Debt Settlement Defined

Debt Settlement, also referred to as Debt Arbitration or Debt Negotiation, is an approach to the reduction of debt. It is a process by which a person contacts their creditors and negotiates with them to accept payment, for less than was originally owed on the loan or on a line of credit. It is a common solution to debt, and you can do it yourself.

Check Debt Status First

Statute of limitations laws exist for the debts you owe. If you are looking into debt settlement, you should find out if you are still liable to be collected upon for your debt. When settling your debt, you can exclude these expired debts, and deal with the others first. In most states, the statue of limitations law on debt expires on average between 3-6 years. If you think your debt may fall beyond this limit, check and find out. Keep in mind that the law only states that you cannot be sued by the creditor for the amount you owe after the time limit expires. You still owe the money by law, but you are safe from legal action. The loan will still show on your credit history, however.

Settling Secured Debts

The fact is secured debt is guaranteed to your creditor with real property, usually a home. With these loans you typically have no room to negotiate except in certain cases. If your home has depreciated significantly more than the amount owed, or if your property has other mitigating factors facing it, you may be able to negotiate the debt down. In most situations, however, creditors will not settle secured loans. Instead they will opt to collect more by confiscating your collateral or physical property used in the loan agreement.

Prioritize Unsecured Debts

Unsecured debts are more common, and typically can be included in a debt settlement. They include revolving credit such as credit cards, medical or legal bills, personal loans, student loans, and even bad checks. Make a list of your unsecured debts that you are looking to settle. Prioritize them based on the amounts owed and the age of the account. You will want to settle your largest accounts first and then those based on age. Older accounts will typically have more leverage to negotiate down. These debts have in most cases already been sold off by your creditors to third-party collection agencies.

Collect the Information on Your Debts

Collect all of your debts and final owed amounts. You then must locate contact information for these creditors. It is best to secure a phone number and also a physical mailing address. This address will be necessary in the debt settlement process.

Evaluate Your Amounts Owed

Look at each of your debts, the total amount owed. Agree first how much you feel you will be able to pay. Keep in mind that once settled your creditor will require payment in full. Make sure you have the available funds to do this on hand before negotiating. When you are deciding an amount, leave room for negotiation. Be careful though, offering too little on your loan will cause your creditors to dismiss your settlement from the start. A good number to start at is 60% off of your debt amount. Decide first how high you are able to go, and set a limit with yourself.

For example: You owe $3,500.00 on a 4 year old medical bill. The most you are able to pay on this amount is $2,100.00 or 60% of the total owed. Offer $1,750.00 or 50% of the amount owed to your creditors. If they do not accept this first offer, propose another amount that is higher, but do not exceed the $2,100.00 amount.

The Negotiation Process

The process of negotiation with your creditors is not as complicated as it may seem. You should make a standard letter that explains and provides the following information:

1. Your account information and total amount owed
2. A brief explanation of why you cannot pay the amount owed due to financial hardship. Also, state your intent to make payment on this account and not default.
3. Request the opportunity to settle this amount
4. Specify an amount and agree to pay this amount if accepted, in full.
5. Include contact information for yourself
6. Send this letter to your creditor via certified mail, and retain a copy
7. If offer is accepted, pay immediately via check through certified mail.