How to Negotiate With Your Creditors and Settle Your Debts

Settle with your creditors and avoid bankruptcy

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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.


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.


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.


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.


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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.
  1. Federal Trade Commission. "Debt Collection FAQs."

  2. Federal Trade Commission. "Debt Relief: A Growing Necessity for Many Consumers," Page 6.

  3. Experian. "Will Settling a Debt Affect My Credit Score?"

  4. Internal Revenue Service. "Topic No. 431 Canceled Debt – Is It Taxable or Not?"

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