debt settlement handshake agreement

Summary: Most people don’t realize that they may be able to settle debt instead of paying in full. It may hurt credit but can avoid lawsuits. Negotiate early, get terms in writing, and pay as agreed. Solo can help you draft a settlement offer, negotiate with the collector and ultimately resolve your debt.

Are you struggling with debt that you can’t pay? Paying some of your debt may be better than paying none of it. Debt settlement can help you get out of debt for less and start rebuilding your credit.

We’ll take a look at how debt settlement works and help you decide whether it’s right for you.

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How does debt settlement work?

Debt settlement is the process of resolving your debt by paying less than you owe. It can damage your credit, so it’s usually only a good idea if you can’t pay your debt in full and are facing the possibility of a debt lawsuit (or have already been sued).

More specifically, here are ten steps that explain how debt settlement works:

You fall behind on payments for an unsecured debt like a credit card, medical bill, or personal loan.
After several missed payments (usually 90–180 days), the account goes into default and may be charged off.
The creditor either keeps the account, hires a collection agency, or sells the debt to a debt buyer.
You review your finances and determine how much you can realistically afford to offer as a settlement.
You contact the creditor or collector and offer to pay less than the full balance owed.
The creditor negotiates with you and may accept, reject, or counter your offer.
Once an agreement is reached, you request written confirmation outlining the settlement terms.
You make the agreed-upon payment, either as a lump sum or through installments.
The account is updated on your credit report as “settled” or “paid for less than full balance.” You can begin rebuilding your credit after the debt is resolved.
If $600 or more is forgiven, you may receive a 1099-C form and owe taxes on the debt.

Typically, the debt settlement process involves negotiating with a debt collector or creditor. Once you’ve agreed upon an amount, you pay it. In return, the creditor or collector promises not to pursue you for the remainder of the debt.

Make sure that you get a copy of the settlement agreement in writing!

Let SoloSettle be your guide through the debt settlement process.

How long should I wait to contact a debt collector?

Don’t wait too long to contact a debt collector to discuss a settlement. The longer you wait, the harder it may be to reach an agreement that’s ideal for you. The earlier you begin negotiations, the more leverage you’ll have to settle.

Often, debt collectors will send nonstop letters and make constant phone calls before taking someone to court for debt. If you’re in this phase, you have some time to decide whether you want to settle.

Many people try to settle their debts only after they’ve been served with a lawsuit, but you don’t have to wait that long. If you haven’t yet been sued, it may be worth reaching out to see if the collector will accept a payment plan.

Payment plans can be advantageous for a few reasons:

You’ll pay the debt in full, which is less damaging to your credit than settling.
You don’t have to come up with a lump sum.
You’ll avoid the time pressure and anxiety that often come with a debt lawsuit.

You’re free to reach out to a debt collector to ask about a payment plan or settlement at any time. However, once you’ve been served with a lawsuit, the collector is much less likely to accept a payment plan.

If you’ve been sued for a debt, you’ll need to respond to the lawsuit by your state’s deadline. Do this before you start negotiating a settlement. If you miss the deadline to reply to the lawsuit, the court will likely enter a default judgment against you. This means that the collector automatically wins.

Sued for debt? Send an Answer with SoloSuit in minutes.

Be prepared before you get started

If you’re stressed about debt, you probably want to get the negotiations over with as soon as humanly possible.

But wait! Are you sure that the debt actually belongs to you?

Debt collectors don’t usually try to collect debt from the wrong people on purpose, but mix-ups happen. Before you start negotiating, make sure that you recognize the debt and ask for proof that the collector has the right to collect it.

When you’re trying to settle a debt with a debt collector, remaining friendly and polite can go a long way. The collector isn’t obligated to negotiate with you, but they will probably be much more willing to if you treat them like a person.

There’s no way to completely take the stress out of negotiating with a debt collector. However, SoloSettle can streamline the process while helping you avoid nerve-racking phone calls. Here’s how it works:

Visit the Solo website and create your free account.
Answer a few questions online, and Solo’s technology will help you generate a settlement offer.
When you’re ready, send the offer to the collector electronically.
Negotiate with the collector until you reach an agreement.
Let SoloSettle arrange your payment.

Ready to settle your debt once and for all? Get started with SoloSettle in minutes.

Plan your initial offer strategically

Your initial offer is one of the most important parts of debt negotiation. If it’s too high, you might end up paying more than you need to. But if it’s too low, the collector might decide you’re not worth dealing with.

How much you should offer depends on whether you’re dealing with an original creditor (the party you originally owed money to) or a debt buyer:

Original creditors often accept offers of 50% to 75% of the total debt amount.
Debt buyers often accept offers of 30% to 40%.

Before you decide on your offer, sit down and take a look at your finances. If you reach a settlement agreement but aren’t able to pay it, you can end up in even worse shape than before.

That’s why it’s a good idea to make your initial offer less than the maximum you can afford. Debt collectors rarely accept the first offer, and there can be a lot of back-and-forth.

On the other hand, your initial offer should still be reasonable. If it’s too small, the debt collector might just ignore your proposal altogether.

Suppose that you have a $1,000 debt. If you say that you’ll pay $100 to settle the debt, the collector might dismiss your offer entirely instead of beginning negotiations.

Want a closer look at how debt settlement works in practice? Here’s an example.

Example: Josh owes $10,000 to a credit card company. The debt has been charged off and sold to a debt collector, and Josh thinks that the collector is about to sue him. While he can’t pay the debt in full, he wants to avoid a debt lawsuit. Before beginning negotiations with the debt collector, Josh sits down and looks at what he can reasonably pay the debt collector. He decides that the absolute maximum he can pay is $6,000. Josh uses SoloSettle to send the collector an initial settlement offer of $4,000. The debt collector counters with $6,000. Josh offers $5,000. The collector accepts.

Check out this video for settlement negotiation tips from a lawyer.

How will debt settlement affect your credit?

Debt settlement can raise or lower your credit score by 100-200 points, depending on the history of the debt in question.

If you owe money to a debt collector, you may have already seen a big hit to your credit score. You should know that debt settlement can damage your credit, too.

Fortunately, the Fair Credit Reporting Act (FCRA) limits the extent of this damage. Negative entries like late payments and charge-offs will generally remain on your credit report for seven years (15 U.S.C. § 1681c). This is the case even if you pay a charged-off debt or catch up on your late payments.

However, paying an account in collections in full is still helpful. It makes you look less risky to lenders because you ultimately paid what you owed.

In terms of credit damage, settling a debt is not as good as paying it in full, but it’s much better than ignoring it altogether.

Settling a debt will be entered into your credit report. This can be a red flag to lenders because it indicates that you didn’t pay a debt as agreed. However, the impact lessens over time, especially if you get a better handle on your finances going forward.

Respond to your debt lawsuit with an Answer in minutes!

Which is better, debt settlement or a payment plan?

If you’re like many people, you would be very willing, at least in theory, to repay your debt in a lump sum. Unfortunately, you may lack the funds to do so. You might wonder whether a debt collection agency will accept a payment plan.

The answer depends on the collector. However, you’re more likely to successfully settle your debt with a lump sum payment than with a payment plan.

From a debt collector’s vantage point, there’s a risk that you’ll establish a payment plan and then default. But if a payment plan is the most viable option for settling your debt, you can always get in touch with the debt collector to ask. The worst they can say is no.

The state you live in matters

It does. Before you settle a debt, take a moment to review your state’s specific debt collection laws. Debt collection rules are fairly similar from state to state, but one major difference is the statute of limitations.

For example, in Massachusetts, the statute of limitations for consumer debt is six years (MGL c. 260, § 2). In Alaska, it’s only three years (AS § 09.10.053).

If it’s been four years since you made a payment on a defaulted credit card and you live in Alaska, the collector can no longer sue you for the debt. If you live in Massachusetts, the collector still has time to file a lawsuit.

Listen as a debt attorney explains the ins and outs of statutes of limitations on debt.

When I negotiate a debt settlement, who exactly will I be dealing with?

The organization pursuing you for debt could be a law firm, a debt buyer or an original creditor. If you settle before you’ve been sued, you’re likely dealing with an original creditor or a debt buyer.

However, if you settle after a lawsuit has been filed, you may be dealing with a law firm hired by the debt collector. These negotiations are often more formal.

Curious about what happens after you respond to a debt lawsuit? Learn more with this video.

A debt settlement takes time to affect your credit

Once you’ve reached a settlement agreement with the debt collector, you’ll probably breathe a sigh of relief. However, it’s not quite over yet. Here’s a typical timeline:

It may take about a week for your payment to clear.
Once the collector updates the account, it could take 30 to 60 days for “settled” to appear on your credit report.
The mark stays on your credit report for seven years.

After you settle a debt, be prepared for your credit score to drop precipitously. This initial credit hit can be alarming, but it will become less important over time.

Sued for debt and don’t know what to do? This short video can offer valuable guidance.

What happens if I don’t pay a debt settlement?

Once you settle your debt, you and the debt collector should each get a copy of the agreement in writing.

A debt settlement is a contract: You pay the agreed-upon amount, and in return, the collection agency considers the debt paid off.

If you sign an agreement and then don’t pay, you have voided the contract. This means that the debt collector may pursue further collection efforts or file a lawsuit against you.

What happens if you’re sued for debt and have no money? This short video explains.

Key takeaways

Settling a debt can be a little complicated. Before you get started, keep the following in mind:

Original creditors often accept 50% to 75% of the original debt, and debt buyers often accept 30% to 40%.
Your original settlement offer should be less than the total amount you’re willing to pay.
Being polite and courteous can get you a long way.

Take a deep breath, and then move forward with your debt settlement plan. You’ve got this!

Settle your debt with SoloSettle today!

FAQ

Is debt settlement a good idea?

That depends on your circumstances. Settling debt can damage your credit, so if you can afford to pay in full, that could be a better option. If you can’t afford to pay in full and you want to avoid bankruptcy, settling the debt is probably better than not paying it.

Does debt settlement destroy your credit?

Settling a debt can have a big negative impact on your credit score, but it doesn’t destroy your credit forever. Collections and settled accounts stay on your credit report for up to seven years. Even so, their impact lessens over time. Rebuilding your credit is entirely possible.

Will a debt collector accept my settlement offer?

Many debt collectors are willing to negotiate settlements, especially if they know they won’t be able to recover the full amount. To increase your chances of success, you should make sure your opening offer is reasonable. A debt collector might refuse to engage with a lowball offer.

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