How to Deal With Debt Settlement

Debt settlement is a viable strategy for managing debt. It allows people to resolve debt for less than the full balance, and the savings are often substantial. Some creditors and debt collectors will settle for 20 to 70 percent of the balance. Someone with $30,000 in credit card debt could pay all of it off for as little as $6,000 under those terms. Debtors should deal with debt settlement by handling it themselves rather than enlisting the services of for-profit debt settlement firms. Some of the firms are legitimate, but the Federal Trade Commission has accused others of collecting large fees while providing little real service.

Instructions

1

Make a list of debts that you want to settle. Refer to billing statements or correspondence from debt collectors to determine balances, and then set aside money to begin settling. Although some debt collectors may settle for 20 percent, you should prepare for settlements for around half the balance to give you some negotiation room. Also, debt collectors usually ask for settlement payments in a lump sum, although some may accept the settlement in a few monthly installments.

2

Settle first, if possible, with debt collectors who have been the most aggressive and may be on the verge of filing lawsuits to force you to pay. (A debt collector's winning a lawsuit against you can proceed to bank or wage garnishment. A court judgment after a lawsuit gives the debt collector powerful leverage, making a settlement for less than the full amount difficult.) Contact aggressive debt collectors by phone and offer to settle for 20 percent of the balance. Keep trying over a few months if they refuse your initial offer. Raise your offer a little each time until you have a deal.

3

Create a second list of your creditors after addressing those possibly on the verge of legal action. Contact each creditor or debt collector and inform him that you wish to settle. Ask if you qualify for a settlement offer and what terms the debt collector is offering. Usually, original creditors will not engage in settlement until accounts are about three months behind. Virtually all accounts placed with debt collectors meet that standard. Start settling with the debt collectors based on what they say they are willing to accept. For example, deal first with a debt collector offering to settle for 35 percent. Then consider the next debt collector asking for 40 percent, and so on. Always try to pay as little as possible no matter what the debt collectors offer.