Paying back bills is not always easy. That’s why so many people across the U.S. are in debt. If the amount of your debt becomes overwhelming, you have options. You don’t need to constantly dodge collections calls and ignore collections mail. You can consolidate your debt, settle your debt, or declare bankruptcy. Understanding each process is the first step in deciding which option is best for you.
First, consider your options
Debt settlement focuses on renegotiating the amount of money owed. Debt consolidation, on the other hand, focuses on shifting who the money is owed to. Settlement shrinks the total amount you owe; consolidation combines all of your debts into one lump sum payment. If you have overdue, unsecured debt, which is a loan not tied to a house, car, or other asset, you can likely pursue settlement or consolidation. If the amount you owe is larger than you could possibly ever pay back, settlement may be your best bet. But if you can currently start paying off a non-negotiable, lower-interest loan, consider consolidating.
You may also consider bankruptcy, but as a last resort, to eliminate and lessen your debt. The two most common types are chapter 7 and chapter 13 bankruptcy. With chapter 7, a trustee appointed by the court can sell some of your property and use the proceeds to partially repay your creditors. Some types of property, like your car, clothing, household goods, and pensions, can be exempt from liquidation, subject to certain limits. You should list the property you are claiming as exempt when you file for bankruptcy.
Chapter 13 bankruptcy, on the other hand, results in a court-approved plan for you to repay all or part of your debts over three to five years. Because it does not require liquidating your assets, a Chapter 13 bankruptcy can allow you to keep your home. Certain types of debts generally can’t be discharged through bankruptcy. Those include child support, alimony, and student loans.
All of these options can hurt your credit score and will remain on your credit report for up to 10 years. Because of this, they should only be considered when you have no other way of repaying your debts in full or partially.
Debt settlement steps:
1. Let your creditors know you can't pay them everything you owe
Communicating with your creditors is always the first step when dealing with debt. They need to know that you can’t afford to pay back all of what you owe. You should explain why this is the case. They may cut you some slack and be willing to negotiate if you have extenuating circumstances making it difficult for you to pay your bills.
2. Assemble documentation for why you qualify for loan forgiveness and payment flexibility
Did you lose your job or main source of income? Did you have unexpected medical bills? Were you unable to get a loan? Whatever case you are building for why you cannot pay your bills, have documentation to back it up. Whether it’s bank account statements or medical invoices, have them handy so that you can refer to them while you speak with your creditors.
3. Confirm to your creditors you want to repay part of what you owe
Make it clear that you have every intention of paying back what you can. Lay out how much you can afford to pay back each month. Only give them a realistic amount that you can actually pay each month. To do this, consult your budget to see what you can afford. Cut out all unnecessary expenses and make paying off your bills your top-priority expense.
4. Request your creditors’ standard forgiveness and restructuring options
The good news is that you’re not the only person who has had to ask for debt forgiveness or restructuring. Your creditors should have a standard program they put people on that can be tailored to your financial situation. Ask them for the paperwork that explains how they are willing to help you pay off your debts to them. While consulting your budget, decide if you can afford to pay back your debts in accordance with their standard policies. If not, explain what you can afford, backed up by documentation.
5. Negotiate and accept their debt forgiveness or restructuring options
Once you have reached an agreement that works with your monthly income and budget, accept the terms of the agreement. You’ll be asked to sign paperwork, which establishes a new contract for repayment. Make sure you read the contract in its entirety. Do not sign anything until you have read every single word.
6. Document the settlement
Never agree to anything only verbally. You need paperwork that outlines the terms of the agreement to hold each party accountable. Keep the paperwork in a safe place where you can refer to it if needed. Do not lose it.
7. Pay the agreed amount over the agreed-upon time
Once the contract is signed, you’re on the hook for the new amount established. This is an amount that you negotiated and said you are able to pay back. Do not miss payments, as that will cause you to be in breach of contract. If you violate the terms of the agreement, the creditor may sue you. And the last thing you need when you are already in deep debt is to pay legal fees on top of everything else. Look at your budget and cut out all unnecessary expenses so that your settlement agreement is your top priority every month.
8. Repeat this process for each of your different creditors
You may owe multiple companies a lot of money for unpaid bills over time. Once you have one debt settlement agreement signed, you’ll need to repeat the process with each of your other creditors. We hope that these steps will help you go about the process