When you owe money, some creditors can use a wage garnishment—a collection process that forces your employer to deduct money from your check—to make you pay what you owe. Because the amount taken from each check can be steep, you might be wondering if it’s too late to negotiate a better payment situation. In this article, you’ll find out how to do just that.
(If you’d like to start with the basics, read When Can a Creditor Garnish Your Wages?)
Make a Lump Sum Offer
It’s to your advantage to get a creditor paid off as soon as possible. In many cases, the creditor will be able to charge additional money that can add up fast, such as post-judgment interest(which can be substantial depending on state law), collection costs, and attorneys’ fees.
Of course, it’s usually best to try to settle before a wage garnishment is in place because you won’t have as many options afterward. After all, once the creditor is already getting paid, it’s unlikely that they’ll be interested in working out another type of long-term payment plan.
Most creditors, however, will accept a significant amount of money now—known as a “lump sum payment”—instead of garnishment payments spread out over time (especially since the payments will come to a stop if you lose your job). It’s a win-win. A lump sum settlement will save both you and the creditor time and money, and the creditor won’t have to pursue the wage garnishment.
You’ll likely do best if you offer to pay the lump sum in no more than one or two installments. Additionally, the sooner you can pay the money, the more likely a creditor will be willing to accept less than the outstanding balance.
If you don’t have enough cash on hand to offer a lump sum settlement, this might be the time to ask for loans from relatives. Another way to drum up cash is to sell off property, such as a second car.
If you settle a debt with a creditor for less than the full amount, the creditor might send a tax form for the unpaid portion. The Internal Revenue Service considers this “forgiven debt income.” Depending on the rest of your financial picture, you might have to pay taxes on this amount.
If you are concerned about the effect forgiven debt income might have on your taxes, consider consulting your tax preparer, a certified public accountant, or a bankruptcy attorney before accepting such an offer. You might find it’s simpler and cheaper to file for bankruptcy.
Questions for Your Attorney
- How do I start negotiations with the creditor?
- What do I need to include in a settlement letter?
- Can you negotiate on my behalf?