Can't pay? Don't know what to say? Here's a 4-step plan

Reached the end of your rope with credit card debt? It appears that card issuers have, too, as reports of cardholders being able to negotiate down their debt are on the rise.

Combine rising unemployment, reduced collections revenues and sinking bottom lines, card issuers are cracking open the door to talk to delinquent cardholders earlier in the collection process -- 90 days instead of 180 days delinquent. Here are some tips to help you begin the negotiation process.

Reach out to issuers sooner rather than laterIf credit card bills are due but funds are scarce, you could be heading into dangerous late-payment territory. You'd hardly be alone, however. Credit card delinquencies -- payments that are more than 60 days overdue -- hit record highs in June 2009, according to Fitch Ratings. After a brief dip in the months to follow, the delinquency rate returned to near-record numbers in October 2009.

To avoid the serious credit and financial damage not paying as agreed causes, you must speak with your creditors. Soon. The question is: Do you know what to say? Without a plan, you may not verbalize your predicament and needs the way you intend (or worse, blurt out something you regret).

If you can't pay and don't know what to say, here's a four-step plan.

1. Clarify your money pictureLenders aren't fond of approximates, so arm yourself with precise figures and time lines before calling. First, develop a cash flow statement. List each of your essential monthly expenses and subtract the total from your income. Then, decide who gets what portion of the remainder. In general, secured obligations such as mortgages and vehicle loans receive top priority, as home and car lenders don't have to take you to court and win a lawsuit to collect what's owed. After those are covered, divvy the leftover sum among your credit card companies.

Now consider when you'll be able to restart normal account activity. Be conservative. If you've been laid off, and think you'll find another job in three months, assume it will take five. Better to delight those you owe with an early payment than disappoint them by begging for an extension.

Analyzing your finances and staying true to your capabilities is essential, says Leigh Ann Fraley, who repaid $19,947 in credit card debt and writes about her experience in her blog, Save Leigh Ann -- The Daily Rantings of a Bulimic Shopper. "I went through my budget so I knew what I had and could adjust. I would tell them that instead of paying $100, I can send $5 but I can do it every month." Though she was apprehensive about making those calls, she often found creditors to be "great; very understanding."

As you're going through the numbers, try not to get discouraged. Overall, lenders are eager to help borrowers in need, especially in this down market. Bank of America, for example, has accelerated efforts to reach out to customers early in the delinquency cycle, before their situation becomes too distressed. "We recommend that they contact the bank so we can evaluate their individual situation and propose the appropriate, customized solution," says Bank of America spokeswoman Betty Riess. The bank (along with hundreds of other banks) also works with credit counseling agencies that counsel, educate and develop restructured debt payment plans for customers who are experiencing financial stress.

What if you've got nothing to offer and don't expect a recovery any time soon? Understand the worst-case scenario before giving up. "If you don't pay your bills, your creditors will likely take collection action of increasing severity over time," warns Jeannine Moore, director of marketing and communications at Consumer Credit Counseling Service of San Francisco. "The end result could be a legal judgment in which the creditor gets the right to garnish your wages, place a lien on your personal property or levy your assets." To prevent it from descending to that level, Moore suggests examining all possibilities, such as securing part-time work to boost income or selling assets to drum up the cash to make payments.

2. Write a 'problem and solution' scriptThe people you'll be speaking with aren't mind readers; it's up to you to explain what happened and how you'd like to fix the problem. Arrange your thoughts by putting your situation and requests in writing:

3. Pick up the phone and dialThe first live human voice you'll hear after the "number prompts" will be the customer service representative's. Don't launch into your well-planned conversation just yet though -- make sure that person has the authority to approve any changes to your account.

Lynnette Khalfani Cox, author of "Zero Debt: The Ultimate Guide to Financial Freedom," recommends customers ask, "Do you have the power to change my interest rate or terms?" If the answer is affirmative, start talking. If it's no (or that no one does), ask to be transferred to the boss. "Make your tone sound like a request, not a demand. Good rapport is vital; you want to solicit cooperation," says Cox. Also identify the person, not just the department, to whom you'll be sending your follow-up letter. If you encounter resistance, either search for management names on the company's Web site or politely explain that you'll copy all correspondence to the CEO. 

Once you have the right employee on the line, pull out your notes and begin.

Still, these are not always easy conversations to begin, especially if your confidence has been shaken. "It's difficult to talk to your creditors when you feel badly about yourself. I had to tell myself that I'm not a bad person," recalls Fraley. "When I got past that and began to communicate, things got a lot better." She suggests employing an ally too. "Have a friend sit with you while you make the call. It helps you not fall apart."

4. Hit the post office and keep in touchYou promised a letter with documentation -- now write and send it. Include your full name and account number, and address it to the correct employee or department. In concise paragraphs, recap your situation, the agreed-upon resolution, and a statement of how you are committed to keeping the account in good standing. Don't forget to add your telephone number and e-mail address, so they can easily contact you. Make copies of the letter and any paperwork, then head to the post office to send the entire package via certified mail, return receipt requested.

"Stay organized and maintain regular contact," urges financial planner Ken Clark, author of "The Complete Idiot's Guide to Getting Out of Debt." "You'll avoid the immensely frustrating situation of having to re-explain your situation, much less start from scratch if the ball gets dropped." Periodic updates also reassure creditors that you're doing everything possible to get back on track.

Finally, know that early intervention is best, as your options for resolution are wide open. Ignore the urge to delay that first phone call. The fact is, even when you're in a financial bind, you are a valued customer, and most creditors will do what it takes to assist you through this tough time.

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