Ask An Expert: Digging Out Of Debt Takes Time, Dedication

Ask An Expert: Digging Out Of Debt Takes Time, Dedication 

 

By Steve Strauss for USA TODAY

Q: Over the past 18 months, we have piled up quite a bit of debt. Most of it is on our credit cards — trying to keep business creditors paid and what not. I don't think I need to file bankruptcy. Is there some other way to get out from under? — Vance

 

A: How would you like to get out of debt for about 50 cents on the dollar? I'll tell you how in a moment.

Although there is very little that is good that can be said about this economy, if there is one bright spot, it is this: Some creditors seem more willing than ever to work with people who are indebted to them.

Businesses get into debt for all sorts of reasons and with all sorts of creditors. Maybe its money owed to a business associate, or a bank loan, or money owed to vendors. Whatever the case, there may come a time when you need or want to get out from under. When that time arrives, you have a few choices.

First, you could, of course, work out a payment arrangement. The advantage here is that this solution will do the least damage to your credit rating. Call your creditors up, tell them what you are able to handle, and I bet you will be surprised at how flexible they are. Creditors know these have been tough times for people and are often willing to work with you.

Another option of course is bankruptcy. It is, and should be, the option of last resort. I have written about it before in this column previously.

But today I want to discuss a third option that can occur before you file a bankruptcy. At that stage, it is often true that your business debts have been sold to third parties – to collection agencies. When that is the case and you want to avoid bankruptcy, what do you do?

Negotiate, that's what.

In an economy like this you just may find that these creditors will be more willing than you think to work out a settlement with you. You can in fact often settle for, yes, 50 cents on the dollar, or less. (Standard caveat: While I do feel sorry for the creditors, and have been named as a creditor in a bankruptcy myself, I can pass no judgment on negotiating down a debt.)

If negotiating a reduction in your debt is of interest to you, here's what you do:

1. Make a list of all of your debts: When people get into financial trouble, there is a natural tendency to hide from the facts, but if you want to deal with your creditors you have to make a list of how much you owe whom. For each creditor or collection agency, list the principle and interest, along with their phone number.

2. Get a lump sum together: This is the hard part. These creditors have little reason to settle with you if you can't pay off the settlement amount in fairly short order – say a month or two at the most. No, I don't know where you will find the money, but I do know you need access to some – from a relative, friend, or wherever – if you want to be successful in this process.

3. Smile and dial: Get on the phone with each agency / creditor and tell them that you want to negotiate a settlement. Offer 25 cents on the dollar. They won't like it, but they will very likely counter offer. If you can offer a lump sum settlement, expect to end up at around 50% of what you owe – sometime a little more, sometimes a little less.

4. Get it in writing: Before making any payments, get each collection agency / creditor to sign a document, yours or theirs, that says they are agreeing to the agreed-upon settlement amount as payment in full for the debt and that you will have no further financial obligations to them. You may want to speak with a lawyer about this part or get a copy of a suitable settlement agreement. Make sure too that your credit report will reflect a zero balance.

5. Pay: Pay as agreed and say goodbye.

It will take you a few years to get a decent credit rating again, but hey, by then the economy should be good once more.

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Ask an Expert appears Mondays. You can e-mail Steve Strauss at: sstrauss@mrallbiz.com.And you can click here to see previous columns. Steven D. Strauss is a lawyer, author and speaker who specializes in small business and entrepreneurship. His latest book is The Small Business Bible. You can sign up for his free newsletter, "Small Business Success Secrets!" at his website —www.mrallbiz.com.