How To Settle Your Debts With Creditors

If you’ve been considering hiring a Debt Consolidation Company, you should really think twice and look into all of your other options first. One of those main options being settling your debts with your creditors yourself. In all actuality, you can do everything for yourself that a Debt Consolidation Company can do for you. And you can do it with far, far less money.

First things first, lets get some things straight about Debt Consolidation and Debt Settlement Companies.  Some Google searching could give end up giving you all sorts of confusing information. Here are a some truths you might not currently know about these companies:

You will spend far more money using a Debt Consolidation Company than doing the settlements on your own.

Debt Consolidation Companies charge you a whole lot more money than you’d expect, to do something for you that you can do for yourself. Debt Consolidation Companies typically charge you on average $700-$1,000 up front, and/or a monthly fee for their services, as well as a percentage of whatever they were able to save you on your debt (typically around 15%). A better place for that $1,000, extra monthly payment, and 15% to go to? To your actual debts!!

Working with a Debt Consolidation Company can hurt your credit score even more.

Yes, your credit might not be looking amazing right now any, but there’s no reason to do things that will make it even worse and even harder to repair.

In a nutshell, here is how Debt Consolidation Companies work:

The idea of Debt Consolidation

The idea of Debt Consolidation is to take out one big loan with a lower interest rate to pay off all of your other debts. The idea is that, if your larger loan has a lower interest rate, then you can use that extra money that you’re saving on interest to pay off the principle of the other debts. In theory, there are some great benefits to this idea:

  • having a lower interest rate can in fact provide you with extra money to put towards principle amounts.
  • having just one monthly payment to worry about is easier to manage and a lot less stressful than dealing with numerous monthly payments.

Here’s the catch:

The Debt Consolidation Companies don’t pay your debts off right away. So in actuality, it’s not like a typical loan (if you were to get a normal loan from a bank, you’d be able to pay off your debts with that and then just make your monthly payment on your new loan). So the “idea” of it being like getting one big loan isn’t true at all.

Here is how they actually work:

  • They have you stop paying your creditors’ monthly payments, and instead start paying one large monthly payment (a culmination of all of your credit card & loan monthly payments in one) to them.
  • Instead of paying off your debts right away, they save up the money that you’ve been paying them in a side account, and then once there’s enough money built up in that side account to pay off a debt, they’ll call one of your creditors and negotiate a settlement with them. Since there’s a lump some built up, they can negotiate with the creditor to accept a much smaller amount than what you actually owe.
  • During the time that you’re working with them, there are no monthly payments, being made to any of your creditors (hence your credit score going down, down, down).

A couple things to note:

I am not saying that Debt Consolidation Companies are necessarily a bad thing for everyone. There are certain scenarios when working with one of these companies can be of benefit. Two immediately come to mind:

  1. if you’re considering Bankruptcy but you don’t qualify for Chapter 7 (in other words if you’re still going to have to pay those debts off), or
  2. if you don’t trust yourself enough to stay on track with your own settlement program. In those cases, it’s usually better to try to work with a Debt Management Company first, especially if you’re trying to keep your credit score somewhat in line.

Settling Debts On Your Own

Back to settling these debts on your own. This can seem like quite a feat to tackle yourself, but really with a few insights it can be a completely manageable and rewarding process! Some things to keep in mind when managing this settlement process on your own:

Watch That Mailbox!

You’ll be able to get a much lower settlement price if the creditor is the one seeking out the settlement. Keep in mind that these offers are only sent out to people that are very past due (when the creditor is getting desperate). But if you so get one of these offers in the mail, drop everything else to jump on that opportunity (not including living expenses like rent, utilities, food, etc)! Make sure you follow the advice below when sending in a settlement payment.

If You Are Current On Your Payments, Don’t Stop.

If your credit score is still looking fairly decent, do everything you can to keep it that way. It might take longer to get your debt paid off, and you’ll end up paying out more money in the end, but you’ll walk away in a better position if you can keep your credit score in tact. The extra money that you’ll pay in interest will be outweighed by the money that you will save in numerous instances by having a good credit score.

Remember That They Are Just As Desperate As You Are!

Creditors understand that anyone that is in this situation is a potential risk for bankruptcy. They know that if you do get to the point of filing bankruptcy, they run the risk of not getting any money for this debt! They understand that some is better than none. Creditors in these situations will often be willing to accept 70% all the way down to even 20% of what you actually owe! Especially when you’re working with a collection agency. They have purchased the debt for a very small fraction of what the original debt was, so no matter how little you can pay them, they will still be making a profit.

Get Any Deals From Them IN WRITING.

Just know that anything they say over the phone or in person can (and most likely will) be denied later on. If they tell you something (“yes, we will accept that amount”) and you don’t get it in writing then consider it as good as if it were never said. Don’t send them a dime until you have all the terms that you’ve agreed to IN WRITING.

Understand This: Debt Settlement Is Considered A “Taxable Event.”

If you settle for an amount less than what you originally owed (which is usually what you are hoping to do), it is possible that you will have to pay income taxes on that difference. Basically, any “forgiven balance” over $600 can be considered “taxable income,” meaning that it can be reported as actual income to you. If possible, try to get the creditor to state (again, IN WRITING!) that you will not owe taxes on the forgiven balance. If not, at least take a look at what you could owe in taxes on that amount and make sure you won’t be possibly putting yourself in a worse situation by having to owe that money in taxes (the IRS is not a very forgiving creditor!).

Negotiate With The Creditor That This Debt Will Be Considered “Paid In Full.”

Let them know that if you settle this debt and pay the agreed upon amount, that it must be reported to the credit bureaus as Paid In Full. Again, make sure to get this IN WRITING!!! If you don’t specify this, it will be reported as “Settled,” and that is not what you want. If future creditors see “Settled” on a debt on your credit report, they will know that you didn’t pay the full amount on the debt, and they will consider you a high risk.

Make Sure That The Original Creditor Can’t Come After You.

If you’re settling with a collection agency that purchased your debt, make sure to negotiate that the original creditor can never come back at you for the difference of what you settled & what you originally owed. Even though they “sold” the account to the collection agency, they still can come after you for that difference! Save yourself from that heartache, and get that agreement IN WRITING!

Steps to Settling Debt on Your Own:

  1. Consider this process when you’re already behind on your payments. Creditors will only settle with people that are 3-6 months behind.
  2. Get all of your debts together & organized. You need to know what you owe & who you owe it to! By this point, your debt has likely been sold to a collection agency (& then possibly resold). Make sure to get all of your debts organized so you know what company currently owns each one of your debts.
  3. Save up about 35-50% of what the debt is and then give them a call. That’s what debt settlement is. It’s you calling them and telling them that you can pay them a lump sum amount if they’ll consider the debt paid. They will try to get as much out of you as possible (remember you’re working with a business here), so remember that this is a negotiation process. Start with less than you could actually afford, and negotiate from there. Start by telling them you have 20% of what you owe them and work from there.
  4. When you make the call, make sure you’re calling the right company! ONLY work with the most recent creditor or collection agency on each debt. They are the ones who currently own the rights to that debt, and they are the ones that will have the authority to report your payment to the credit bureaus.
  5. Again, I can’t overemphasize this enough, make sure you get any agreements, you guessed it, IN WRITING before you send off any money.
  6. Never pay with a check from your checking account. Bottom line, you don’t want these companies knowing your account information or even what bank you bank with. Always pay with a cashier’s check or money order.
  7. On the check, write these words: “If this check is cashed, that makes this account (write the account number) settled in full.” Just another way to protect yourself, going along the same lines of getting everything in writing!
  8. Keep track of the debts that you’ve paid off. Believe me, if you call a company to pay a debt that’s already been paid, you can’t trust that they’ll turn away the money. DON’T end up paying off the same debt more than once! You can’t be too organized when it comes to this process. Come up with a system to keep track of what’s been paid off.
  9. Keep on truckin! It is so rewarding to get debts paid off and watch yourself get closer and closer to being debt-free. Remember that this is the time to be on a tight budget. Find ways wherever you can to put extra money towards this goal. And as you’re scrimping, saving, and working extra hours remember your goal of NO MORE DEBT! Enjoy the process and enjoy each step towards your goal.