Get Out of Bad Debt Using Debt Settlement

Much of what you read about debt settlement tells you to stay away from it, that settlement is only a scam. However, debt settlement is a legitimate way to get rid of bad debt. Thanks to a new Federal regulation for debt relief companies, debt settlement companies have a harder time scamming consumers.

What is Debt Settlement?

In debt settlement, your creditors agree to accept a lump-sum payment that is less than the outstanding balance on your debt. Creditors accept settlements on accounts that are at risk for turning into a loss and more often accounts that have already seen a loss.

Who Can Settle Your Debts?

You can settle your own debts or go through a debt settlement company. In the past, the debt settlement industry has been filled with scams from companies who make promises they never keep. New Federal regulations on debt relief companies will eliminate some of these scams, but some settlement companies have already found loopholes to get around the law.

You don’t have to go through a debt settlement company. You can settle debts on your own. If the debts are already several months past due, charged-off, or at a collection agency, it will be easier to negotiate a settlement than on accounts that are current or less than 90 days past due. You can offer a settlement to a creditor or collection agency by phone or by letter.

Offering a Settlement Payment

Whether you call or send a letter, the gist of what you want to say is this: “I’m having financial trouble and I can’t make regular payments on this debt or pay it in full. I may be able to come up with enough money to settle this account if you’re willing to accept a lower payment.” Include your settlement offer in the letter.

Settlement offers are usually time-sensitive, so you need to be able to pay before the offer expires. So, don’t make an offer until you have enough money to make the settlement. How will you get enough money to settle your accounts? Some debtors settle their accounts after coming into a large sum of money. Others put aside money each month until they have enough to offer a settlement. That’s actually how debt settlement works when you work with a settlement company.

If you don’t have access to enough money to settle your accounts outright – dipping into retirement accounts usually isn’t a good idea – you’ll have to save up the money for a settlement. To do this, you’ll take the money you’re currently paying toward your debts and put it in a savings account each month. Yes, that means any account that’s current will go delinquent, late fees will be added to the balance, the late payment status will go on your credit report, and your credit score will go down in the process. When your debts are already bad, most of these negative actions have already happened so you’re really just taking care of the debt so you can move on with your life and start rebuilding your credit score.

This is a guest post by Frank Collins. Frank is a professional personal and business finance writer who specializes in debt relief options, credit scoring and strategic investments. If you have the courage to attempt a debt settlement by yourself, you can get some help in the form of sample letters at


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One Response to “Get Out of Bad Debt Using Debt Settlement”

  1. D Petersen |  May 28, 2011 at 9:32 am

    The debt settlement scams continue to be pervasive. Although the number of debt settlement companies is decreasing somewhat, this doesn’t mean the survivors are any more legitimate. The FTC does not regulate them.

    The Federal Trade Commission’s regulations which took effect in late October, 2010, did not apply to all debt settlers because the FTC did not have jurisdiction over the debt settlers who used the internet (rather than telephones) for their initial communication with consumer borrowers.

    The telemarketing regulations prohibited up front fees charged by the 80% of the debt settlers that the FTC had authority to regulate. The remaining 20% continue with “business as usual” which is seldom a good thing for the consumer.