You have several options for debt negotiation if you find yourself unable to pay your debts, but still have home equity, retirement funds, or a compensation bonus. You can cut back on expenses to free up more cash for debt payments, or work with a credit consolidation company to combine your debts into a single, usually lower, monthly payment. If you are unable to pay even a consolidated payment on your debt, you will need to negotiate with your creditors and get lower payments—a process called debt negotiation or debt settlement.

When to negotiate debt

If you are overwhelmed with debt and thinking about filing for bankruptcy, consider trying to negotiate your debt with your creditors first. A debt negotiation will be less harmful to your credit rating than a bankruptcy. However, note that debt negotiation is not always successful, and that settling your debt rather than paying it in full will negatively impact your credit score.

What debt negotiation could mean

If you do not successfully negotiate your debt and can't make your payments, your credit rating will likely suffer as creditors report your nonpayment to ratings agencies. If you are a homeowner, creditors may place liens (security interests granted by the law to ensure payment for a debt) against your home or sue you for collection of the debt. If they win, creditors may be able to have payments taken out of your wages. If you succeed in settling your debt, note that the IRS may treat the amount of debt that was forgiven as taxable income.

Choosing a settlement company

While you can negotiate directly with your creditors, you can also get help from a professional debt-settlement company, all of which charge fees. Choose a company carefully and watch out for scams. Many companies pose as nonprofits and claim to help, but may charge high fees or require "donations" that only make your debt grow.

To pick a reputable debt consolidator, the Federal Trade Commission recommends asking for a referral from local universities, credit unions, housing authorities, or U.S. Cooperative Extension Service. These organizations should know of legitimate, local nonprofit credit counseling programs. You can also ask the banks or your local consumer protection agency for referrals. Aim to work with a company that offers in-person services, and carefully read its agreement to make sure it truly saves you money.

Many states have laws regulating debt-settlement companies, so be sure to contact your state Attorney General to learn what's legal in your state.

What debt negotiation may cost

Other than fees for getting help from a debt settlement company, the debt negotiation process itself does not involve fees.

Additional resources:

Federal Trade Commission publication: Knee Deep in Debt

Debt Settlement Expert Reveals Options for Getting Out of Debt

Related Legal Guides:

Bankruptcy or Debt Negotiation: A comparison

Fair Debt Collection

Debt Settlement Tips

Declaring Bankruptcy