Do-It-Yourself Debt Settlement

If you're feeling overwhelmed and are struggling to keep up with your monthly payments, debt settlement may be your best alternative. Debt settlement allows you to repay some of what you owe to your creditors, stop harassment by debt collectors and avoid bankruptcy. There are a number of companies that advertise debt settlement services, but it is possible to settle your debts yourself.

Function

Debt settlement allows you to repay less than what you actually owe to your creditors. Typically, debt settlement can only be used to negotiate unsecured debts, such as credit cards, personal loans or lines of credit or unpaid medical bills. It's important to keep in mind that creditors are likely to consider a settlement only if your account is at least 60 days or more delinquent.

Process

The debt settlement process begins by making contact with your creditors. Depending on the age of the debt, you may be negotiating with the original creditor or with a collection agency. While you can contact the creditor by telephone, it's always best to send a statement in writing that includes your name and contact information, the original account number and the total balance due. Your letter should also include the amount you wish to offer and the terms of payment, such as multiple payments or a lump sum. You can also negotiate how the debt will be reported to the credit reporting bureaus. The creditor will review your offer and either accept or make a counteroffer. Once you and the creditor agree on an amount, you can make arrangements for payment. You should also request that the creditor send written verification of the agreement and receipt of payment.

Benefits

The primary benefit of debt settlement is that it can potentially save you a substantial amount of money. Depending on the creditor and the total amount you owe, you may be able to settle your debts for anywhere from 35 percent to 75 percent of the actual balance due, saving you hundreds or even thousands of dollars in fees and interest. Typically, the older your debt is the less your creditor may be willing to accept. If a creditor chooses to sue you, negotiating a settlement can help you to avoid incurring a judgment on your credit report or being subject to a wage or bank account garnishment. While debt settlement is damaging to your credit, the effects are not as severe or long-lasting as filing bankruptcy.

Considerations

While there are several advantages to negotiating your debts, debt settlement does have its drawbacks. Until the debt is resolved, your creditor may choose to report the account as delinquent to the credit reporting bureau, which can cause your credit score to drop significantly. A drop in your credit score can make it more difficult to obtain new credit, open accounts for utilities or cell phone service in your name, make major purchases, such as a home or vehicle, gain employment or receive favorable interest rates. Additionally, any amount of debt over $599 that is forgiven may have to be reported as income on your taxes unless you can prove that you were insolvent at the time the settlement occurred.