How to Settle Debts if You Cannot File Bankruptcy

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1Settling Debts on Your Own

2Using a Debt Settlement Company

3Signing Up for Debt Management

4Identifying Other Options

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You might not be able to file for bankruptcy because you filed too soon in the past. Unfortunately, you lose one of your strongest bargaining chips if you can’t threaten a creditor with bankruptcy. Nevertheless, you can still negotiate debt settlements. Debt settlement works best with unsecured debts, like credit cards or medical bills. You should identify how much you can afford to pay in one lump sum and then reach out to your creditors to negotiate. If you have other debts—a mortgage, unpaid taxes or student loans, or unpaid child support—then you should identify other options.

Steps

Method 1

Method 1 of 4:

Settling Debts on Your Own

1. 
   1
   Identify your types of debts. Not all debt is created equal. You might be able to negotiate a settlement with some creditors but not others. For example, the following are common debts people neglect to pay:

   • Unpaid child support or alimony. Your child support or alimony is set by a judge and can’t be lowered other than by court order. A judge won’t forgive you for failing to pay child support or alimony, so this debt can’t be negotiated down.
   • Back taxes. Typically, it is very difficult to lower the amount of taxes you owe. However, you might be able to get an installment agreement to pay back the amount of taxes over several years.
   • Secured debt. A debt is secured when you pledged an asset as collateral. If you don’t pay, the creditor can seize the collateral. Secured creditors, such as your mortgage company, may be willing to suspend payments temporarily or change the terms of your loan. However, they are unlikely to lower the amount that you owe.
   • Unsecured debt. Credit card debt, medical debt, and personal or payday loans are generally “unsecured” debts. This means there is no collateral securing the loan. You will probably be most successful settling these debts.
2. 
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   Figure out the largest lump sum you can offer. Debt settlement typically involves offering a lump sum. In exchange, the creditor writes off the remaining unpaid debt. Many creditors are willing to accept a lump sum instead of setting up a repayment plan, since a lump sum is guaranteed money.

   • Go through your savings accounts and other financial accounts. Check how much money you can pull together.
   • If you need to, ask friends or family for an interest-free loan.
3. 
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   Meet with an attorney to discuss your options. Everyone’s situation is different. For example, some debts are so old that the creditor or a debt collector can’t sue to collect them. You should know this before beginning to negotiation. Meet with an attorney to discuss your strategy for tackling your debts.

   • You can get a referral to an attorney by contacting your local or state bar association.
   • Once you have a referral, call up the attorney and ask to schedule a consultation. Ask how much the consultation will cost.
   • If you are low income, you might qualify for legal aid. You can find the nearest legal aid office by visiting the Legal Services Corporation’s website at http://www.lsc.gov.
4. 
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   Call the creditor. Make an initial contact over the phone. You don’t know how the creditor will respond. They may be willing to help you. Find the phone number on the bills you receive and call.

   • The sooner you call the better. You want to negotiate directly with your creditor and not a debt collector, if possible.
   • When you call, try to pin down how much you owe in total. This information might not be clear from your bills. For example, interest might accrue daily, and several days or weeks might have passed since you received your bill.
5. 
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   Explain why you have fallen behind. You should be able to explain in a few sentences why you can’t pay your bills. Remember to tell a consistent story each time. For this reason, it helps to be honest since you will not forget the truth.

   • You could say, “I was diagnosed with cancer two months ago and have had to pay for treatments. I haven’t been able to contribute a penny to anything else.”
   • Or you could say, “I was laid off last month and am looking for work. I need some time to catch up on the bills.”
6. 
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   Remain calm. You are probably feeling incredibly stressed. Nevertheless, you don’t benefit by getting angry. Always remain calm. You should be prepared to hear the person on the other end say, “No.”

   • You should expect threats of being sued or, if you have a secured loan, of losing your property. The more prepared you are mentally for these threats the easier you will be able to handle them.
7. 
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   Take detailed notes. You want to fully document the conversations you have with bill collectors. Always note who you are speaking to, as well as the day and time.

   • Summarize what the person on the other end says. Also write down what you said in response.
   • Sometimes, bill collectors make illegal threats. For example, a bill collector might threaten to put you in jail. It is illegal to make those kinds of threats, so you want to fully document them.
8. 
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   Draft a debt negotiation letter. After you’ve figured out what you can afford, you should make a formal offer to settle the debt. You can draft a debt negotiation letter and mail it to the creditor. Send a letter even if the creditor sounded resistant to negotiating over the phone. Remember the following:

   • Format the letter like a standard business letter.
   • Include your essential details: your account name and number, as well as the amount you currently owe.
   • Explain why you can’t make the monthly payment.
   • Make an initial offer. Ideally, you want to repay 40-60% of the total debt, so make your initial offer on the low end. You can’t be more aggressive because you can’t threaten bankruptcy.
   • Mail the letter certified mail, return receipt requested and keep a copy of the letter for your records.
9. 
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   Continue to negotiate. The creditor might not agree to your initial offer. In this situation, you will need to continue to negotiate. If the creditor insists you pay 90% of the amount owed, you can increase the amount you are willing to pay—for example, from 40% to 45%.

   • Remember not to agree to amount you can’t afford. Go back to your proposed monthly budget to double check that you can make payments.
10. 
    10
    Negotiate how the creditor will report the debt. You want to harm your credit score as little as possible. Accordingly, you should try to negotiate how the creditor will report the debt to the three credit reporting agencies. For example, you want the creditor to agree to report the debt as “paid in full.”

    • You should also try to get the creditor to remove negative information from your credit report.
11. 
    11
    Get your agreement in writing. Once you reach an agreement, be sure to get a settlement agreement or Letter of Agreement from the creditor. The agreement should state the amount you will pay. It should also outline the interest and penalties you agree to pay.

    • If you don’t get something in writing, then the creditor could claim that no agreement was reached.
    • Remember not to make any payment until you have a signed agreement in place.
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Method 2

Method 2 of 4:

Using a Debt Settlement Company

1. 
   1
   Understand debt settlement programs. Debt settlement programs are usually offered by for-profit companies. You pay regularly into a special savings account—usually for 36 months or so. Once the debt settlement company thinks that enough money has accrued in the account, they will reach out to your creditors and try to negotiate a lump sum payment.

   • You should understand that debt settlement programs aren’t doing anything you can’t do on your own. You can also negotiate a lump sum payment with your creditors. However, debt settlement companies often claim that they are better at negotiating than you are.
   • Also realize that not all creditors will agree to settle for a lump sum. Debt settlement companies can’t work magic, though they may be helpful depending on your situation.
   • Debt settlement might be helpful if you are afraid of negotiating on your own or you feel pressed for time.
2. 
   2
   Research debt settlement companies. There are many scammers working in the debt settlement field. You shouldn’t sign up with one until you have thoroughly researched them. Pay attention to the following as you analyze debt settlement companies:

   • Avoid promises or guarantees. A company cannot “guarantee” anything. For example, they may guarantee to settle credit card debt for 30-60% of the amount you owe. In truth, they can’t promise this result.
   • Refuse to work with a company that requires upfront fees or charges any fee before settling the debt.
3. 
   3
   Check if the debt settlement company has been sued. Search online by typing in the name of the company and “complaints.” Also check with your local Better Business Bureau to check complaints.

   • You can expect some people to be unhappy. But watch out for complaints alleging that the debt settlement company didn’t explain fees properly or skimmed money off the top that they weren’t entitled to.
   • Also check with your state’s Attorney General whether lawsuits have been filed.
4. 
   4
   Read the debt settlement company’s disclosures. Each debt settlement company must provide you with certain information. If they don’t, then walk away and refuse to do business with the company. A company should make the following disclosures:

   • The company’s fees and conditions of service. Generally, you pay the company a percentage of the debt or a percentage of the amount they saved you.
   • How long it will take before the debt settlement company reaches out to your creditor and offers to pay the debt.
   • The negative consequences if you stop making payment. Debt settlement companies often recommend that their clients stop paying their creditors. The company should acknowledge that stopping payment will negatively impact your credit history and potentially expose you to a lawsuit.
   • Your entitlement to the interest on the money you deposit into the savings account.
   • Who manages the account. It should be managed by an administrator who is not affiliated with the debt settlement company.
   • Your right to withdraw your money from the account at any time.
5. 
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   Sign a contract. If you choose to work with a debt settlement company, then get a contract. Read it thoroughly and meet with a lawyer if necessary to make sure that you understand what you are agreeing to. Sign the contract and keep a copy for your records.
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Method 3

Method 3 of 4:

Signing Up for Debt Management

1. 
   1
   Consider debt management instead. Debt management is an alternative to debt settlement. Credit counselors might offer debt management plans. With these plans, you deposit money with your credit counseling organization and they pay off your unsecured debts with your creditors. As a condition of using the plan, you might need to agree not to take out any more credit.

   • Unlike debt settlement, debt management usually can’t reduce the principal owed. However, the credit counselor might be able to get your creditors to forgive penalties or fees and agree to lower interest rates.
   • They also might be able to stretch out the repayment period, thus lowering your monthly payment.
   • You should always check whether you could have gotten your creditor to agree to these reductions on your own. If so, you don’t need to use a debt management plan.
2. 
   2
   Find credit counselors. Most reputable credit counselors are non-profits. You can find reputable credit counselors in a variety of places, including the following:

   • universities or branches of the U.S. Cooperative Extension Service
   • housing authorities
   • credit unions
   • military bases
   • U.S. Trustee’s website: https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111
3. 
   3
   Check how much you can afford to pay. Before beginning a debt management plan, you need to figure out how much you can pay. You won’t be a strong negotiator if you initially agree to pay an amount of money you can’t afford. Go over your income and expenses to find out what is the most you can pay on your debts.

   • Remember to list income from all sources. Income includes wages and tips but also Social Security payments, disability payments, alimony, etc.
   • Expenses are things like your rent or mortgage, groceries, utilities, health insurance, and educational expenses.
   • Also think about generating more income, possibly by working a part-time job.
4. 
   4
   Make monthly payments. If debt management works for you, then you must make your monthly payments to the credit counselor. The counselor then forwards on the payments to your creditors. Debt management plans often take four or more years to complete.

   • Check with your creditors that your bills were paid. Always stay on top of whether the credit counselor is doing what they say they will.
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Method 4

Method 4 of 4:

Identifying Other Options

1. 
   1
   Modify your child support or alimony. Move quickly if you can’t make your court-ordered payments. Although the judge won’t forgive unpaid child support or alimony, the judge might agree to stretch out the repayment over a year or so.

   • See Lower Child Support or Lower Your Alimony Payment for more information.
2. 
   2
   Work with your mortgage company. A mortgage company might be willing to modify your mortgage. They might not lower the principal. However, you could negotiate another fix, which could help you, such as the following:

   • Agree to forbearance. This means that the mortgage company agrees to let you stop making payments for a period of time until your financial situation improves.
   • Lower the monthly interest rate.
   • Convert an adjustable-rate mortgage to a fixed-rate mortgage.
   • Stretch out the repayment period, e.g., from 30 years to 40 years. You will end up paying more in total, but the monthly payments should be lower.
3. 
   3
   Change your student loan repayment schedule. Student loan expenses have increased over the years, so it is not unusual to find that you can’t make your monthly payments. However, you generally have plenty of options for reducing your monthly payments. Some options include:

   • Deferment. You can defer making payments if you are suffering economic hardship.
   • Forbearance. Your lender allows you to stop making payments for a set amount of time or lowers your payments. You can qualify if your monthly payments are more than 20% of your monthly income.
   • Income-based repayments. Depending on your loan, you can lower your payments based on family size and income.
   • Extended repayment. You can stretch out the length of time to pay your loans, e.g., up to 25 years.
   • Other. Depending on your loan, you may have several other options.
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