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How to Negotiate a Debt Settlement On Your Own

4191499159 9748ebc81a o How to Negotiate a Debt Settlement On Your Own

If you’re drowning in credit card debt, you may think bankruptcy is the only way to dig yourself out. While filing bankruptcy can give you a clean financial slate, it can also cause serious damage to your credit that may take years to repair. Settling your debts is an easier way to get out of the hole and your credit won’t take as big of a hit.

There are lots of companies that advertise debt settlement services but these typically come with a hefty premium and you’re not automatically guaranteed results. The easier and cheaper way to settle your debts is to deal with your creditors yourself. If you’re not sure how to go about initiating a settlement, here are a few helpful tips to guide you through the process.

How Debt Settlement Works

When you settle a debt, it means the creditor agrees to accept less than the full balance owed. You either make one lump sum payment or several smaller payments and the remaining balance is forgiven. Depending on the creditor and how much you owe, you may be able to settle for anywhere from 30 to 70 percent of the outstanding balance of your debt.

Typically, a creditor will only consider a settlement when an account is delinquent but you should keep in mind that they’re not required to accept your offer. Letting an account go unpaid won’t necessarily improve your odds of getting a settlement and the missed payments will be reported on your credit. If more than $599 in debt is forgiven, you may have to report it as income on your taxes.

Preparing a Settlement Offer

Before you call up the credit card company, you need to decide how much you want to try to settle the debt for. There’s no set formula for calculating how much to offer your creditor. Ultimately, it depends on what you owe, how much cash you have to work with and how long the account’s been delinquent.

You should only offer what you can reasonably afford to pay but you need to make sure the settlement is fair. The credit card company’s goal is to collect as much money as possible and they could reject an offer that they consider to be too low.

You’ll also need to decide whether you’re comfortable paying all at once or if it’s better to break the payments up. It’s also a good idea to prepare a counteroffer, since it’s likely that the credit card company will try to get the most favorable deal possible.

Contacting the Creditor

If you’re ready to make a settlement offer, you need to make sure you’re contacting the right creditor. When you miss a payment on your credit card bill, the account is usually sent to an in-house collections department. Once your account’s been delinquent for a certain period of time, the credit card company may decide to assign it to an outside debt collection agency.

If the account has been assigned to the collection agency, then you may still be able to negotiate with the credit card company directly. If the credit card company sold your account, then you’re stuck dealing with the debt collector. Either way, you need to know who owns the account before you try to make an offer.

When you’re ready to make an offer, you need to decide if you want to handle the negotiations over the phone or in writing. Calling the creditor is a faster way to get things started but you’ll want to make sure you keep a record of your conversations.

Finalizing an Agreement

If the credit card company agrees to a settlement, you should get everything in writing before you hand over any cash. The agreement should spell out what amount was owed, what you’re settling the account for and how the settlement will be reported on your credit. Typically, the account will show up as “Settled” unless you specifically as for the creditor to report it as “Paid in Full” or “Paid as Agreed”.

When you’re ready to pay up, ask the credit card company if they’ll accept a money order or wire transfer. Avoid giving a creditor direct access to your bank account and make sure you get a receipt when you send the money. It’s also a good idea to follow up with the creditor to make sure the payment was received and properly credited to your account.

Dealing with a creditor may not be an ideal way to spend an afternoon but sacrificing a few hours of your time can translate to big savings. Persistence and a thick skin are key to getting the best deal possible when you’re trying to negotiate a debt settlement.

Photo Credit:  Debt Settlement Companies

Sources: Federal Trade Commission: Settling Credit Card DebtIRS: Tax Topic 431–Canceled Debt: Is it Taxable or Not?

About Rebecca Lake

Rebecca has been writing about the nuts and bolts of personal finance since 2009. Her work has appeared on a number of popular finance sites, including the Quicken money blog and Money Crashers. As a homeschooling mom of three, she's always looking for ways to make the most of every dollar.

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