February 20, 2023, 02:56 PM
ZSMICHAELHow to Negotiate With Creditors to Reduce Your Debt
Whether it’s the IRS or hospitals or credit-card companies or mortgage lenders, there are ways to get better terms—and maybe even reduce the amount owed
t would be hard to overestimate the impact of a crushing burden of debt. It can be a hole that gets deeper even after you spend years trying to fill it in. It can be a mountain that makes it hard to see past. And it can even stop the passage of time: Unable to catch up on their bills, some people delay marriage or childbearing, decline or delay medical treatment, or stay living in the homes of parents or friends.
For many people, though, the insurmountable debt may not be as insurmountable as it seems. Most creditors—from the mortgage company to the hospital to the IRS—are willing to discuss reductions in the debt load, or at least in the terms of repayment. The key for debtors isn’t to be so paralyzed that you fail to even try. Defaulting on debt can destroy a person’s credit score, or worse, lead to legal action and the seizure of property.
Here are some of the ways debtors can negotiate with creditors, depending on the kind of debt they have. Will they always work? Definitely not. But most professionals say that the biggest impediment to many of these tactics may not be creditor resistance. It may be debtor inertia.
Federal-tax debt
As anyone who owes federal income taxes knows, the IRS never mails you a letter just to say “hi.”
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“There is a real temptation not to open the bill,” says IRS spokesman Eric Smith. “But there is one thing about tax bills: They don’t get better with age.”
Delinquent taxpayers—roughly 10.3 million individuals in 2021—face steep consequences. For example, someone who didn’t file a 2021 return (or request an extension) is typically penalized 5% of the unpaid taxes every month until reaching a 25% cap. Interest is also charged and compounded daily, with rates currently at 7%. (That percentage might go even higher if the Federal Reserve raises interest rates again.) There also is a late-payment penalty of 0.5% of the unpaid taxes, an amount that accrues monthly.
What does that add up to? A lot. Say you file your 2021 return on March 1, 2023, with a tax balance due of $10,000. You’ll owe additional late-filing and late-payment penalties totaling around $2,500 or more. You’ll also owe interest. If you pay the tax bill when you file, the penalty and interest charges will stop accruing at that point. The IRS will then bill you for the penalties and interest. (If you then timely pay that bill, you won’t owe any additional penalties and interest.)
Worst-case scenario, the IRS can legally garnishee the taxpayer’s wages, take money deposited in financial accounts, and seize and sell personal property, such as vehicles and real estate.
Delinquent taxpayers should act long before the situation becomes dire, Mr. Smith says. The most common approach is to contact the IRS and set up a payment plan that whittles down the balance over time. For instance, “if you owe $50,000 and can pay that off in six years or less, usually we’re going to approve that agreement,” Mr. Smith says.
If paying back taxes isn’t possible using an installment agreement, because you simply don’t have the income and resources, taxpayers can apply for an “offer in compromise,” which reduces the overall tax liability. The IRS received over 49,000 offers in compromise in 2021, of which it accepted about 15,000. Mr. Smith cautions taxpayers to avoid “offer mills” and other scammers who advertise that they can settle tax debt for pennies on the dollar. “Chances are, they’re not going to deliver what they’re promising,” he says.
Taxpayers facing financial hardship, such as job loss or significant medical expenses, can ask the IRS to report their accounts as currently not collectible. That status means the IRS will temporarily suspend certain collection actions, such as seizing property. But being “not collectible” doesn’t erase the debt, which continues to accrue penalties and interest.
The collections process and penalties vary depending on the circumstances. For example, some exceptions are made when the taxpayer lives in a federally declared disaster area or is a member of the military serving in a combat zone.
The percentage of total consumer-debt balance by delinquency status
30 days late
%
4.0
60 days late
90 days late
3.5
120+ days late
3.0
Severely derogatory
2.5
2.0
1.5
1.0
0.5
0
2003
’05
’10
’15
’20
Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit, February 2023
Credit-card debt
Facing higher prices for goods and services, more consumers may be using their credit cards to cover day-to-day costs.
In the fourth quarter of 2022, credit-card debt jumped to $986 billion, surpassing the prepandemic high of $927 billion, according to the Federal Reserve Bank of New York. And while delinquencies—balances 30 days or more past due—remain historically low, they also are increasing, the Fed report found.
Consumers get in trouble when their purchases and interest charges snowball to the point where they can’t make the minimum payments. “More times than not, it’s a crisis when consumers come and see us,” says Barry S. Coleman, vice president of program management and education at the National Foundation for Credit Counseling.
The foundation is a network of nonprofit member agencies that helps consumers develop a plan to both reduce their living expenses and pay outstanding debts, says Mr. Coleman. Counselors work directly with the credit-card companies to make the clients’ monthly payments more affordable, he says. If the companies agree to a debt-management plan, the consumer makes monthly payments to the agency, which disperses the money to the creditors. The foundation charges a small monthly administrative fee, which can be waived if the client is unable to pay.
Nonprofit counseling agencies are particularly useful when the debtor needs one payment plan that works across multiple creditors. Still, borrowers can also call their credit-card companies directly to request a payment plan that could include things like reducing their interest rate, lowering the minimum payment, waiving late fees and/or even settling for a lower amount. Consumers should be prepared to provide documentation of extenuating circumstances that led to the debt, and be sure to get a payment plan in writing.
Credit-card issuers differ in their terms when agreeing to payment plans. “Some will reduce the interest rates down to single digits. Others may only go down a couple of percentage points,” Mr. Coleman says.
In a few cases, consumers can ask the credit-card company to forgive a certain percentage of the debt or settle the debt for a certain percentage, Mr. Coleman says. In those situations, there must be severe delinquency of many months. Still, “it’s the exception rather than the norm,” he says.
Mr. Coleman discourages clients from transferring their outstanding balances to a single, low-rate credit card unless they can pay it off during the card’s introductory term. Significantly delinquent consumers probably won’t qualify for the card in the first place, and those who do typically see interest rates skyrocket on balances that remain after the initial term expires.
Mr. Coleman also warns against using payday loans. “Oftentimes, the interest rates are extremely high and require payments every couple of weeks,” he says. In the end, “they can make a consumer’s situation far worse than what it was.”
Mortgage debt
In the fourth quarter last year, 0.57% of all mortgages were seriously delinquent, according to the New York Federal Reserve Board. But rising interest rates—and higher house payments—may see delinquency levels rise in the coming years, says Guy Cecala, executive chairman of Inside Mortgage Finance, a publisher of news about residential mortgages.
Homeowners who are significantly behind in their house payments should immediately contact their loan servicer, the company that handles the administrative side of loan payments. (Check your monthly statement for the name of your servicer.) Describe your situation and—most important—say how you plan to repay what is owed.
“I’m aware that most people view the mortgage servicer as a faceless machine. That is generally not the case,” Mr. Cecala says. “What they really want to know is if there’s a solution.” Someone whose home was damaged in a hurricane may be waiting for an insurance payment. A homeowner who recently became unemployed should outline efforts to rejoin the workforce.
Missing mortgage payments will likely lower your credit score, so ask the loan servicer about forbearance, which will pause or reduce your mortgage payments. At the end of the term, the homeowner can repay the past-due amount, which now includes the interest accrued during the forbearance period. Another option is to request a payment plan in which you make your regular monthly house payment along with a portion of the overdue balance. Separately, some mortgage servicers will allow a payment deferment, in which the past-due balance is tacked to the end of the home loan.
If mortgage debt continues to amass, the loan servicer may push the homeowner to sell the property.
All of these approaches aim to avert foreclosure and the seizure and sale of your house. Last year, 324,237 properties in the U.S. faced foreclosure filings, up 115% from 2021 but down 34% from 2019, before the pandemic shook up the market, according to Attom, a real-estate data company. Lenders repossessed 42,854 properties through foreclosures in 2022, up 67% from 2021 but down 70% from 2019.
Mortgage-relief scammers abound, so be wary of companies that promise to negotiate with lenders on your behalf.
The biggest impediment to negotiating debt may not be creditor resistance. It may be debtor inertia.
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Student-loan debt
Student-loan recipients are currently stuck in legal limbo, waiting for the Supreme Court to rule on the legality of President Biden’s plan to forgive up to $10,000 per person in federal loans and up to $20,000 in federal loans to borrowers who also received Pell Grants. Meanwhile, the pandemic-era payment pause was extended to June 30 or until the legal challenges are resolved—whichever comes first. (If the litigation hasn’t been resolved by June 30, payments will resume 60 days after that.)
For now, borrowers can assess whether their monthly payments are still manageable once the pause ends. If not, contact your loan servicer and inquire about deferment and/or forbearance options, as well as other repayment plans.
“I would recommend exploring income-driven repayment plans,” says Karen McCarthy, vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators. Since monthly payments are generally based on the borrower’s discretionary income and family size, “the repayment amounts can be as low as $0, but still be considered in [satisfactory] repayment status,” she says.
Another option is to apply for a federal consolidation loan that combines multiple student loans into a single loan, possibly with a lower total monthly payment. However, these loans typically lengthen the repayment timeline, so the borrower likely faces more principal and interest payments. Consolidation loans are also available from private lenders, but many lack the income-driven repayment options and eligibility for public-service loan forgiveness.
Nurses, teachers, public-service employees, military personnel and others may be eligible for public-service loan forgiveness. Disability and other hardships will also be considered for forgiveness.
Continuing to miss payments will likely lead to default, at which time the entire balance of the loan, with interest, becomes due. Defaulting also erases eligibility for loan deferment, forbearance and forgiveness, as well as access to federal student loans in the future. The borrower’s credit rating is dinged, and the government can withhold tax refunds and garnishee wages.
Don’t let it come to that, Ms. McCarthy says. “It’s possible to get a lower monthly payment amount that will keep you in satisfactory repayment status, which is the No. 1 goal here.”
Medical debt
Almost a quarter of adults in the U.S. say they currently have medical or dental bills that are past due or that they are unable to pay, according to survey results released last year by the nonpartisan nonprofit Kaiser Family Foundation.
“It’s really expensive to age—and to get sick—in America,” says Caitlin Donovan, senior director of the Patient Advocate Foundation. The nonprofit helps individuals with serious medical conditions resolve financial issues related to their healthcare, and even helps them apply for financial aid and copayment relief.
“A few years ago, a patient’s bill was $30,000, and we got that down to $0 by working with hospital and insurer,” Ms. Donovan says.
Nonprofit credit-counseling agencies can also help negotiate with healthcare providers and insurers on your behalf.
Patients who are unable to pay have certain rights and protections from debt collections. The first step is to call the hospital or treatment center’s billing office to ask about financial assistance, cost reductions and/or payment plans that might be available.
“I’ve spoken to people who are in collections with the hospital and they would have qualified for financial assistance,” Ms. Donovan says.
When making your case, be prepared to provide documentation, such as proof of income, insurance, disability and even your proximity to the facility if travel expenses are significant. If financial assistance isn’t available or the patient isn’t eligible, healthcare administrators are sometimes willing to negotiate a lower balance and/or work out a payment plan. Additionally, patients can contact their health-insurance provider and appeal the amounts that aren’t covered by their plan.
Separately, patients can apply for grants through the Patient Advocate Foundation. Funding comes mainly from private donations and health-related nonprofits devoted to specific ailments. For example, the Begin Again Foundation funds grants for patients diagnosed with sepsis, acute respiratory distress syndrome or toxic shock syndrome.
Some healthcare providers offer medical credit cards to their clients. These typically come with no- or low-interest introductory rates that reset down the road—sometimes at a higher rate than that of a regular credit card. “Better options are finding funds elsewhere and working with hospital directly,” Ms. Donovan says.
Ms. DeCarbo is a writer in South Carolina. You can reach her at reports@wsj.com.
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