Settling Your Unsecured Debt

Normally, when you borrow money to buy things, it is generally accepted that you will have to pay the money back — with interest. If you are having trouble with paying your debt back, due to financial hardship, you might be able to settle your debts. It is important to note that, for the most part, debt settlement only works with unsecured debt (such as credit cards, personal loans, medical bills, etc.). Your car or home will likely be repossessed if you try debt settlement on those types of secured debt. (Although in some exceptionally rare cases you may be able to convince a mortgage lender to agree to some measure of debt forgiveness.) If you can prove financial hardship, you can even settle debt you owe to the IRS.

With debt settlement, the creditor agrees to accept an amount that is less than you owe. In some cases, you may have already paid back the original amount you borrowed, but high interest means that you have a long way to go until your debts are discharged. In any case, some creditors may be willing to allow you to pay anywhere between 25% and 80% of what you owe them. In order to negotiate, though, here is what you will need to do:

• Stop making payments. (Don’t do this with secured debt. Your creditors will just take the item the debt is secured with.)
• After a few months, offer to pay a sum immediately. Realize that your initial offer will probably be rejected on general principle.
• Negotiate with your creditors until you can agree. Make sure that you keep a record of all contact. Correspond through the mail, using Registered mail to “prove” that the creditors are getting your offers.
• Get a settlement agreement in writing.

It is important to realize that settling your debt will result in a lower credit score. Not paying your creditors will reflect negatively, as will the fact that you settled. This will make it harder for you to get good loan terms in the future.

Also, you should be aware that if a creditor or collection agency does not wish to deal with you, a lawsuit may be filed. This can result in wage garnishment and other unpleasantness. Most creditors will not bother with this, preferring to settle instead, but there is a risk of it happening.

In general, it is best to try and work out a payment plan or to try some other method of paying of your debts. Debt settlement should be a step you take as a last resort — the very last thing you try ahead of bankruptcy.

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