The Amateur Financier

(Once again, I’m pleased to present a well-written and informative guest post here on the Amateur Financier, this one on the topic of debt settlement.  A word before we begin, though; if you are considering debt settlement, be sure to know the laws about debt forgiveness and similar topics in your country and state/province. Be aware that debt settlement(s) can have a negative impact on your credit score, although generally not as bad as a bankruptcy.  Also, by far the best way to deal with debt is to pay it off in full to the company to whom it is owed; neither debt settlement nor bankruptcy should be considered if it is at all possible for you to pay off your debts (even if doing so will require major sacrifices on your part).

All of that said, there are times when you simply cannot pay off your debts, and face the possibility of bankruptcy as a result.  If you find yourself in that sort of situation, the following is for you.  )

Debt settlement presents a debt repayment alternative for people facing bankruptcy. Because bankruptcy has such devastating effects, including a record on your credit report for 10 years and a serious blow to your credit score, debt settlement is often preferable. A settlement also affects your credit, but doesn’t go on public record and is removed from your credit report after seven years.

Many people have used a debt settlement services to settle their debts. Others prefer to settle debts on their own. If you’re the do-it-yourself type and want to work on your debts, here’s a guide to settling your accounts.

Lay the Groundwork for Settlements

Start by making a list of all your debt and include the current balance due. It’s also a good idea to separate your secured debts, those that have a piece of property as collateral, from your unsecured debts. In general, you can only settle unsecured debts, like credit cards, retail trade lines, and personal loans. You may be able to settle a secured debt, but only if you’ve already given up the property. For example, you could settle the deficiency judgment on a repossessed vehicle.

For each of your debts write a “low” settlement offer and a “high” settlement offer. Low is 30% of the balance due and high is 70%, or the most you can afford to pay. Aim to keep all your settlements between these amounts. When it’s time to make settlement to your creditors, keep your offer on the low end. If you write these numbers down ahead of time, you won’t have to do the calculations while you’re on the phone.

The Financials Around Settlement Offers

Figure out how you can pay for settlement. Debt settlement can take several months or years depending on how soon you can come up with the money to settle your accounts. If you have access to a large sum of money, you can settle your debts quicker than if you have to come up with the money. Most people end up putting aside money every month until they save up enough to make a settlement payment. Then, they repeat the process for each of their debts until they’re all settled.

It’s a good idea to accumulate your settlement payments in a new checking account that’s separate from your regular account, especially if you have a credit card with the bank of your primary account. Once you decide you’re going ahead with settlement, stop paying your credit card accounts. This is a necessary step since creditors only accept settlement offers on accounts that defaulted or are at-risk of default. Accounts are not at-risk if the payments are on time. Deposit all your regular credit card payments into your new checking account that’s designated specifically for settlement.

Dealing With Past Due Accounts

Expect to get phone calls and letters from creditors and collectors once your accounts become past due. Don’t tell them you’re thinking about settling your accounts because they could send these accounts directly to an attorney for a lawsuit. Instead, if you decide to talk to your creditors, tell them you’re having trouble making payments and trying to get back on track but don’t know when you’ll be able to send a payment.

Negotiating and Paying Your Settlement Offers

When you have enough for a settlement, contact your creditors to negotiate. In general, you’ll have to wait until your accounts are around 90 days past due to negotiate a settlement even if you already have the money ready. You can settle before then if the creditor brings up settlement. Otherwise, before the 90-day mark, you should always let the creditor to mention settlement first.

Because you’ve already done the calculations, you know how much you can afford to pay on a settlement. Let your creditor know that you’ve been having financial trouble and you can’t resume monthly payments on your account, but that you may be able to come up with a settlement if they’re willing to accept one. At this point, you can get a variety of responses depending on the creditor. They may say they never settle accounts. Or they may give you a high counteroffer.

If the creditor says they never settle accounts, thank them for their time and make your offer again in another 30 days. If you’re never successful with that creditor, the account will eventually be charged-off and sent to a collection agency, who probably will settle. If you ultimately want to avoid a charge-off, you’ll have to pay your account in full before it gets 180 day past due.

When a creditor gives you a higher counteroffer, decide whether you could pay that offer. You may give some push back to get them to reduce the settlement amount, but judge by the creditor’s response whether you’ll be successful with a lower counteroffer. There may be some creditors who are firm with their settlement amounts. If you can afford the higher settlement and avoid a charge-off, then it’s worth paying. On the other hand, if you can’t afford it, you may have to let the account go to a collection agency so you can get a better deal.

Dot the I’s and Cross the T’s

Before you send payment for your settlements, get a settlement agreement from the creditor. The agreement should be on company letterhead, with the amount of the settlement, the date the settlement is due, and a statement saying the settlement payment satisfies the account in full. Then, when you have that letter, you’re ready to make the settlement.

Check your credit report a few weeks after your settlement payment is made to be sure your account is updated correctly. The account balance should be $0 and the status should reflect that a settlement has been made. Once you start making settlement negotiations, you’ll get more comfortable bargaining with your creditors. Keep up the process and eventually you’ll have all your debts paid.

This guest post was written by James Quinn, a professional writer specialized in topics related to personal finance, debt relief, credit repair and more. If you are willing to settle your debts on your own, pass through the debt settlement blog for more tips and advice on the topic.