How to Get the Best Debt Settlement

Settling debts is often a harrowing experience, but one that more and more people are having to face. Getting the "best" debt settlement is not the same for everyone. It depends on how much money you owe, whom you owe (negotiating with the IRS will be very different from Lowe's), how panicked you are about creditors calling you constantly, and how good you are at negotiating settlements, especially when the person on the other end of the telephone is threatening you. Here are several strategies for settling debts. One of them will probably be the best one for you.

Instructions

Hire a Debt-Relief Service

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Hire a debt-relief service if you owe more than $10,000 and can't handle the stress. Remember, though, that not all debt-relief companies are the same. Some represent the creditor companies, while others represent you, the consumer. You want a company that has your best interests in mind. Make sure to do your homework before signing up for a specific company's services. See Resources to learn about companies that specialize in debt relief.

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Peruse the websites of several debt-relief companies once you have decided that hiring a company to settle your debt for you is the option you want to take.

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Realize that most of these companies will calculate payment for their services by taking 25 percent to 35 percent of the amount they "saved" you. This means that if you had $100,000 in debt and they settled for $60,000, you would owe them 25 percent to 35 percent of $40,000, or $10,000 to $16,000. Make sure you plan for some way to pay them for helping you.

Settle the Debts Yourself

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Call your creditors one by one and offer to settle your debt at 50 percent of each debt's value. Most companies will be willing to settle for a portion of the debt, but only if you can make a full payment of that portion at the same time you are calling. Therefore, do some preparation ahead of time. Check with your bank or mortgage company to see if you have equity in your home against which to borrow enough money to pay off your debts. Ask family members if anyone has money you can borrow to pay off your debts. If you call your creditors and are ready to deal, they likely will be ready to deal, too.

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If necessary, be a broken record. Tell your creditors you don't have enough money to pay the 70 percent they are asking to settle, but you can pay them 50 percent if they will settle the debt that day. If they then ask for a 60 percent settlement, repeat that you can settle for 50 percent immediately. And if they come back to you and say they are not allowed to settle for anything less than 55 percent, say that you wish you had enough money to pay off the entire debt, but you don't; you have enough money to pay for 50 percent and can do it right then, over the phone. They will usually accept your offer.

6

Arrange with your creditors to set up a "hardship" payment plan. If you don't have the cash available to pay 50 percent of your debt as a lump-sum settlement, some creditors will waive interest charges if you will agree to lock into a payment plan you can manage on a monthly basis. You will be expected to pay off the full balance, but at least you will be able to cash-flow the payments.

7

Validate the debts with your creditors. This is a time-intensive strategy that will require you to have nerves of steel when you speak with your creditors. This strategy works only if the debt is being collected by a second or third party. By federal law, companies may sell their delinquent accounts to collection agencies or other companies, and then these second owners will contact you to try to collect the debt. This is why on your credit report you may see companies listed that you don't recognize. Federal law also states that companies must be able to prove to you that they own your debt, and this gets more and more difficult to do as your debt gets purchased by third and fourth companies. If a company cannot prove to you by a very specific standard that they own your original debt, they must remove the mark on your credit report and they might even owe you $1,000 as a penalty. Often, but not always, when you get far enough down the validation process, the company coming after you for payment will back down and remove its claim. See Resources to learn more about the debt-validation process.

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Offer a lower settlement payment if the collection company is not the original owner of the debt. Here is how debt collection works: You owe money to a company, and it tries to collect from you. Sometimes it is willing to offer a settlement of 50 percent to 70 percent of the original debt. If it cannot collect the debt, it likely will sell your debt to another company for 25 cents on the dollar or less. Now this second company will try to collect the debt from you, but its profit margin will be much greater if it can collect the full amount from you. Since this new debt owner paid so little for your debt, your offer of a low settlement amount is more likely to be accepted.

9

Wait and do nothing. While debtors will threaten to file judgments against you, most (not all) of them will not do so because of the hassle and expense involved. There is a seven-year statute of limitations on debts. After seven years from the date of the original debt, no one can claim it and it has to be removed from your credit report. This strategy works best with smaller debts. In the case of a large debt (several-thousand dollars or more), a company is more likely to find it worthwhile to file a judgment against you, in which case you will owe the debt until it is paid, and if you get a pay raise or an inheritance, you have to pay off the debt first with the money.

Hire an Attorney

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Hire an attorney if your debt is with the IRS and more than $20,000. Make sure to find an attorney who specializes in tax settlements and who will make what is called an "offer in compromise" for you. The IRS will often be willing to settle for 70 percent to 90 percent of your debt, as long as the debt is income tax rather than Social Security. Unlike debt-relief companies, the better tax attorneys will charge an hourly rate rather than a percentage of the settlement. And although a good attorney can cost upward of $200 per hour, he can often settle the matter in five to 10 hours of work.

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Consider filing bankruptcy. If your debt is simply insurmountable and you need immediate relief, talk with a bankruptcy attorney about options. Some bankruptcy immediately cancels out all your debt, but you may lose your home in the process and have trouble getting new credit for years to come. Other types of bankruptcy declare that you will pay your debts someday when and if money becomes available, but it immediately removes the harassing calls and letters from creditors.

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In general, every decent attorney will require a monetary retainer of some kind. You will need to scrape together some money to pay the retainer, or the attorney will not agree to work for you. You will also need to find a way to pay your attorney the balance due her once your debts are settled.