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How to Arrange a Debt Settlement

If you have a debt that you can’t afford to repay in full, a good option may be to negotiate a settlement. This is when you and your creditor consent to settle an account balance for less than what you owe. Whatever reduced sum you both agree on is the deal. Once the creditor accepts your offer, you are no longer responsible for paying the forgiven balance.

It is most typical to make a settlement with a collection agency. Because these businesses buy accounts from original creditors or other collection agencies for a percentage of the balance, they may accept less than the original debt. You may also arrange a settlement with an original creditor, whether it is your credit card company, a dentist, or anyone else you may owe. To increase the likelihood that the creditor accepts your offer, give a reasonable explanation for not being able to pay the full balance.

Process of Settling

Determine the amount that you have to go toward the debt. In most cases you must have the entire figure in one lump sum – creditors rarely accept partial payments on a settlement. You may be able to come up with some money by tapping your savings accounts, using a tax refund, selling property, or even asking a friend or family member for a loan (as long as you can pay them back, of course). If your creditor has already made an offer, you can either accept it or try to negotiate an even better deal.

How low will a creditor go? That is entirely up to them, but the age of the debt is a major factor. Typically, the older the debt, the less the creditor may accept. If you can’t be taken to court because the statute of limitations for lawsuits has run, it is possible to pay very little of the balance. The statute of limitations is the number of years a creditor has to sue you for a debt. This time frame varies, so check your state’s law regarding lawsuits and unsecured debts. The National Association of Attorneys General publishes a list of Attorneys General for each state: (202) 326-6000/ They will be able to provide you with statute of limitation information for your area.

Once you have determined your offer and have the money to send, call the creditor and begin to negotiate. Explain that you would like to settle the account and present your offer. The creditor may accept or reject your proposal, or they may make a different offer. At that point you would bargain until you reach an agreement. If they accept a reduction, you may also ask that they report the settled account as paid in full.

Some people find speaking with creditors intimidating, and if you do, you may choose to negotiate entirely by mail instead. However, even if you start the process over the phone, make the final arrangement in a letter. Send it certified mail, return receipt requested. Keep copies of all written correspondence for your records.


Settling a debt is not the right choice for everyone. If the debt is nearing the time where it will naturally age off of your credit report, leaving it alone until it is no longer evident could be a better option. Most negative notations remain on a credit report for seven years; starting either from the date the original creditor charged the debt off and sent it to a collection agency, or from when you last made a payment. If you have the money to pay in full, it is usually best to do so, since it will reflect most positively on your credit report. Finally, be aware that if you choose to settle a debt, there will likely be a tax consequence for the forgiven sum.

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