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How to settle your debts for less than what you owe

Life throws us curveballs, and some of those may result in substantial debt. If the amount of your debt feels overwhelming,
you may want to consider negotiating with your creditors to pay less than the full balance. There are two options:
You can negotiate with individual creditors yourself, or you can work with a third party who will negotiate on your behalf
to pay off debt on delinquent, unsecured credit accounts and personal loans over a specified time (or all at once).

For example, if you have a $10,000 credit card balance, you may only be required to pay
$4,000 to close and “settle” the account and have the remaining $6,000 forgiven. 



The problem with traditional debt settlement companies

Not all companies that offer debt settlement services have your best interests in mind. Some charge hidden and excessive fees. Some negotiate your accounts in an order that gets them paid faster rather than saving you the most money. When selecting a provider to help you negotiate with creditors, you can start by checking out the company with your state Attorney General and local consumer protection agency.In addition, the FTC cautions against using any company that:

  • charges any fees before it settles your debts
  •  touts a “new government program” to bail out personal credit card debt
  • guarantees it can make your unsecured debt go away
  • tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
  • tells you it can stop all debt collection calls and lawsuits
  • guarantees that your unsecured debts can be paid off for pennies on
    the dollar

You can find out more about different settlement companies here.

Risks and alternatives​

Negotiating with creditors may or may not be the right option for you. You need to consider the risks, such as the possibility that you’ll be sued and, if you miss a payment, you may be back at square one. It’s also wise to consider how it impacts your credit and that you may owe taxes on the amount of debt forgiven on your accounts.

We recommend consulting a tax attorney or tax adviser for information specific to your situation, but here are some things to consider regarding the potential impact on taxes:

  • Not everyone will owe taxes on their settlements.
  • If you have a debt that is settled for less than the original balance, and the difference (the forgiven portion of the debt) is more than $600, you’ll need to report this as income. You should receive a 1099-C tax form from your creditor.
  • Remember, if you end up owing taxes, it’s because you saved money. Just as you set aside funds to use for settlements, if you’re solvent and owe taxes on any forgiven debt, you must also set aside funds to pay the taxes.

How does negotiating with creditors impact my credit?

There are pros and cons to settling debts. Creditors will actually not settle with you unless you make late payments. These late payments have a negative impact on your credit score. In fact, on-time payment history is roughly 30% of how your credit score is factored. It’s likely, however, that you’re considering settling your debts because you’re already late on at least some of your accounts. Because this is already impacting your credit score, settling your accounts can help your credit heal and your credit score recover.

If debt settlement is not the right choice for you, some alternatives you may consider are reducing your interest rates and eliminating fees, consolidating your debts, or filing for bankruptcy.

Helpful tools

While you can negotiate with creditors directly, do your own research first. You can calculate what you might save with a debt settlement calculator and then use a debt consolidation calculator to assess if this is a viable option for you instead. You can also use a credit card payment calculator to assess how long it will take to pay off your credit card(s) if you don’t choose a settlement plan.

Debt Settlement Agreement — Build the contract for your settlement documenting the criteria you negotiate with your creditor.

Credit Dispute Letter — Draft a letter to dispute information on your credit report. These are available online.

Debt Consolidation Calculator – Assess if debt consolidation is a viable option for you. 

Credit Card Payment Calculator – Discover how long it will take to pay off your current credit card balance.

While the tools listed above can help you explore your options for getting out of debt, you may find it challenging to determine the best course of action for your situation. That’s where Resolve comes in.

Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more.  


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