Settling Debt on Your Own

The Process

In order to settle, you must first be able to make an upfront payment of 35-65% of the existing debt balance with one of your collectors. You can do this by making a monthly transfer into a savings account until you reach a potential settlement amount. You may also find other ways to come up with the money, such as selling property or using a tax refund. Conversely, obtaining a loan or other debt to pay off a collection account is one of the worst things you can do.

Negotiate a Settlement Offer

Your collectors are likely sending you collection letters that include a settlement offer. You may be able to settle for less than their first offer. Other collectors may agree to a settlement offer that you make, even if they did not propose one to you. Keep in mind that collectors can include both collection agencies and attorneys.

A settlement should be in writing. It should spell out the major provisions of your agreement. Never send in payment based on a verbal promise! Here are some common provisions in successful debt settlement offers:

The contract should clearly state identifying information, including the collector name and address, debtor name and address, date of the agreement, purpose of the contract (debt settlement) and the account information (account number, account balance, original creditor).

An agreed settlement amount should be stated, and it should also include a clause whereby payment of the settled amount would be deemed to fully indemnify the debtor from any future claims by any claimant regarding the debt.

Some savvy debtors also get agreement that the collector will remove any negative information from all credit bureaus regarding the debt. Credit bureaus disapprove of this process, but it is still allowed. In most cases, the original creditor would still show negative information.

Another common clause is a statement summarizing that while you do not acknowledge the validity of the debt, you would like to close the issue.

Any taxes on forgiven debt could still be owed, so make sure you consult a qualified tax advisor to find out what you could owe. Keep in mind that when you negotiate your own settlement, you are taking on responsibilities that might otherwise be handled by a settlement company or attorney. It is usually well worth it to settle on your own rather than using these expensive representatives. However, you should educate yourself to make sure that you cover all possibilities so that you are protected from additional legal action.

Avoiding Judgments

If you have numerous collection accounts and are simply trying to avoid legal action, then you may want to consider saving money in a savings account in anticipation of future legal action. Many times, you may be able to negotiate a settlement or payoff with the collector after you have received a summons for court. Just make sure that you do this before the court date. If you cannot satisfy the debt before the court date, then you should make arrangements for defense of the court action. Ignoring a summons would likely result in a summary judgment (automatic loss).

Proactively settling on your collection accounts can help you avoid judgments. It can also help you improve your damaged credit rating. If you have the financial ability to settle on all accounts, then this can be a good step toward improving credit and eliminating legal liability.

If you are struggling financially, then there are two common options. The first is to save each month for the purpose of averting impending court action. In other words, you would use your savings to negotiate a settlement or payoff only once you have received a court summons. If no court action is pursued, then you could continue saving for a rainy day.

The second option is bankruptcy. By filing for bankruptcy, you may be able to avoid collection attempts and additional legal action. Bankruptcy is generally seen as a last resort, and should only be used when it is warranted. Qualified legal counsel can help you understand the bankruptcy options and the process. An attorney can explain how bankruptcy may provide some protection from creditors. For more information, contact a trusted bankruptcy attorney or your state's bar association. If you would like a copy of a Chapter 7 Resource Guide, you may request a free copy through Vision Credit Education, Inc.

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