I congratulate you if you seek to eliminate your debts through settlement. Using debt settlement, you can erase your old obligations and begin a new life free of minimum payments and debt collectors.
Before you begin the debt settlement process, you should understand how the process works and what you should ask for in the agreement. Additionally, you will need to prepare yourself for inevitable negotiations. Before you become debt-free, you may need to contact multiple creditors, depending on your number of creditors.
To begin the debt settlement process, it is essential first to determine your non-negotiables. Ultimately, the goal should be to have your account reported settled or paid in full to the credit reporting agencies.
Your written agreement should indicate that your payment represents a settlement and request that the creditor forgives the remaining balance.
In a settlement agreement, the following items must be included:
- The date on which the settlement agreement was signed
- Name and address as they appear on your legal documents
- Original creditor’s name and account number
- Name and account number of the collection agency (if applicable)
- Amount of the settlement
- The due date for payment
- Please specify the address to which the price should be sent (a physical address or an online portal)
- Payment constitutes full settlement of the account if it is made
- Credit reporting bureaus must be notified of the settlement of the account
- Release of all further claims against the creditor
The terms of your agreement may also be included. You should indicate the due dates of your settlement payments if you intend to extend your settlement payments over a few weeks or months.
What is the process of debt settlement?
An old obligation can be settled for a fraction of its original value through debt settlement. Your creditor will release you from further collection efforts in exchange for a one-time payment and will report your account as settled to credit reporting agencies.
The creditor cannot pursue you for payment as long as you comply with the terms of your settlement agreement.
If you wish to eliminate all your debts, debt settlement can save you thousands of dollars in interest and penalties. Additionally, it allows you to pay a smaller amount than you owe the creditor.
Debt settlement indeed has some disadvantages. As a result, your credit score may be negatively affected, and it may take time to recover. Depending on how other accounts in your name are handled, you may need help obtaining new credit or purchasing a home for a few years.
It’s still possible to fix your credit score and emerge from the process in a better financial situation, with more money to save and spend on your family.
How should I handle debt settlement?
A debt settlement agency can negotiate a fair settlement with your creditors on your behalf for a fraction of the cost. You pay them monthly throughout your program, and they save the funds to pay off your debts.
Even though working with a debt settlement agency may seem like a good idea, they can be expensive. The settlement company will typically charge you about 25% of the total value of your debt. It is important to note that the agency’s fees are included in your monthly payments, and there is no guarantee that you will save money due to their efforts.
Here’s an example.
As an example, Mike owes $10K on his credit cards. Upon signing up with a debt settlement agency, he can settle all his debts for 65% of their original value. For their services, the debt settlement company adds 25% to the bill. Mike saves only $1K through the program or 10%.
You can handle debt settlement by yourself and save the money you would spend on a settlement agency. Although it will require additional effort, the payoff may be worthwhile.
Getting started with debt settlement
The first step is to list all the debts you intend to settle. Provide the total amount you owe, the name of the creditor who owns your account, and the last transaction you made with that creditor.
The next step is to develop a savings plan. Your debt should be paid off as soon as possible by saving as much money as possible each month.
Debt settlement plans require you to stop making payments to your creditors. If you cease making payments, your creditors will be more willing to accept a settlement offer since they believe you can no longer meet your minimum obligations.
See If You Qualify for Credit Card Relief
See how much you can save every month — plus get an estimate of time savings and total savings — with your very own personalized plan.
Save the money you would typically pay your creditors. Consider taking on a second job to save more for your settlement. You will be able to recover financially more quickly if you settle your debts as soon as possible.
Determine which creditors you wish to pay off first. Some people can begin with small debts, which will allow them to achieve some early success. Additionally, you will be able to develop your negotiating skills before you deal with more significant obligations, which can be challenging to resolve.
What to include in your debt settlement offer
You should send a debt settlement offer that can be customized for each account. There should be specific information included in the request, such as:
- Name and contact information
- Name of the creditor or debt collector
- Account number
- Your current debt
- Settlement offers you can make
- Creditor approval or denial instructions
- Credit reporting agencies should be notified that your account has been paid in full by the creditor
It will depend on the account’s owner, age, and how much you are willing to offer as a settlement. As long as you have not made payments to the original creditor for at least six months, it is fair to offer 50% of the account’s value as a settlement.
Settling a lawsuit with a debt collector
If a debt collector sues you, you should take action as soon as possible. To settle your debt, please follow these steps:
- Respond to the debt lawsuit by filing an answer. Make sure to send a copy of the letter to the opposing lawyer if your efforts to settle the debt fail; filing an Answer will automatically protect you from losing the case by default.
- Offer a settlement. Determine how much you can afford to pay the debt collector. Depending on your debt situation, you may offer 60% of the debt’s value as a starting point. If you owe $10K to a collection agency, you may contribute $6K. It is common for several negotiations to take place before a settlement is reached.
- Make sure the settlement agreement is in writing. To settle the debt, you must obtain the creditor’s written consent. Moreover, you will need a statement confirming that your account has been cleared and that no further collection efforts will be undertaken against you. Ensure that all credit reporting agencies receive a report indicating that your account has been paid in full. Payment in full status notifies potential future creditors that you do not have any remaining obligations for your old account.