So you’ve decided to go through the debt settlement process.
You’re going to end up paying less than you owe and getting out of debt much faster than you would otherwise.
But, there are some things that are important you pay attention to during the process.
Here are a few tips on how to navigate your finances once you decide to settle your debts.
In this article:
- Validate your debt
- Check the statute of limitations
- No open credit lines
- Contact creditors
- Get it in writing
- Be calm
- Be patient
- Separate savings account
- Read and save your mail
- Make your plan of attack
- Know what you can afford to put towards your settlement
- Make agreed upon scheduled payments
- Ask for a letter of deletion
- Send a cease and desist letter
- Download the app TapeACall
- Keep the 1099c form your creditors give you
Tip #1: Validate Your Debt
Collection agencies are known for going after bogus debts and invalid accounts. They’ve even been known for trying to collect on a debt that has already been collected on.
What’s our point?
Make them prove it to you.
Collection agencies must prove to the consumer that the debt belongs to them. So don’t be afraid to ask a collector for proof that the debt is yours.
This is a called a debt validation letter.
Ask the collection agency to send you a debt validation letter before you do anything.
Tip #2: Check the statute of limitations
Each state has a statue of limitation on when they can ask the court to get involved in collecting a debt.
Once the statute has passed, the debt collector will have a very hard time getting a judgment if filed in a court.
Here’s a resource you can use to check the statute of limitations in your state.
Tip #3: No open credit lines
Once you decide you want to try and get out of debt through the debt settlement process, you must stop paying on all your unsecured debt.
Keeping that one credit card open and paid on time that you save for “emergency” purposes can backfire on you. Creditors can update your credit on occasion and should they see a drop in your credit scores or that you have stopped paying your other credit cards, they may close your account.
People ask, “Does this happen all the time?” No, not ALL the time, but it can and it does. If you do decide to keep that one card open, know that you’re taking a risk. All the money you’re paying towards the credit card can be taken from you at any time.
— Get Out of Debt (@getoutofdebtcom) April 6, 2018
Tip #4: Contact Creditors
When you begin the negotiation process, you’re going to need to set aside time to call your creditors. You’ll want to see what type of offers they’ll give you initially.
By doing this, you’ll get a better idea of which creditors will be the best to work with, and which ones will offer the best settlement.
Tip #5: Get it in writing
If a creditor tells you that they need a payment today to get started, this should be a red flag. Collection companies are notorious for having people make an upfront good faith payment. In reality, this payment could just be going towards past due interest.
And once it does, they might come back and tell you that they couldn’t get the original settlement offer approved.
No matter what you do, do not pay on a settlement until you get it in writing. Without the settlement offer in writing, you have no guarantee.
(Want more helpful advice on how to handle a settlement with your creditors while taking the fast track out of debt? Use this 6-Step Guide On How To Negotiate with Your Creditors so you can effectively lower your debt by an average of 40-60%. Simply click here to learn more and to get the free guide.)
Tip #6: Be calm
Dealing with the decision to go towards debt settlement can be very stressful.
When dealing with your creditors or collection agencies it’s important to remain calm when you’re on the phone. Remember, the other person on the end of the line may not have your best interests in mind…
To receive the best results we find that being honest and keeping a cool head gets you much further.
Tip #7: Be patient
Just because you’re ready to strike a deal doesn’t mean your credit card company is.
Many times, they will advise you the best deal to be had is a 10-20% discount. If you accept this, you did achieve your goal of getting your debt settled.
However, it’s also very likely you left a ton of money on the table. It may take many months of going at them before you get a better discount.
As a rule of thumb, the longer the debt goes unpaid, the better deal you’ll be able to make.
So if your debt is brand new, don’t expect as much of savings as you would on an older account.
Tip #8: Separate Savings Account
Make sure to set aside a separate savings account to put money into every month to settle your accounts.
Creditors prefer to make a settlement that’s paid with one lump-sum payment. If you’re able to build your cash reserves in a separate savings account, you’ll be ready to jump on that great settlement offer.
Tip #9: Read and save your mail
Many of the “snail” mail pieces you receive may look like junk mail. But whatever you do, do not throw them away.
Create a file for each creditor you have and store any correspondence you have with them. This might come in handy later down the line during negotiations.
Tip #10: Make your plan of attack
It’s important to create a plan of attack and pick a target settlement amount before you approach your creditors.
Let’s say you owe $20,000 across 5 different creditors and you’d like to start settling your debts.
Keep in mind…
A 20% discount would mean a payback of $16,000. On the other end of the spectrum, an 80% discount would mean a payback of just $4,000.
Maybe you were aiming to achieve a 40% discount overall. A 40% discount on $20,000 means a payback of $12,000. So your first step will be to try and get that amount in your savings account.
Take a look at your finances and how much you can set aside each month. If you can afford to dedicate $500 to pay off your debts every month, it’ll take you 24 months. If you can only save $350 a month, add another year onto that timeline.
The amount you’re able to save every month is directly proportionate to how long it’ll take you to get out of debt.
Tip #11: Know what you can afford to put towards your settlement (and still have money to survive)
Start with a simple “T” chart.
On the left-hand side, write out any income you get on a monthly basis.
So whether you’re a business owner, w2 employee, getting government assistance…whatever the case may be, spell out all your monthly income on the left-hand side.
On the right-hand side, spell out any expenses. Do not include your credit card payments in this.
Be sure to include:
- Car Payment
Make sure to include any recurring payments you have every month and then give it your best guess on things like food and gas. If there’s anything else, add it to this column.
Here’s an example of what that might look like:
At the end, you should hopefully have some money left over.
Now you’ll have a good idea of what you have to work with to ensure Tip #10 happens…
Tip #12: Make agreed upon scheduled payments
Never miss a payment once you’ve agreed to the settlement terms.
Let’s say you settle a $5,000 credit card with monthly payments of $250 for 12 months. Overall, you’ll be paying back $3,000 and saving 40%. You negotiated yourself a great settlement! The most important thing to do now is to make sure you pay on time each and every month.
If you should miss a payment, your creditor can void the agreement and apply your payments towards interest and late charges on the original balance.
This will leave you in a way worse position than you were in originally.
So when accepting a settlement offer, make sure it’s one you can stick with.
Tip #13: Ask for a letter of deletion
A letter of deletion is a letter from the creditor stating that the account should no longer report on your credit. 9 out of 10 times your creditor will tell you to go kick rocks, but you can’t get what you don’t ask for.
Settling on your debts will hurt your credit score.
But, getting a letter of deletion can help that.
Once you receive your letter, send it over to your credit reporting agencies (i.e. Experian Equifax and TransUnion) and ask them to update their records.
Tip #14: Send a cease and desist letter
One of the worst experiences you’ll go through when settling your debt is dealing with the harassing phone calls.
As a consumer, you have rights and collection agencies are NOT allowed to constantly harass you.
Once your debt has been sold from the original creditor to a collection agency, you can stop the harassing phone calls by sending the collection agencies a cease and desist letter.
This forces them to contact you via snail mail and will stop the calls at home, your place of work, and help you avoid the stress of nonstop phone calls.
(Finding these tips helpful? There’s a whole lot more where that came from! Use this 6-Step Guide On How To Negotiate with Your Creditors so you can effectively lower your debt by an average of 40-60% with your creditors. Simply click here to learn more and to get the free guide.)
Tip #15: Download the app TapeACall
Collection agencies are not allowed to contact you after you send a cease and desist letter.
If they do, each phone call may be worth up to $1,500 to you.
Make sure you record these calls when they happen. You can easily use the app TapeACall to help you with this.
More often than not, a collection agency will gladly “credit” your account the $1500 than go to court over it.
It’s a good tool to keep in your back pocket.
But be sure to talk with an expert lawyer when using this tactic.
Tip#16: Keep the 1099c form your creditors send you
Your creditors will send a 1099c for the difference between the settlement agreement and your original balance.
It’ll look like this:
Your account can use an insolvency form to get some tax relief here.
An insolvency form acts as a worksheet for your overall debt versus your overall assets.
If you have more debt than you do assets, you may be considered insolvent to the extent that your net worth is negative. Thus, potentially resulting in an exemption from these taxes or a reduced amount of tax liability.
Speak with a tax professional once you get these documents.
Debt settlement can be a great tool to get out of debt without the pain and consequences of bankruptcy.
Pay close attention to our 16 tips above, and you shouldn’t run into any issues.
Are you considering doing debt settlement on your own? Let us know in the comments!