debt settlement solutions

How to Negotiate a Settlement of Debt

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If your find yourself in the difficult position of negotiating a debt settlement, be sure you check with your financial advisor and thoroughly research all your options first. If you believe you’re in over your head, a compromise can be the first step towards better times in your financial life. Creditors aren’t likely to simply offer an easy way out, but through negotiations you may be able to cut a deal that helps put your past behind you.


Choose Your Amount

Don’t set yourself up to fail by offering more than you can comfortably afford. Promising more than you can pay might temporarily stave off your creditors, but once you stop making sufficient payments you may find yourself facing a lawsuit, and potentially, bankruptcy court. By starting your negotiation with an amount that you know you can pay, you’re more likely to reach a settlement that doesn’t fall through and end up causing even more financial damage.


Although creditors generally want the full amount of the debt you owe, they might be more willing to work with you if you’re truly struggling just making the minimum payments. While your cash on hand might not be enough to appease your creditors, a payment plan in which both parties compromise might have a greater chance of success.


Be Flexible

For example, instead of making a lump-sum payment, you might offer your creditors a one-year payment plan, during which time interest is suspended. If your creditors would rather get as much as they can as fast as they can, consider offering a certain percentage of your debt, such as 50 percent of the amount owed, as a one-time lump-sum payment.


As with most negotiations, there might be a little tug-of-war involved. Start by offering your creditors a low amount that you’re confident you can pay and await their reply. Be patient. While they may not accept your offer right away, you can try to renegotiate at a later time.


Understand the Repercussions

Late payments can drag a credit score down, as can large amounts of outstanding debt. If your debt settlement includes negotiating the principle owed to a lesser amount, the creditor may report your account as “paid less than full,” which can be damaging to your credit score.

However, debt settlement can also keep you out of bankruptcy, which has the single greatest negative effect on a credit score.


Additionally, there can be tax implications from your debt settlement. Forgiving credit card debt can be considered taxable income. According to the IRS, you may receive a Form 1099-C if you’re forgiven for a debt of $600 or more.


While negotiating a good debt settlement can help get your financial house in order, understand how it can also impact your credit and financial future. But if you think can get out of debt without settling, consider creating a personal budget that helps you get out of debt another way.


This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from, Inc.  © 2013, Inc.  All rights reserved.