Getting out of debt can be a daunting task, and that’s true even if you’re not in dire straits financially. If you’re considering debt settlement, though, it may be acutely overwhelming. Understanding how to settle debt for less than what you owe can give you an advantage as you work to get back on your feet.
But what’s the best way to approach the process? Here are three ways you can approach your debt settlement and decide the right path for you.
How to Settle Debt for Less
From the beginning of the debt collection process, you’re at a disadvantage. Collection agencies can be aggressive in their pursuit to collect the money, whether or not you owe it. Although they understand the laws, debt collection agencies are constantly running afoul of government regulators for breaking them.
If you’re in a situation where you can offer to settle debt with a reduced lump sum payment instead of going to court, you have three ways you can approach the process.
Do It Yourself
If you decide to try settling debt on your own, here are some steps you can take:
- Make sure you actually owe the debt: Sometimes collectors try to get you to pay on a debt that’s time-barred — meaning it’s past the statute of limitations in your state — or that doesn’t even belong to you. Request a validation letter and verify the debt before you agree to pay any amount.
- Put together a picture of your finances: Before you offer to settle debt with a reduced lump-sum payment or reduced monthly payments, you’ll want to make sure it’s a reasonable proposal. Start by writing down your income and expenses to show how much you can reasonably afford to pay. You’ll want to include a buffer with your cash flow in case of an emergency and other unexpected expenses.
- Take your plan to the debt collector: Once you’ve laid the groundwork for your offer, contact the collection agency and explain your plan and offer — and make sure you record the conversation so you have their responses for later. Because collectors typically pay only a fraction of the original debt amount, they’re more likely to work with you than your original creditor. That said, expect a negotiation. Once you’ve settled on a figure, request it in writing, so there’s no way the agency can come back later and demand more.
Negotiating on your own behalf will cost you less in terms of lawyer fees or debt settlement company charges. It’ll also give you the chance to learn the ins and outs of the debt collection process. But foregoing that cost may result in you paying more than if you had an expert negotiator by your side.
Work with a Debt Settlement Company
Debt settlement companies work on behalf of consumers to negotiate settlements with collection agencies. They do this in exchange for fees, which you pay to the company. Once you sign up, you’ll typically pay into an account with the settlement company until it has enough to negotiate with the collection agency.
The benefit of hiring a debt settlement company is that you don’t have to worry about dealing directly with the collection agency — they’ll do that for you. You’ll also get the help of a company that works with collection agencies every day, so they know how to negotiate and maximize your savings.
That said, here are some potential issues with hiring a debt settlement company:
- They sometimes promise more than they can deliver.
- There’s no guarantee they’ll be able to save you more than if you did the work yourself.
- The collection agency may refuse to work with certain settlement companies.
- They can be expensive, with some charging thousands of dollars.
On that last note, it’s important to understand that the fees you pay to the company could wipe out a lot of the savings you’d gain from settling. Also, like collection agencies, debt settlement companies have a knack for getting in trouble with government regulators.
For example, while they’re not allowed to collect fees upfront, some of them try to do so.
A debt settlement company could be the right decision if you’re worried about doing it on your own. But it’s important to keep the potential pitfalls in mind before you sign an agreement.
Hire a Debt Attorney
Hiring a lawyer to work with a collection agency is generally a better choice than working with a debt settlement company.
For starters, an attorney can help you explore all of your options before you begin the process of debt settlement. If your situation is in good enough shape to pursue a debt management plan, for instance, a good attorney will tell you that instead of charging you to settle.
Additionally, an attorney can defend you in court if the collection agency decides to sue you. They can also work on your behalf if the collection agency violates your rights as a consumer — and they’ll explain those rights in detail.
Attorneys will also charge a fee for their services, but they can be less expensive than what a settlement company would charge.
Keep in mind, though, that not all debt attorneys are created equal. In fact, some debt settlement companies will use lawyers as a front, so while you think you’re working with a law firm, you’re actually working with a settlement company.
Make sure you meet the attorney in person for your first consultation, and if the lawyer doesn’t deal with the collection agency directly or you can’t even meet with one, that’s a big red flag.
Choosing the Best Path Forward for You
In most cases, it’s best to avoid debt settlement companies because you can’t be completely sure that they’ll always have your best interests in mind. If you do, though, make sure you research how the company has handled other customer debts and whether they’ve had issues with government regulators for violating consumer protections.
In the event that you prefer to have control over the entire process and avoid paying the fees of a debt settlement company or a law firm, you can go through the settlement and negotiation process on your own. If you go this route, though, it’s crucial that you take the time to research the process and learn tips on how to maximize your savings in negotiation.
Finally, if you’re not sure you want to handle the debt settlement process on your own, your best bet is to work with an attorney. A good one will walk you through all of your options to help you find the best fit. They’ll also make sure that you don’t have to deal with the collection agency and that your rights don’t get violated.
Finally, if things get ugly with the collection agency, an attorney can represent you in court for your protection.
If you’re considering debt settlement, take the time to think about all of your options and choose the one that best suits your needs and your goals.