How to Settle Debts if You Cannot File Bankruptcy
Identify your types of debts., Figure out the largest lump sum you can offer., Meet with an attorney to discuss your options., Call the creditor., Explain why you have fallen behind., Remain calm., Take detailed notes., Draft a debt negotiation...
Step-by-Step Guide
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Step 1: Identify your types of debts.
Not all debt is created equal.
You might be able to negotiate a settlement with some creditors but not others.
For example, the following are common debts people neglect to pay:
Unpaid child support or alimony.
Your child support or alimony is set by a judge and can’t be lowered other than by court order.
A judge won’t forgive you for failing to pay child support or alimony, so this debt can’t be negotiated down.
Back taxes.
Typically, it is very difficult to lower the amount of taxes you owe.
However, you might be able to get an installment agreement to pay back the amount of taxes over several years.Secured debt.
A debt is secured when you pledged an asset as collateral.
If you don’t pay, the creditor can seize the collateral.
Secured creditors, such as your mortgage company, may be willing to suspend payments temporarily or change the terms of your loan.
However, they are unlikely to lower the amount that you owe.Unsecured debt.
Credit card debt, medical debt, and personal or payday loans are generally “unsecured” debts.This means there is no collateral securing the loan.
You will probably be most successful settling these debts. -
Step 2: Figure out the largest lump sum you can offer.
Debt settlement typically involves offering a lump sum.
In exchange, the creditor writes off the remaining unpaid debt.
Many creditors are willing to accept a lump sum instead of setting up a repayment plan, since a lump sum is guaranteed money.Go through your savings accounts and other financial accounts.
Check how much money you can pull together.
If you need to, ask friends or family for an interest-free loan. , Everyone’s situation is different.
For example, some debts are so old that the creditor or a debt collector can’t sue to collect them.You should know this before beginning to negotiation.
Meet with an attorney to discuss your strategy for tackling your debts.
You can get a referral to an attorney by contacting your local or state bar association.Once you have a referral, call up the attorney and ask to schedule a consultation.
Ask how much the consultation will cost.
If you are low income, you might qualify for legal aid.
You can find the nearest legal aid office by visiting the Legal Services Corporation’s website at http://www.lsc.gov. , Make an initial contact over the phone.
You don’t know how the creditor will respond.
They may be willing to help you.
Find the phone number on the bills you receive and call.
The sooner you call the better.
You want to negotiate directly with your creditor and not a debt collector, if possible.When you call, try to pin down how much you owe in total.
This information might not be clear from your bills.
For example, interest might accrue daily, and several days or weeks might have passed since you received your bill. , You should be able to explain in a few sentences why you can’t pay your bills.
Remember to tell a consistent story each time.For this reason, it helps to be honest since you will not forget the truth.
You could say, “I was diagnosed with cancer two months ago and have had to pay for treatments.
I haven’t been able to contribute a penny to anything else.” Or you could say, “I was laid off last month and am looking for work.
I need some time to catch up on the bills.” , You are probably feeling incredibly stressed.
Nevertheless, you don’t benefit by getting angry.
Always remain calm.You should be prepared to hear the person on the other end say, “No.” You should expect threats of being sued or, if you have a secured loan, of losing your property.
The more prepared you are mentally for these threats the easier you will be able to handle them. , You want to fully document the conversations you have with bill collectors.
Always note who you are speaking to, as well as the day and time.Summarize what the person on the other end says.
Also write down what you said in response.
Sometimes, bill collectors make illegal threats.
For example, a bill collector might threaten to put you in jail.
It is illegal to make those kinds of threats, so you want to fully document them. , After you’ve figured out what you can afford, you should make a formal offer to settle the debt.
You can draft a debt negotiation letter and mail it to the creditor.
Send a letter even if the creditor sounded resistant to negotiating over the phone.
Remember the following:
Format the letter like a standard business letter.
Include your essential details: your account name and number, as well as the amount you currently owe.
Explain why you can’t make the monthly payment.
Make an initial offer.
Ideally, you want to repay 40-60% of the total debt, so make your initial offer on the low end.
You can’t be more aggressive because you can’t threaten bankruptcy.
Mail the letter certified mail, return receipt requested and keep a copy of the letter for your records. , The creditor might not agree to your initial offer.
In this situation, you will need to continue to negotiate.
If the creditor insists you pay 90% of the amount owed, you can increase the amount you are willing to pay—for example, from 40% to 45%.
Remember not to agree to amount you can’t afford.Go back to your proposed monthly budget to double check that you can make payments. , You want to harm your credit score as little as possible.
Accordingly, you should try to negotiate how the creditor will report the debt to the three credit reporting agencies.
For example, you want the creditor to agree to report the debt as “paid in full.”You should also try to get the creditor to remove negative information from your credit report. , Once you reach an agreement, be sure to get a settlement agreement or Letter of Agreement from the creditor.The agreement should state the amount you will pay.
It should also outline the interest and penalties you agree to pay.
If you don’t get something in writing, then the creditor could claim that no agreement was reached.Remember not to make any payment until you have a signed agreement in place. -
Step 3: Meet with an attorney to discuss your options.
-
Step 4: Call the creditor.
-
Step 5: Explain why you have fallen behind.
-
Step 6: Remain calm.
-
Step 7: Take detailed notes.
-
Step 8: Draft a debt negotiation letter.
-
Step 9: Continue to negotiate.
-
Step 10: Negotiate how the creditor will report the debt.
-
Step 11: Get your agreement in writing.
Detailed Guide
Not all debt is created equal.
You might be able to negotiate a settlement with some creditors but not others.
For example, the following are common debts people neglect to pay:
Unpaid child support or alimony.
Your child support or alimony is set by a judge and can’t be lowered other than by court order.
A judge won’t forgive you for failing to pay child support or alimony, so this debt can’t be negotiated down.
Back taxes.
Typically, it is very difficult to lower the amount of taxes you owe.
However, you might be able to get an installment agreement to pay back the amount of taxes over several years.Secured debt.
A debt is secured when you pledged an asset as collateral.
If you don’t pay, the creditor can seize the collateral.
Secured creditors, such as your mortgage company, may be willing to suspend payments temporarily or change the terms of your loan.
However, they are unlikely to lower the amount that you owe.Unsecured debt.
Credit card debt, medical debt, and personal or payday loans are generally “unsecured” debts.This means there is no collateral securing the loan.
You will probably be most successful settling these debts.
Debt settlement typically involves offering a lump sum.
In exchange, the creditor writes off the remaining unpaid debt.
Many creditors are willing to accept a lump sum instead of setting up a repayment plan, since a lump sum is guaranteed money.Go through your savings accounts and other financial accounts.
Check how much money you can pull together.
If you need to, ask friends or family for an interest-free loan. , Everyone’s situation is different.
For example, some debts are so old that the creditor or a debt collector can’t sue to collect them.You should know this before beginning to negotiation.
Meet with an attorney to discuss your strategy for tackling your debts.
You can get a referral to an attorney by contacting your local or state bar association.Once you have a referral, call up the attorney and ask to schedule a consultation.
Ask how much the consultation will cost.
If you are low income, you might qualify for legal aid.
You can find the nearest legal aid office by visiting the Legal Services Corporation’s website at http://www.lsc.gov. , Make an initial contact over the phone.
You don’t know how the creditor will respond.
They may be willing to help you.
Find the phone number on the bills you receive and call.
The sooner you call the better.
You want to negotiate directly with your creditor and not a debt collector, if possible.When you call, try to pin down how much you owe in total.
This information might not be clear from your bills.
For example, interest might accrue daily, and several days or weeks might have passed since you received your bill. , You should be able to explain in a few sentences why you can’t pay your bills.
Remember to tell a consistent story each time.For this reason, it helps to be honest since you will not forget the truth.
You could say, “I was diagnosed with cancer two months ago and have had to pay for treatments.
I haven’t been able to contribute a penny to anything else.” Or you could say, “I was laid off last month and am looking for work.
I need some time to catch up on the bills.” , You are probably feeling incredibly stressed.
Nevertheless, you don’t benefit by getting angry.
Always remain calm.You should be prepared to hear the person on the other end say, “No.” You should expect threats of being sued or, if you have a secured loan, of losing your property.
The more prepared you are mentally for these threats the easier you will be able to handle them. , You want to fully document the conversations you have with bill collectors.
Always note who you are speaking to, as well as the day and time.Summarize what the person on the other end says.
Also write down what you said in response.
Sometimes, bill collectors make illegal threats.
For example, a bill collector might threaten to put you in jail.
It is illegal to make those kinds of threats, so you want to fully document them. , After you’ve figured out what you can afford, you should make a formal offer to settle the debt.
You can draft a debt negotiation letter and mail it to the creditor.
Send a letter even if the creditor sounded resistant to negotiating over the phone.
Remember the following:
Format the letter like a standard business letter.
Include your essential details: your account name and number, as well as the amount you currently owe.
Explain why you can’t make the monthly payment.
Make an initial offer.
Ideally, you want to repay 40-60% of the total debt, so make your initial offer on the low end.
You can’t be more aggressive because you can’t threaten bankruptcy.
Mail the letter certified mail, return receipt requested and keep a copy of the letter for your records. , The creditor might not agree to your initial offer.
In this situation, you will need to continue to negotiate.
If the creditor insists you pay 90% of the amount owed, you can increase the amount you are willing to pay—for example, from 40% to 45%.
Remember not to agree to amount you can’t afford.Go back to your proposed monthly budget to double check that you can make payments. , You want to harm your credit score as little as possible.
Accordingly, you should try to negotiate how the creditor will report the debt to the three credit reporting agencies.
For example, you want the creditor to agree to report the debt as “paid in full.”You should also try to get the creditor to remove negative information from your credit report. , Once you reach an agreement, be sure to get a settlement agreement or Letter of Agreement from the creditor.The agreement should state the amount you will pay.
It should also outline the interest and penalties you agree to pay.
If you don’t get something in writing, then the creditor could claim that no agreement was reached.Remember not to make any payment until you have a signed agreement in place.
About the Author
Frances Parker
Enthusiastic about teaching hobbies techniques through clear, step-by-step guides.
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