Managing Debt For Dummies
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A debt collector may agree to let you pay less than the total amount you owe on a debt. Although settling a debt shows up as negative information in your credit report, negotiating a settlement indicates that you took responsibility for paying as much as you could on the debt. Your credit report will show that the settled debt is not outstanding anymore.

an approved debt settlement agreement.
Credit: ©

Here's how to approach negotiation on debt settlement with a debt collector:

  • Determine what you can afford to pay. Review your budget. Do not offer more than you can afford. When you know how much you can afford, begin your negotiations by offering less.

    When you negotiate with a debt collector do not provide bank account numbers, your place of employment, or references.

  • Ask the debt collector to remove all negative information from your credit records related to the settled debt that has been added to your records since the debt was turned over to him. (The debt collector cannot remove any negative information about your debt that was added to your credit files when the debt was still with the creditor.) Then check your credit histories to make sure that the negative information has been removed.

  • Put the deal in writing. Get the details of the agreement in writing before you give the collector any money. It's also a good idea to hire a consumer law attorney to review the agreement. At a minimum, your agreement should clearly state:

    • How much you have agreed to pay.

    • Whether you will pay the settlement amount in a lump sum or over time.

    • When the lump sum or payments are due.

    • How you will make the payment(s), such as via an electronic bank transfer or with a cashier's check. Avoid giving a debt collector a personal check.

    • That the debt collector agrees to report to the credit bureaus that your debt has been "paid in full" as soon as the settlement amount is received.

    • Any concessions that the debt collector has agreed to make.

    • Conditions that breach the agreement and the consequences of the breach.

    • Do not sign the agreement until it reflects everything you agreed to and unless you understand everything in it. After you sign the agreement, make a copy for yourself and file it in a safe place.

      If the debt collector won't put your agreement in writing, prepare an agreement yourself; sign it; and send it to the debt collector via certified mail, return receipt requested.

    When you encounter a debt collector who refuses to negotiate, contact the creditor who turned your debt over to the debt collector. Find out if the creditor may be willing to work out an agreeable compromise.

If you don't feel confident negotiating a debt settlement agreement, hire a consumer law attorney to do it for you, especially if the debt you owe is substantial. The mention of bankruptcy may motivate a debt collector to settle your unsecured debt for less than what you owe.

In the end, debt settlement may cause you to owe more in federal income taxes because the amount that you don't pay is reported to the IRS as income. However, depending on the state of your finances when you settle the debt, the IRS may decide that you are insolvent so you won't owe any federal taxes.

About This Article

This article is from the book:

About the book authors:

John Ventura: John is a best-selling author and a nationally boardcertified bankruptcy attorney. He is also an adjunct professor at the University of Houston Law School and the director of the Texas Consumer Complaint Center at the Law School.
As a young boy, John dreamed of becoming a Catholic priest so he could help everyday people, and he spent his high school years in a Catholic seminary. After graduating, however, John decided to achieve his dream by combining journalism with the law. Therefore, he earned an undergraduate degree in journalism and a law degree from the University of Houston Law School. Later, he and a partner established a law firm in Texas, building it into one of the most successful consumer bankruptcy firms in the state. He subsequently began a successful consumer law firm in South Texas.
Today, as Director of the Texas Consumer Complaint Center, he supervises law students as they help consumers with their legal problems. He is also a regular speaker at law conferences around the country and serves on the Bankruptcy Council for the Texas Bar Association.
John is the author of 13 books on consumer and small business legal matters, including Law For Dummies, 2nd edition; The Everyday Law Kit For Dummies; Divorce For Dummies, 2nd edition; and Good Advice for a Bad Economy (Berkeley Books). John has been interviewed about consumer money matters by numerous national media including CNN, NBC, NPR, Bloomberg Television & Radio, The Wall Street Journal, USA Today, Newsweek, Kiplinger’s Personal Finance, Money, Inc. Martha Stewart’s Living, Bottomline, Entrepreneur,,, and In addition, his comments and advice have appeared in major newspapers around the country, and he has been a frequent guest on local radio programs.

Mary Reed: Mary Reed is a personal finance writer who has coauthored or ghostwritten numerous books on topics related to consumer money matters and legal rights. The books she has coauthored with John Ventura include The Everyday Law Kit for Dummies, Divorce For Dummies, and Good Advice for a Bad Economy (Berkeley Books). Mary has also written for the magazines Good Housekeeping, Home Office Computing, and Small Business Computing, and she has ghostwritten numerous articles that have appeared in national and local publications.
Mary is also the owner of Mary Reed Public Relations (MR•PR), an Austin, Texas-based firm that provides public relations services to a wide variety of clients, including authors, publishers, attorneys, financial planners, healthcare professionals, retailers, hotels, restaurants, and nonprofits.
Prior to starting her public relations business and writing career 20 years ago, she was vice president of marketing for a national market research firm, marketing director for a women’s healthcare organization, and public relations manager for Texas Monthly, a national award-winning magazine. She received her MBA from Boston University and her BA from Trinity University in Washington, DC.
In her free time, Mary serves on the board of a community development corporation in her neighborhood. She also enjoys long morning bike rides, road trips with her husband, gardening, working her way through the stack of books by her bed, taking care of her six cats, and spending time with her family and many friends.

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