1. DEBT SOLUTIONS

7 Steps to Prepare For the Debt Settlement Process

7 Steps to Prepare For the Debt Settlement Process
Key Takeaways:
  • To get ready for debt settlement, tighten up your budget. You’ll want to cut expenses and build savings to be in the best possible position to negotiate.
  • Organize your debts. Debt settlement doesn’t work for secured debts like car loans, or federal student loans. Focus on unsecured debts like credit cards and medical bills
  • Get familiar with negotiation tactics, learn what your rights are, and let your family in on what’s going on. They could provide key support throughout the process.

If you’ve considered all the options and decided debt settlement is the best solution for your financial problems, it’s time to get ready. Preparation could make the debt settlement process a success.

Step 1: Find your rock-bottom budget

The vast majority of people in debt don’t get rid of it for free. Unless you qualify for Chapter 7 bankruptcy, you’ll need to pay something. 

In the long run, settling debts could help you find more breathing room in your budget. First, though, you need to brush up on budgeting, and cut expenses to the minimum. 

To make debt settlement work, you need to have something to offer your creditors. Cutting expenses could help you build savings that you can use to settle your debts. It also helps you figure out how much money you could put toward payments each month if you’re able to negotiate a payment plan. 

Cutting expenses always involves sacrifice. That can be tough. Keep your goal in mind. Imagine your future, where you have enough money to make sure all of your bills are paid and you can even save some a little every month. When it comes to getting rid of debts, the potential long term payoff is worth the pain of short-term financial sacrifices.

Step 2: Make sure your necessary expenses are covered 

If there are any expenses you anticipate in the months ahead that you absolutely can’t avoid, make sure you can afford them before you make a settlement offer. 

That doesn’t mean you should splurge on one last vacation or a luxury purchase before you get serious about debt settlement. That kind of spending weakens your negotiating position. 

However, if you know your roof leaks, get it fixed. That’s money you can’t offer a creditor. 

Step 3: Triage your debts

Triage is the process medics use to prioritize who needs treatment first in an emergency. You can sort through your debts in a similar way.

Not all debts are good candidates for debt settlement. Creditors are unlikely to accept a reduced amount for secured debt (when your loan involves collateral, something of value that can be take by the creditor for non-payment). In other words, if you default on your car loan, they’ll take the car. Unless you’re willing to give up the car, your car loan payment would be a “necessary expense” (see above). Since debt settlement won’t help you with secured debts, you might consider other debt relief options.

Government student loans also can’t be negotiated. There may be other payment options available to make these more affordable. Those should be pursued separately from the debt settlement process.

This leaves all your unsecured debt. That includes credit card balances, unsecured personal loans, private student loans, and medical debt. Creditors you owe these types of debt may be willing to negotiate.  

Step 4: Research debt settlement options

You can negotiate with creditors yourself, or you can work with a debt settlement professional. If you negotiate on your own, first learn the best way to approach creditors, and what types of offers they are likely to accept. 

If you decide to work with a debt settlement company, research the background of any firm you’re considering. Here’s a checklist of things to look for:

  • Has been in the debt relief business for at least several years

  • Has a track record of success with a large number of clients

  • Communicates clearly and openly about how its process works

  • Offers well-trained debt experts to assist you

  • Won’t charge an upfront fee

  • Is a member of a reputable industry association

Step 5: Prepare your responses to creditors

Until you reach a debt settlement agreement, it’s likely that creditors and collection agencies will continue to contact you. Figure out in advance how you’ll respond, and limit the information you share with them. If you work with a debt settlement professional, they should help you with a communication strategy before the process begins.

As part of this preparation, learn your rights under the Fair Debt Collection Practices Act. This law limits how often debt collectors can contact you, how they can approach you, and what information they must provide. 

Step 6: Tell your family what to expect

If you have a family, they could be affected by the debt settlement process. Your budget and access to credit will be limited. Also, family members may be exposed to debt collectors who contact you.

It’s best if your family knows why you’re going through all this, so you can let them know how you hope the family will benefit in the long run. 

Step 7: Imagine success

Go into the process with clear goals. Those goals should include starting over with fewer payments, and eventually rebuilding your credit.

Getting there may take time and involve some difficulties, so imagining what settlement success looks like should help you see it through.

Insights into debt relief demographics

We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during June 2024. The data provides insights about key characteristics of debt relief seekers.

FICO scores and enrolled debt

Curious about the credit scores of those in debt relief? In June 2024, the average FICO score for people enrolling in a debt settlement program was 583, with an average enrolled debt of $24,376. For different age groups, the FICO scores varied. For instance, those aged 51-65 had an average FICO score of 587 and an enrolled debt of $25,386. The 18-25 age group had an average FICO score of 573 and an enrolled debt of $21,487. No matter your age or debt level, it's reassuring to know you're not alone. Taking the step to seek help can lead you towards a brighter financial future.

Tackle Financial Challenges

Don’t let debt overwhelm you. Learn more about debt relief options. They can help you tackle your financial challenges. This is true whether you have high credit card balances or many tradelines. Start your path to recovery with the first step.

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