Step 1:

Your Attitude and Mind set

Developing the right attitude is the first step in debt settlement (DS). Attitude counts! Like any sport or other competitive venue, attitude has a direct bearing on the outcome of a negotiation. Expect to win. If you think you deserve to get the best settlement, your passion will color your arguments and strengthen your statements. Negotiation is simply the settlement of conflicting interests without resorting to force.

You must control negotiations. First, realize who you are talking to. You are dealing with a 9 to 5 office employee and there is absolutely nothing to be afraid of. Don’t let them push you around simply because you may owe the company money. Let them know that you are willing to work with them and that you want to pay them back. Don’t play defense; play offense.

Knowledge is Power!

Once you understand how and why the DS process works, and the reasons you shouldn't use a debt settlement company, you should feel more confident and determined to settle your own debts. Not only will you save more money, but you will also save time and get out of debt much faster.

The process is simple and safe; there is no reason to pay someone else to simply set up a savings account and store money for you. We understand that falling deep into debt can be a suffocating experience and the thought of negotiating with a creditor may leave you breathless.

With the information provided here, you will be empowered, have more confidence, and finally take control of your debt.

Step 2:

Who are You Dealing With?

When you settle your own debts, you should find out if your account is still with the original creditor or if your account is being handled by a collection agency. Keep in mind that the original creditor will be more sympathetic and easier to negotiate with than a collection agency.

There is no clear rule for how long it takes a creditor to send your debt to a collection agency? Generally speaking, medical creditors - such as doctors, dentists, and hospitals - are quicker to turn debts over to collection agencies.  Credit card companies, which have collection departments of their own, may keep the debt for a longer period of time.

Step 3:

Know Your State's Statute of Limitations

Each U.S. state has their own time frame which limits a creditor's ability to sue on an old debt. This time frame is known as the statute of limitations and it varies for collections and judgments. The statute of limitations starts from the date of last activity on an account; this is usually the date of last payment. For instance, if a collection agency placed a collection back in August of 2000, the statute of limitations would start on that month. Let's say you paid the collection in full on March of 2004, the statute of limitations would now start over in March of 2004. Before you decide to pay off any debt, check to see if the statue of limitations has expired for the account. If the account is beyond the statute of limitations, a creditor cannot sue you and you shouldn't pay the debt. See your state.

Step 4:

Get Organized. Have a Plan.

Set up file folders for each debt account you have. Obtain a copy of your free credit report and record any notes about each account such as: the original creditor, your last payment, the balance, your payment history, etc. Depending on how long certain accounts have been delinquent, you may have already received a settlement offer from a creditor. If your debt is older and your creditor or collection agency hasn't contacted you in a while, you may need to proactively start the negotiations on your own as described below.

As soon as possible, you'll need to formulate a plan for accruing cash over time and setting it aside in a savings account. Because you may be strapped for cash, this may seem difficult. If you find it impossible, or that it would take forever, then you may need to consider bankruptcy as an alternative.

If possible, you should keep paying on at least one or two credit cards, making sure they are in good standing for future usability and helping to re-establish your credit score. The credit cards you want to pay/keep in good standing are usually the ones with the lowest current balance owed and the highest limit.

If you have enough equity in your home, you may consider using it to completely settle a debt. Know that taking money out of your home's equity may be unwise because you are exchanging your unsecured debt for a secured debt. If you default on your house payment, you could lose your house. You should only take out a 2nd mortgage if you are certain you can make all future payments for both mortgages (1st and 2nd).

Determine Which Debts To Settle

Whether you call and begin negotiations or your creditors begin to hound you, they will all likely pressure you to settle their debt first, but the choice is up to you. Usually the best debts to settle first are the ones which charge higher interest rates, and that will make the most dramatic change in your monthly budget. Also, consider settling debts on accounts that already have delinquent payments. Keep as many accounts in good standing as possible.

Step 5:

Your First Settlement Offer

Each creditor handles delinquent debt differently; some creditors immediately assign the delinquent account to a collection agency, whereas other creditors maintain the account for several months and then hand it off to a collection agency. In either case, an original creditor or collection agency will likely delay in filing a judgment until they make a valid attempt to collect the debt.

If you call up a collection agency and tell them that you would like to finally settle your old debt, they may or may not be willing to bargain. See below and hone your negotiation skills.

If you receive a settlement offer in the mail from either a creditor or debt collector, you need to make a choice. If they offer a good settlement (40% - 50%) and if you have the available funds to immediately pay it off, it may be wise to take the deal. On the other hand, if you have multiple delinquent accounts and one company offers you a 40% discount, you may want to write them back and try to negotiate a better settlement.

Note that a settlement offer usually has an expiration date. If you can't settle the debt by the deadline, you should call the company and let them know that you want to settle the debt, but you will not have the funds until ______. If they agree to wait, get the new settlement offer in writing. If they do not agree right away, they may call for or send a new written offer later. Remember, each company handles debt differently and even treats each of their clients uniquely.

You Need to Negotiate

When you are ready, either take the call from the collector or call them yourself. Get the supervisor on the line and tell them you are glad to contact him (her). Explain that you are sorry that you have fallen behind but you are working to get bills taken care of. Then let him know that you have come into some money, not near enough to pay all of your bills, but enough to make a dent. Ask, "If I paid you cash in seven days, what is the lowest amount you would take to have this account settled?" DO NOT SUGGEST A PRICE OR TELL THEM HOW MUCH MONEY YOU HAVE!

The supervisor will likely hem and haw, trying to get you to commit to something; insist that while you have some money, you want to pay off "1 or 2 bills". If the supervisor will not give you a figure, say, "Well, you have my phone number. I will be paying money to one or two of my accounts in this next week. But I need to settle at a price that makes the most difference in my circumstances, I know you understand. If you can provide me with a reasonable amount, please call me in the next 24 hours."

If the supervisor offers a settlement any higher than 60%, simply say, "Thank you, I truly do want to settle this account but I was hoping for a bit better than that. I'll check back with my other creditors, but if you can offer a better amount please call me in the next 24 hours."

This technique is especially helpful if you have multiple debts you want to settle. About half the creditors will likely stand their ground, but the rest will discuss it, and probably offer you great settlements from 35% - 50%, including waiving all interest and late fees!

Making a Counteroffer

After you first talk with the supervisor and see that he (she) is not willing to negotiate, it's time to call him back with a counteroffer. For instance, let's say the supervisor first offered a settlement of $4000 on $6000 debt, contact him and ask if he could come down a little more. If you have $3500 available to pay, tell him that you can pay $3000 cash (for example) in seven days if he will agree to accept that amount as payment in full. The company may or may not. If they agree, great! You just made a 50% settlement. They may counter you back. If their offer is still to high, tell them you will check with your other creditors and thank them for their time. They may call you back within a few hours with another offer!

If, at first, it seems as if the company is not willing to budge at all, know that they will all break eventually. Their only alternative is to take you to court which takes months. Keep persisting; write more settlement offers until they respond.

Once you have an agreement, insist that they send a Letter of Agreement or Memorandum of Agreement to you (email or fax) detailing the agreement made. It should say at a minimum that the creditor will accept the amount agreed as payment in full for your account (citing the account information) if paid within X days. Also insist that all credit reports from the creditor will list your account as "Paid in Full." This document is extremely important and binds the company to the deal.

Step 6:

Settling Your First Debt

Whether you have accepted a company's offer or you have contacted the company directly and negotiated a settlement, it's time to settle your first debt. Considering you've accumulated enough cash in a savings account to pay 40% - 70% of the first debt, you're almost ready to send off the check or money order.

After you have received the agreed upon terms in writing then make your payment. Many people have made arrangements for reduced lump sum payments with creditors without getting the terms in writing. The debt collectors continue to send collection notices and say, "We have no record of any such arrangement." Protect yourself.

If the debt was assigned to a collection agency; not sold to it, then you need to be certain of who to make the check out to. Be very careful here, because unfortunately many people have been instructed by a collection agency to send the payment to them, only to have the original creditor call weeks later demanding payment. In this scenario it's best to make a check or money order out to both parties (creditor and assigned debt collector) and have both parties sign for the check. Always send your payment via certified mail return receipt requested.

Key Elements of Debt Settlement

To Settle a Debt, It Must be Late

The debt settlement (DS) process usually starts after you have been several months past due on your debt. If you are only one or two months past due, the creditor calls you and demands that you pay on the past due account; at this point they don't want to accept a settlement offer.

Negotiate on Your Terms

When negotiating, keep in mind that you have the upper hand; your money is your bargaining chip. Be a reasonable negotiator; the creditor will play ball, but won't bend over backwards either. For instance, ask the representative to cancel all the late fees and penalties if you pay a large enough payment up front. Agree to a new monthly payment amount that you can afford. Let the representative know that you are having problems and you may only be able to afford a certain amount. Be polite but firm. If the creditor agrees to a reduced lump sum payment to pay a balance off in full, be sure to get it in writing before making your payment.

Start your negotiations at the end of the month. If an account is in collection the collection department or collection agency will be more inclined to negotiate as they are trying to close out their books for the month. Many of these representatives have monthly quotas to meet or bonuses to win.

At any time you feel as if the representative is not willing to work with you and you are feeling frustrated, politely demand to talk to the supervisor. Supervisors can usually offer deals that normal reps can't.

Record Everything

It is imperative that you save copies of all letters you send to creditors and any documents they fax or mail to you.

Always send letters via certified mail return receipt requested. This proves that you sent the document. When the creditor or collection agency receives the letter, they must sign for it and the post office will send you a green card saying when they received it. This will cost you a few dollars but it's well worth the expense.

Always use a check or money order when making payments and send it via certified mail return receipt requested. It is very important that you are always able to prove that you have paid them. Keep all of this information together in your folder for future reference.

Accumulating Money for Settlement

If you find yourself in the common scenario of having more month at the end of your money, and unable to make all of your minimum payments, you may be asking yourself; should I continue to juggle multiple debts, or should I let some accounts go unpaid, hoping to settle the debt 5 - 10 months down the road?

Choosing to juggle debts in the hope to pay off all your debts may seem like the morally right thing to do, but eventually your minimum payments and debt will probably be no less than when you started juggling, and in fact, may have increased due to high interest and penalty charges. In order to regain control of your life and finances, you may need to let some (not all) accounts go unpaid. If you choose this route it is imperative that you save the money you would normally pay towards your debts so you can use it to later settle.

After 4 or 5 months, you'll notice that the creditor or debt collector will ease the tone of their verbal collection efforts. Their primary objective is now to collect as much of their money as possible. Here's where they may settle.

Terms and Definitions

• Original creditor - A bank, credit card company, or medical office - whoever you created the debt with. The original creditor is not restricted by the Fair Debt Collection Practices Act (FDCPA).
• A collection agency is any agency which collects a debt on behalf of another company. Under these terms and federal law, this includes:
  • Companies who purchase the debt for pennies on the dollar (also known as junk debt buyers)
  • Companies who have been assigned to collect the debt
  • Lawyers who send you letters to collect a debt

 

Disclaimer: The information provided in this site is not legal advice. All information is general information, some of which pertains to legal issues involved in the subject matter. Credit Matters Inc. is not a law firm and is not a substitute for an attorney or law firm. Your access to and use of this site is subject to additional terms and conditions.

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