Debt Settlement and Debt Negotiation Explained

Take control of your debts

In an ideal world, we would be able to repay all of our debts in time and would not struggle to keep our finances in order. Unfortunately, these are far from ideal times and many Americans need to look at options to help relieve the pressure of their money situations. Debt settlement and debt negotiation are empowering ways for consumers drowning in debt to take control and turn their fiscal circumstances around.

Take the first step in the right direction

Congratulations for taking the first important step towards a better financial future by reading this article! It is imperative that you resist the urge to put your head in the sand and ignore your money problems. Read through this explanatory guide to see what you can do to ease the burden of your debts:

What are debt settlement and debt negotiation

These are alternative ways to approach debt, rather than looking towards debt consolidation, resorting to bankruptcy or defaulting on debts by simply failing to pay. They involve contacting your creditors (the companies that have lent you money or to whom you owe money) and negotiating with them to lower your monthly payments. These paths can result in:

  • Reducing the rate of interest
  • Paying a lump sum at a reduced rate and writing off the remainder of the balance
  • Creating a much lower repayment schedule that is more manageable for the creditor.
Debt Settlement and Debt Negotiation Explained

Debt Settlement and Debt Negotiation Infographic (scroll down if you want to use it on your website)

Can a consumer handle debt settlement and negotiation themselves?

Absolutely. Although there are some debt management firms that can charge between 10 and 75% of the total debt about you are seeking to be settled, it makes much more financial sense to take the action yourself and be negotiate with your creditors alone.

Why may lenders agree to a debt settlement or negotiation?

It comes back to the old adage that “something is better than nothing.” If a consumer is really struggling to repay their debts and it looks unlikely that they will be able to repay the full amount within a reasonable time period if at all, the likely alternative option is bankruptcy. Unsecured creditors such as credit card companies, banks and lenders are the lowest on the repayment totem pole in bankruptcy. The logic is that they would rather receive something (even a much reduced amount) from a debtor now rather than risk receiving nothing is he or she is declared bankrupt.

I would like to try to negotiate my debts with my creditors. What can I do?

1)      Write a settlement/negotiation letter to your creditor: In this letter, you need to try to convince the creditor that it is beneficial for them to come to an arrangement with you to reduce your debt or to accept lower monthly payments. You need to:

  • Be professional and objective
  • Treat it like a type of “business proposal”
  • Explain the severity of your financial situation
  • Include all of the account details you have with them
  • Make a reasonable repayment suggestion or repayment schedule

2)      Wait to hear back from the creditor: They will either accept your proposal or reject it. If they reject it, do not give up. You can either write another letter explaining that your first proposal was as far as you can go, or modify your proposal and try again.

3)      If your proposal is accepted: An agreement has been reached. Congratulations! Ask your creditor to put everything in writing. This “Letter of Agreement” is your formal proof that the settlement/negotiation has been reached. Do not pay any monies to the creditor until you have received this letter.

Read our other articles for advice on how to tackle debt and take control over your finances. Good luck!

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