Settling your debt with creditors takes persistence and patience. When you find that the amount you owe is overwhelming and you can't keep up the payments, it's time to take action and contact your creditors in an attempt to reduce your account balances. Alternatively, there is another option if you do not have the time or ability to do it yourself.
Contact
Contact your creditors and obtain the name of a representative in the debt settlement department. Then send a letter detailing why you cannot pay the entire balance or the minimum payment and indicate whether or not your situation is permanent. Normally, only unsecured debt can be settled. Therefore, credit cards, medical bills and other debts that are not attached to collateral are more likely to be settled than mortgages or car loans.
Negotiate
Work out the settlement arrangement. Your creditors are more willing to negotiate a settlement with you if you have skipped payments. They would rather receive some money than nothing in the fear that you may file for bankruptcy or continue not to make your payments. Ask your creditor in writing to make you a settlement offer before you tell it what you would like to pay. If it's not low enough, offer to pay 25 to 30 percent of the amount that you owe, if you have been in default and the debt has been charged off. If you have not been delinquent for long, you may have to settle on a much higher amount, such as 70 to 75 percent of your balance. Some creditors will require you to pay the settlement amount in one lump sum, so be prepared with money set aside. Do not send a negotiated payment until you receive the offer in writing and your creditor agrees not to pursue the balance that is being forgiven. Beware, however, that the creditor may report the forgiven amount to the IRS as income and you will be required to pay taxes on it.
Help
Get assistance. If you are not comfortable contacting and negotiating with your creditors, contact a credit counselor who specializes in debt settlement programs. The Federal Trade Commission warns that there are some companies that are not legitimate and that the fees can be high. The company may require you to deposit money for your settlements into one of its accounts. Make sure that it is held at a bank that is insured and that you still may control the funds. Ask the company how long it has taken to settle accounts for others so that you are prepared to wait months or years for a resolution.
Credit Impact
Expect your credit score to fall. Although your creditors may agree to settle your accounts, your credit history and score will be impacted. However, if you have many late payment or delinquent accounts on your history already, your score will not fall as much as for those who have good credit. For example, if you have a current credit score of 680, you may see a drop of 45 to 65 points after you settle your accounts. However, if your score is 100 points higher, you will experience an impact of losing 105 to 125 points.
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