In this article, I am going to give you the inside scoop on how to successfully settle your debts for less than what you owe.

When struggling with serious debt problems you really have three options: (1) pay them in full; (2) file bankruptcy; or (3) negotiate a settlement where you agree to pay less than what is owed, and the creditor agrees to eliminate the debt and stop collection activity.

Most of the people I meet with would very much like to pay their debts in full – they just simply aren’t in a position to do so. Let’s begin with the assumption that if you are reading this article that, for whatever reason, you are not in the position currently to pay your debts in full.

The next option is bankruptcy. Bankruptcy – particularly Chapter 7 bankruptcy – is a powerful tool that will eliminate most of your debts completely. However, there are many situations where filing for bankruptcy can be a very bad idea. For more on that click HERE.

The third option is negotiating a settlement with your creditors. If you have the ability to pay something on your debts, just not everything, then settlement might be the best option.

Here are three steps to settling your debts.

Step 1 – Determine Your Settlement Budget

The first step is figuring out what you can afford to pay your creditors. Settlement offers are usually paid in the form of a lump-sum payment or monthly payments over time. You must be able to offer something because no creditor is going to settle for zero.

Determine whether you will be offering the settlement payment in a lump sum or monthly payments. Do you have money in a savings account or set aside that you can use to negotiate with? Do you have a family member or friend who is offering to assist you in your settlement efforts?

I usually don’t recommend using retirement funds like a 401(k) or IRA for debt settlement. You can learn more about that here.

If you don’t have a lump sum then you need to take a close look at your budget and determine how much you can afford on a monthly basis.

You need to be brutally honest with yourself in this step. In my experience, we tend to overestimate what we can actually afford on a monthly basis. You don’t want to set yourself up to fail on the settlement because you were too optimistic about what you can actually afford on a monthly basis.

Once you know what you can afford, it is time to prepare the offer.

Step 2 – Draft and Relay the Settlement Offer

The next step is to formulate the actual offer. I almost always recommend that you relay the settlement offer in writing – whether that is a letter, fax, email, etc. The reason is, by writing down the proposal you can focus the creditor on many of the other reasons they should agree to your proposal, not just the dollars and cents.

When settlement offers are done over the phone everything is usually focused on how much you are going to pay and it is more difficult to communicate the reasons why settlement on your terms is a good option for the creditor.

When drafting your proposal there are a few things to keep in mind. First, is you need to give them reasons as to why the settlement is in their best interest. Try and draft your settlement proposal from the perspective of the creditor who is reading it.

If there is anything in your life that will make it legally more difficult for them to collect from you, let them know. Do you have a tax lien? Let them know. Are you having your wages garnished by another creditor? Let them know. Is the sole source of your income Social Security? Let them know – Social Security income is exempt from garnishment, meaning that it is going to be very difficult for them to collect from you and thus they will be more likely to accept a lower amount.

Also, be prepared for counteroffers. No matter what number you give them, they will come back with a higher number. You don’t want to play too many games with this, but if you have $5,000 to settle your debt and absolutely not a penny more, it is usually best not to have your initial settlement offer be the full $5,000.

Step 3 – Finalize the Paperwork

After you have reached an agreement with the creditor make sure you get their agreement to the settlement offer in writing before you pay them any money.


The writing can be an email or a simple letter, but make sure you have proof that you are settling the debt in full and not just making a payment.

Once you have the writing you can pay them in whatever form (cash, check, credit card, etc.) that they prefer.

If they have filed a lawsuit against you but a judgment has not been entered, then you need to get them to agree to dismiss the lawsuit WITH prejudice. This means that they will not be able to file the lawsuit ever again.

If a judgment has already been entered against you, then once the payment clears the creditor must agree to file a Satisfaction of Judgment to show that you have satisfied the debt against you.

Debt settlement can be stressful, but if you approach it with the mindset that they want you to pay money and you want to settle the debt, then if you can find some middle ground both sides can be satisfied with the final result.

Here are a couple of other items to consider when trying to settle your debts:

If you need professional assistance in settling your debts feel free to give us a call. I would be happy to meet with you and develop a strategy for solving your debt problem once and for all. Click HERE to set up a consultation.

Schedule a Free Consultation!

John Skiba, Esq. John Skiba, Esq.

We offer a free consultation to discuss your debt problem and help you put together a game plan to eliminate your debt once and for all. Give us a call at (480) 420-4028

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