hard times. Doing so could give you the breathing room you need to avoid a bankruptcy filing.
Identify Your Goals
You might be feeling financial stress, but you still need to think carefully about what you are hoping to achieve. Consider the following:
- You want to temporarily suspend payments on your debt, usually for a month or two, without getting hit with a penalty or late fee. This is an option if you have reason to believe your finances will quickly improve.
- You want to reduce your interest rate so that you can lower your monthly payments. You might not have any extra money each month, and lowering your rate could help you stay current on your debt.
- You want your creditor to forgive some or all of the principal. This is called debt settlement, and it is much harder to get a creditor to agree. However, you might not think you have any chance of ever getting on top of your debts.
Once you identify what you hope to achieve, you will be better positioned to approach your creditor.
Characterize the Debt
You also need to analyze the debt that is affecting you. Debt falls into roughly three categories:
- Secured debt. These are debts backed by an asset as collateral. Your car loan and mortgage are examples of secured debts. Because of the existence of collateral, creditors will rarely reduce the amount of principal you owe. You also can’t get rid of these debts in bankruptcy. However, some creditors might let you suspend payment for a month or two.
- Unsecured debt. Credit cards and medical bills fall into this category, as do unsecured personal loans. You have a stronger bargaining position with an unsecured creditor, since a Chapter 7 bankruptcy can wipe out the debt entirely.
- Court-ordered payments. Alimony and child support cannot be wiped out in bankruptcy, so you can’t get rid of arrearages. A court judgment for a personal injury lawsuit or business dispute, however, might be dischargeable in bankruptcy, so a creditor might be willing to work with you.
Approach Your Creditor Confidently
You want a sensible game plan when you call your creditor. For example, you might want to skip a credit card payment for a couple months. Identify why you think your finances will improve in two months’ time; your creditor wants to hear why. Also gather evidence that you have been a good borrower in the past. When you call, explain your current difficulties and how things will turn around in a couple months. Then ask explicitly if you can skip a few payments. They might say “yes” or they might say “no,” but you need to ask first.
Remember, bankruptcy is an option for dealing with unsecured debts and some court judgments. Contact a bankruptcy lawyer at Nowack & Olson to discuss your situation at 888-813-4737.