March 04, 2021
Summary: You might not be able to repay all that debt. But you know it won't get thrown out in court. Learn how to make a settlement agreement, repay what you can, and move on with your life.
Are you behind on your credit card payments? Can't pay your medical bills? Bought a car you can no longer afford?
If so, don't worry about going to jail or getting your car taken away right now. You may not even need to sell your plasma or list your Ty beanie baby collection on eBay, because a debt settlement agreement could be a better alternative.
About one in 13 consumers with a credit record has made a debt settlement agreement on one or more of their accounts, and the number of debt settlements has been on the rise since 2016. Clearly, there's a reason so many people are hopping on the settlement train.
What is a debt settlement agreement, and how do you get one?
A debt settlement agreement is like a super awesome secret handshake between you and your creditor. (Okay, maybe it's not quite that chummy, but it is a chance to cut a good deal with the people asking you to cough up the cash.)
Your creditor agrees to compromise the debt (meaning: you pay less!), and you agree to pay this new amount upfront or in the form of a payment plan. You could also pay the debt in full, but we assume you probably wouldn't be in this situation if that were a viable option.
Most creditors agree to let you pay less debt than you owe, as long as you pay it all at once. After you make this lump-sum payment, the debt is forgiven. Time to party! (But don't go getting yourself into debt again, of course.)
Sometimes a creditor will allow you to make a payment plan for your remaining debt. You'll end up paying more than you would if you paid it all upfront, but the total will still be less than the amount you owe.
Though a bit more costly than a lump-sum payment, this could be an ideal path to take if you need a more manageable way to pay off your debt. But remember, not all creditors want to run the risk of you defaulting on your payments, so this might not be possible.
There are some clear benefits to opting for a debt settlement agreement, especially in comparison to continuing to ignore the debt or paying the debt in full.
If you have debts that are more than 90 days delinquent, have enough money to settle, and you're a decent negotiator, it could be a great route to take.
Here are some other pros and cons to consider before you go for it.
In most debt agreements, the debtor ends up paying a fraction of the outstanding debt. Sweet deal, right?
Plus, you get to wipe out the debt sooner than if you were to make regular payments for the full amount.
In short, not only are you getting rid of your debt at a faster rate — but you're also paying less than you originally owed, and your creditor is cool with it. Cheers to that.
After the debt is paid off, the creditor reports the settlement to the credit bureaus, which probably won't have much of an impact on a bad credit score — but keep in mind that a good credit score could take a temporary hit. (Still, this option is often better than ignoring the debt completely.)
In some cases, you may also have to pay taxes on the debt that is canceled out in your settlement. So, take time to consider the pros and cons of debt settlement before you decide if it's right for you.
By opting for a settlement agreement, you'll be kissing your debt goodbye soon. Don't stress — this will all be behind you before you know it. Here's what to do when making a debt settlement agreement.
You may owe a bunch of money, but it's not a retailer or even a credit card company knocking on your door asking you to pay up. Instead, your debt has been passed over to a collection agency — and sometimes it can be tricky figuring out exactly which agency you're dealing with.
Start the process of settling your debt by identifying who owns your collection account. This might be on the pile of bills you've received in the mail, or you can look it up on the Annual Credit Report website.
Now is the time to brush up on your negotiation skills, because the collection agent isn't going to let this one slide easily. Most collection agencies buy debt for 4-8 cents on the dollar, then hope to collect roughly 11 cents in return.
Knowing that these folks aim to double their money will give you a good starting point. Call the collection agency and explain why you're not able to pay off your full debt, then make an offer to settle.
Begin with a low proposal (4-5 cents), then make a counter-offer from there as needed. Play it cool — the waterworks probably aren't going to do you any good here.
If you end up making a deal that works for your budget, great! But don't be afraid to walk away if you can't come to an agreement that suits your financial situation.
Take a deep breath. You did it! But all that skillful negotiating could go to waste if you don't get it written down. Ask the collection agent to send you the official debt settlement agreement via mail, email, or fax, making sure it includes:
Debt settlement agreements are increasingly common among today's consumers. But is it the right choice for you?
If you have the money to settle, are ready to negotiate, and want to pay off your debt more quickly, it's certainly a good option to consider.
SoloSuit makes it easy to respond to a debt collection lawsuit.
How it works: SoloSuit is a step-by-step web-app that asks you all the necessary questions to complete your answer. Upon completion, you can either print the completed forms and mail in the hard copies to the courts or you can pay SoloSuit to file it for you and to have an attorney review the document.
"First time getting sued by a debt collector and I was searching all over YouTube and ran across SoloSuit, so I decided to buy their services with their attorney reviewed documentation which cost extra but it was well worth it! SoloSuit sent the documentation to the parties and to the court which saved me time from having to go to court and in a few weeks the case got dismissed!" – James
Here's a list of guides for other states.
Being sued by a different debt collector? We're making guides on how to beat each one.
Is your credit card company suing you? Learn how you can beat each one.
Need more info on statutes of limitations? Read our 50-state guide.
Need help managing your finances? Check out these resources.