**Disclaimer – Debtprison.net does not administer legal or financial advice. The contents of this website are my opinions on collection agencies and how to deal with them. Nothing on this website should be interpreted as legal advice or council. No opinions on this website should be used to replace the advice of your financial advisor or your legal council.

I recently wrote a new article on the subject of debt settlement entitled Helpful hints for Debt Settlement. Helpful hints provides a short list of do’s and don’ts.

I once considered settling my debts using one of those agencies that ran commercials on t.v. and radio. You can read about my negative experience with this in a previous article Reasons not to file bankruptcy or settle your debts. However, if that article still doesn’t convince you to take the long road, here’s some advice for settling your credit card debt on your own. This article is full of useful information about the consequences of defaulting on your creditors.  So take your time to review this post and feel free to add your comments at the end. Related Debt Prison articles you should read are Get Everything in Writing: Collection Agencies and Their Lies and How to Deal With Collection Agencies.

Please take a few minutes to read Tell Debt Settlement Companies to Kiss Your Ass, which is actually an email from one of my readers who describes her personal experience with two different debt settlement companies.  This will give you an inside look at how these companies work and hopefully convince you not to use them.  See also, Restrictions on Wage Garnishment for Debt Collection.

When to consider settling your debts

At this point you should already have a tight budget you are following. You might consider settling your debts when you can no longer meet the minimum payments. For example, for whatever reason your income is not high enough to pay all of your bills. If you are in this position it’s my belief that you should stop payment on non-critical items. Critical items are food, vehicle, rent, electricity, water, and a phone. Non-critical items would be credit card debt, student loans (these can be deferred for now), and medical bills.

Make a list of your critical and non-critical obligations. Write down the critical items on the left side of a sheet of paper and the non-critical on the right side of the paper. At the bottom of each list write the total amount of debt for both categories. This may be a sobering process for you. It should be crystal clear in your mind how much is owed to each and every creditor. I currently owe money on five different accounts for a total of $49,000. I can tell you within a hundred dollars how much I owe on each one of them. This keeps me focused on lowering my debt and controlling my spending.

In addition to a tight budget you should consider ways to lower your critical expenses. Perhaps you could move in with a friend or relative and pay little or no rent until you get your debts back on track. Also, are there tangible items that you could sell to generate additional cash? Start asking yourself these questions. Remember that the worse your credit score is, the higher interest you will pay on future loans. So let’s try to start thinking about the long term as well.

Why you shouldn’t use debt settlement companies

It is true that debt settlement companies provide a service. There are two points that should be made in regards to why debt settlement companies are unnecessary. The first point is that you can perform the exact same functions that they do. This article is about how to settle your debts on your own. Well basically you accomplish this by going through the same steps that debt organizations do. Why involve a third party in a situation like this? The credit card companies had rather deal with you directly. And although it may not be any fun – you are better off if you will deal with them directly. This means talking on the phone with them and writing letters. I know how stressful this can be, but it’s a necessary evil.

 The other point is that debt settlement companies charge you for the service they render. When I contacted a debt settlement agency they charged me $50 just to sign up for their program. I would pay them $600 per month. Of this they would keep $60 for themselves and put the other $540 into an account (their company account – not a bank account with my name on it). So here I am broke, not paying my credit card debt, and paying a ridiculous $60 per month for a false sense of security. In addition, the $540 is going into their account. This is a bad idea. These companies are not banks. If you were to change your mind in a couple of months you can’t just go and make a withdrawal. There is a complicated process and you may not even get all of your money back. I’ve heard some bad stories. After reading the sign up information I simply called them back and said no thanks (I still had to sign and fax a waiver to them)!

What will happen when you stop making payments

For the first month or two you will get some phone calls from your credit card company. You can answer if you want and just let them know that you don’t have the money right now to make any payment. If you make a small payment this will only postpone the debt settlement process for you. So I wouldn’t make any payment at all. It is a good idea to write them a letter explaining why you cannot make payments at this time. It’s always a good idea to send every letter as a registered letter. This way you will know for sure that they received it. Keep the receipt from the post office. If you haven’t already made a file for each creditor – you should do so at this time.

Although you are not making payments the credit card company will continue to add late fees, over the limit fees, and minimum balance due to your account. I recommend keeping track of the fees and interest added to your account from the first month you miss your minimum payments. You may be able to talk them into waiving these fees when they get ready to settle your debt. Meanwhile back at the ranch you should be saving any money you have. But I wouldn’t keep it in a bank or any account that could be traced by an investigator. At home in a safe or a safe deposit box would suffice.

The sixth month is often the magic month. After you’ve gone 6 months without making a payment of any kind the creditor will probably be ready to settle your debt or turn it over to collections. If possible you want to avoid the bank turning your account over to an outside collection agency. Like I said earlier you don’t want to involve another party to this situation. This will complicate your ability to settle this debt and put it behind you for good. If your account goes to an outside collection agency expect the phone calls to increase as they love letting their automated computer dial your phone number. You should keep on file any letters sent to you in regards to your account.

The goal of debt settlement

The goal is to have the bank accept a partial percentage of what’s owed. For example, if you owe them $6,000, maybe they will accept $3,000 as payment in full. They would rather get $3,000 than nothing at all. Now this won’t work if you don’t have any money to offer them. So you must have cash somewhere that you can use to meet this $3,000 obligation. The purpose of debt settlement is to keep you from having to file bankruptcy. If you file bankruptcy then your creditors will most likely end up receiving nothing. You also want the creditor to send you a letter stating that this $3,000 is “payment in full.” They can verbally agree to settle your debt, but if you don’t have this in writing you could be in trouble. They might just send you a bill for the other $3,000 and act as if they don’t recall the conversation.

You want your credit score to be as high as possible. Having the bank close the account and stating “payment in full” will help keep your credit score high. If you don’t demand this your credit report will indicate that the account was closed and you failed to pay the $3,000. Remember, if you have the money to settle the debts then you are in control. You have money and the banks can get it – but let it be on your terms.

Get everything in writing

Never agree to send them payments until you receive a letter from them stating that this $3,000 will be regarded as “payment in full.” And that this payment completely 100% fulfills your obligations to this debt. If you don’t receive the letter then they don’t receive a payment. And when you pay them send a money order and send it overnight. Do not send a check as this will give them your checking account numbers. This could also come back to haunt you. If they refuse to put it in writing then they aren’t serious.

If you are dealing with an outside collection agency (the bank sold the debt to a third party) the rules are the same. But before settling with a collection agency contact the original creditor first and make sure that you can’t settle with them directly. If they say “NO” because they sold the debt then deal with the collection agency. But here’s the tricky part. There should be no grey area. What if you receive a letter from the collection agency stating that $3,000 is payment in full and you pay them, but the bank comes back later and bills you for the remaining $3,000? I’ve heard of this happening as well. So make sure that dealing with said collection agency satisfies this debt in full. Get the agreement in writing and keep every letter. Don’t forget to send all letters registered and keep the receipts.

The negative side of debt settlement

The bad thing about settling your debts is that you aren’t keeping your word. You agreed to honor a loan and you haven’t. This bothers most folks as it should. Settling your debts can affect your credit score. Your score is already affected because of the months you went without making payments. It may be further damaged by creditors reporting that your account was “settled”. This will lower your score even further. Remember, this means that on future loans you will pay higher interest. That’s why getting the “paid in full” or “paid as agreed” is so very important.

The debt settlement process is very stressful. Your phone is ringing off the hook and the conversations can be intimidating. Try to remain calm and stand your ground, you may be able to get through this without hurting your credit that much. You can check your credit report for free every 4 months at annualcredireport.com. I recommend you keep a close eye on this report, it gives you an idea of where you are financially and helps keep you focused on the consequences of debt.

Discuss this article, share ideas, and meet new people at Debt Prison Forums.

Related Articles

* Restrictions on Wage Garnishment for Debt Collection

* The Fair Debt Collection Practices Act

* Reasons not to file Bankruptcy or Settle Your Debts

* Can you go to jail for not paying your debts?

* How to deal with collection agencies

* Sample Debt Validation Letter

* Information on Credit Card Balance Transfers

* How I Escaped Credit Card Debt

* What You Should Know About Credit Cards

* How to seek bargains for food and clothes