Credit Scores & Credit Monitoring What To Do About Bad Credit How to Negotiate With Your Creditors and Settle Your Debts Settle with your creditors and avoid bankruptcy By David Haynes David Haynes David Haynes is a full-time attorney experienced in basic bankruptcy concepts, as well as secured transactions, liens, and lawsuits in bankruptcy court. He currently serves as the senior attorney and privacy officer at the Office of Systems Integration in Sacramento. Over the course of the last decade, he has written about complex bankruptcy topics for various publications, including The Balance and the Loyola Los Angeles Entertainment Law Review. He also provides legal advice relating to complex, sensitive, and high-profile IT contracts. learn about our editorial policies Updated on November 30, 2021 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board Fact checked by Ariana Chávez Fact checked by Ariana Chávez Ariana Chávez has over a decade of professional experience in research, editing, and writing. She has spent time working in academia and digital publishing, specifically with content related to U.S. socioeconomic history and personal finance among other topics. She leverages this background as a fact checker for The Balance to ensure that facts cited in articles are accurate and appropriately sourced. learn about our editorial policies In This Article View All In This Article Make Initial Contact Have a Strategy Start Your Offers Low Keep a Professional Tone Get a Written Settlement Agreement Effects of Debt Settlement Photo: fizkes / Getty Images Are you looking for ways to avoid bankruptcy? If you have some cash, but not enough to pay your debts outright, you can try negotiating new payment terms or even a payoff for less than you owe. These negotiations can lead to lowered account balances, affordable monthly payments, or even complete resolution of the debt. Although this strategy is generally geared toward settling with private and institutional creditors (such as credit card companies and banks), it may also be applicable to government creditors, such as the IRS. Learn how to settle your debts by negotiating with creditors. Note If the prospect of dealing with several creditors at once seems daunting, you might consider enlisting the help of a nonprofit credit counseling agency, which can arrange a debt management plan and negotiate for you. Another option is debt settlement provided by a debt relief agency, but that process will likely have significant effects on your credit score. Make Initial Contact Before you talk with a collector, it is best to know your rights. Collectors are bound by the Fair Debt Collection Practices Act and many similar state statutes. If you know your rights and understand the process before you start, you'll be better able to negotiate. If you are very far behind on your monthly payments, then a creditor or collection company is probably already calling. If so, the easiest way to start negotiations is to inform the caller that you wish to settle the debt. Set up a time with a creditor or collector to call and discuss a settlement. If the creditor has not been calling you, you can initiate contact. When you talk with the creditor: Act confidently and decisively.Ask for clarification if you don't understand something.Don't agree to any terms unless you completely understand what is expected from you.Don't agree to anything until you see it in writing. Have a Strategy The general strategy of negotiating with your creditors is fairly straightforward: Pay what you can reasonably afford on the outstanding debt that you owe. This, of course, must be balanced with how much a creditor is willing to accept. Generally, creditors will prefer a lump-sum payment over regular payments. If that's the case, a good strategy is to offer a one-time payment at a reduced amount. For example, if you owe $10,000 to a credit card company, you might wish to offer a one-time payment of $5,000. This allows the company to collect a significant portion of the debt, which they may be willing to do if they are unlikely to get more. Note Only offer what you know you can pay, within a reasonable period of time (such as within 30 days). Start Your Offers Low You have nothing to lose (and maybe a lot to gain) by starting low. This means that you should certainly not make the highest offer you can afford at the outset. A creditor will likely counter your offer with a higher amount. If you start low, this will make it more likely that the creditor's counter-offer will be closer to the range you can pay. Keep a Professional Tone It is essential to maintain a positive atmosphere and tone when dealing with creditors. Although a bill collector may be unpleasant, if you are professional and positive, you will be more likely to reach a settlement. People are more willing to work with those who have a good attitude and treat others well. This may be difficult, but it is important to achieve the goal of debt settlement. Not every creditor will respond positively, but even if only some of your creditors agree to a settlement, this still gives you much more wiggle room for repaying the others. Get a Written Settlement Agreement A settlement agreement protects you if you pay the creditor, and the creditor changes its mind and demands payment on the remaining amount. A settlement agreement will absolutely be necessary if a creditor has already sued you. The settlement agreement should always be in writing. Although it is not necessarily cost-effective to involve an attorney, it is sometimes in your best interests to do so. Effects of Debt Settlement Debt settlement can have the tremendous positive effect of allowing you to avoid filing for bankruptcy. However, the downsides include having to work with multiple creditors and no guarantees of success. Keep in mind that a debt settlement will be reported on your credit report and may lower your credit score. However, the debt is already on your credit report, bringing your score down. A debt settlement gives you the opportunity to start rebuilding it. Note You may have to consult an accountant to determine whether the debt settlement will be considered a taxable gain that you will have to declare on your taxes. Some kinds of forgiven debts are considered taxable income, while others are granted exceptions. Although debt settlement via creditor negotiation is not a perfect solution or the right fit for everyone, it may be an effective and viable option for many. Settling your debts can save you from bankruptcy and give you the freedom to start rebuilding your finances. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Trade Commission. "Debt Collection FAQs." Federal Trade Commission. "Debt Relief: A Growing Necessity for Many Consumers," Page 6. Experian. "Will Settling a Debt Affect My Credit Score?" Internal Revenue Service. "Topic No. 431 Canceled Debt – Is It Taxable or Not?"