If you’re struggling to pay off a large debt, you may consider a debt settlement option. This debt relief method involves written negotiations with creditors through debt settlement letters.
When you receive a debt settlement letter, it's essential to understand what it means. A debt collection agency usually sends this type of letter, indicating that they are willing to settle your debt for a reduced amount. They will give you a specific deadline by which you must respond to the offer. If you accept the offer, you must pay the reduced amount in full.
It's important to note that this is not the same as debt consolidation or debt management, and it will not reduce your interest rates or monthly payments. However, it does provide an opportunity to pay off your debt for less than the total amount owed.
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Debt settlement may sound like a dream come true, but it has consequences and shouldn’t be your first option. It is a meticulous process involving a lot of back and forth with the hope that creditors will forgive a portion of your debt. Depending on your negotiating skills and the status of your debt, you could end up paying a significantly lower amount or almost the same amount as your original loan.
Debt settlement also eradicates your credit score, significantly lowering it and staying on your record for seven years. You will have difficulties accessing other loans in the next seven years until you’ve rebuilt your credit standing. Any forgiven debt is also considered taxable income, and you must legally report it to the IRS or face penalties.
However, if you’ve tried all other debt relief methods and nothing seems to work, then a debt settlement may be the only choice to avoid bankruptcy. It will also give you significant relief from the financial stress that unpaid debt causes.
When you decide to go the debt settlement route, it’s time to write a debt settlement letter. If you receive a debt settlement offer from a creditor, you can review the terms outlined. However, if you are the one who will initiate the debt settlement process, you must be the one to write first.
Clearly describe your situation when writing a debt settlement letter. Creditors should believe that you cannot pay your debt entirely. Going into detail about your financial hardship will benefit you. However, stick to the facts and avoid embellishing the truth. Some creditors may ask for documented proof such as health records in case the cause of financial hardship is a health condition, illness, or severe injury. Other common causes of financial difficulties that are often considered include disasters and job losses.
Be professional in your choice of words and share your complete information, like the total amount owed and your account number, so they can quickly identify your account. Outline the amount you are willing to pay and ensure you already have this figure. In rare cases, a creditor may agree to a fixed monthly installment. However, it’s beneficial if you already have the negotiated amount since a creditor will most likely agree to the settlement when they’re sure you can already pay off the debt.
When proposing a settlement amount, start with 30-40% of what you owe, which provides a good negotiation baseline. Expect creditors to negotiate a higher amount. In your letter, include other requests such as updating your credit records, waiving any late payment fees, and reporting your account as fully paid.
Once you’ve written and sent your letter, wait for your creditor to respond. Include an expected response date in your letter. While waiting for a response, ensure you’ve saved the amount you indicated. Debt settlement can be a long process, depending on your creditor, and you may have to do several follow-ups.
Keep all negotiations in writing, and once you’ve reached a final agreement, request a formal settlement agreement outlining the terms of both parties. Remember, you are entering into a new contract with the creditor, and you want to document the obligations of both sides. This will protect you in the event of issues in the future.
Debt settlement may be tricky, but it’s worth considering before filing for bankruptcy. You can achieve the debt relief you need with patience and a cleverly written debt settlement letter.
Read this other Processing Card blog to learn tips for negotiating debt settlement.
Florence Carpenter is passionate about ensuring that the process of opening merchant accounts is as straightforward as possible. She graduated from the University of Michigan with a bachelor’s degree in Marketing.
