Debt Negotiation - UPDATED

Did you know that most debt is highly negotiable?

If you are having a problem paying your debt, call your lender and talk to them. Most lenders are highly motivated to have you to continue making your payments.

Think your interest rate is too high? You can get that lowered usually with a call. Likewise, if you want to just make an interest only payment for a month or two, the lender will usually allow that. If you need to renegotiate the term of your loan (that's extending the time you make payments on a loan) they can adjust that as well. Finally, if you are able to make good faith payments toward your debts, you can also get penalties reduced or eliminated. All of these items can help in lowering your monthly payment and helping you if you're facing a short term cash crunch.

However, this negotiation does have its limits, and that's the debt trap. The bank wants two things from you: they want you to pay your interest due each month and they want the balance due. Of course, lowering your interest rate reduces the interest they collect - but they still collect interest from you.

Most people are so afraid of their lender, they never try to negotiate with them and just accept usurious levels of interest and penalties on their debt. When I hear about credit cards charging 30% interest, I am floored that anyone would even pay that. The banks only charge that because they feel they can milk that out of the populace.

Believe me, the lenders DO NOT want you to default! As long as you're making payments, they make money - never forget that. If you're having problems with your debt, or even if you're not and just want some better terms, call them today and see what they can do for you. If you get a lot of stonewalling from the first rep that comes on the phone, ask to talk to their manager. Move on up the line until you get satisfaction. Keep names and numbers of the people you talk too.

You do need to understand your limits, though. If you call your lender and ask them to reduce your credit card balance from $3,000 to $2,000 they will laugh at you. The companies can't do that. The only thing that discharges debt (that is releases you from the obligation of your debt) is bankruptcy or foreclosure.

UPDATE - On February 13th, Henry Paulson came out with another mortgage rescue plan that is more of the same. Six of the biggest mortgage lenders in the country (that make up about 50% of the outstanding mortgages right now) are going to freeze the foreclosure process for 30 days in order to do some "work outs" with these heavily indebted homeowners. This is basically the same plan as the "Hope Now" alliance that hasn't done jack squat since it was instituted back in the fall (Hope Now has helped a total of 10,000 homeowners since it was instituted - as a comparison we had 2 million foreclosures in 2007). The reason is because the work outs don't address the real problem, people took on too much debt. They're going to try to refinance these homedebtors into a fixed rate, lower the interest rate, remove penalties, extend the term of the mortgage, etc. However, this doesn't solve the problem of too many people took on too much debt that they couldn't afford.

This is problem that's happening in the housing market right now. When the government and the lenders talk about negotiating with homeowners, they're talking about interest rates, loan terms and penalties assessed. The problem is that most homeowners in trouble paid too much for their homes, they took on too much debt. It doesn't matter how you change the terms on the debt, you're never going to be able to get a person who makes $50,000/year able to pay a $500,000 mortgage.

That's it, game over.

The banks won't voluntarily discharge that debt. Those loans have to be defaulted on those homes have to be foreclosed on for that debt to be released from the system.

So, don't pay a penny more than you have to in interest or penalties. Remember that those expenses are a direct tax on your wealth. Don't be afraid to talk to your lender and get those expenses minimized as much as possible.