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Negotiating with Creditors

Settle with your creditors and avoid bankruptcy


One of the central strategies to avoid filing for bankruptcy is to negotiate with your creditors. These negotiations can lead to lowered account balances and affordable monthly payments. Although this strategy is generally geared towards settling with private and institutional creditors (e.g., credit card companies), it may also be applicable to government creditors, such as the IRS.

Initial Contact

In many instances, if you are very far behind on your monthly payments, it is likely that the creditors and/or collection companies will be calling you every day and night. If your creditors are calling you, the easiest way to start negotiations is to inform the caller that you wish to settle the debt. Set up a time with the creditor or collector to call and discuss a settlement. If the creditor has not been calling you, you should be the one to initiate contact.


The general strategy of negotiating with your creditors is fairly straightforward: pay as little as possible on the outstanding debt that you owe. This, of course, must be balanced with how much a creditor is willing to accept. Generally, creditors will want to obtain a lump sum payment over regular payments. Thus, a good strategy is to offer a one time payment, at a reduced amount. For example, if you owe $10,000 to a credit card company, you might wish to offer a one time payment of $5,000.

Start Low

A further important principle of negotiating with creditors is to start low. This means that you should certainly not make the highest offer you can afford at the outset. This is because a creditor will likely counter your offer, thereby raising the amount. If you start low, this will make it more likely that the creditor's offer will be closer to the range you can pay.

Tone and Interaction

It is essential to maintain a positive atmosphere and tone when dealing with creditors. Although a bill collector may be unpleasant, if you are professional and positive, there is a possibility that a settlement will be reached. This is simply based upon the principle that people are more willing to work with those who have a good attitude and treat others well. This may be difficult, but it is important to achieve the goal of debt settlement!

Settlement Agreement

After you reach a settlement with your creditor, it should be boiled down to a settlement agreement. Although it is not necessarily cost effective to involve an attorney, it is legally in your best interests to do so. A settlement agreement should be drafted (something very brief), which consists of a general release of claims by both parties. A settlement agreement protects you if you pay the creditor and the creditor changes its mind and demands payment on the remaining amount. A settlement agreement will absolutely be necessary in the case where a creditor has already sued you.

Effects of Debt Settlement

Debts settlement can have the tremendous positive effect of allowing you to avoid filing for bankruptcy. However, the downsides include having to work with multiple creditors and no guarantees of success. Furthermore, the debt settlement will be reported on your credit report and may lower your credit score. Additionally, you may have to consult an accountant to determine if the debt settlement will be considered a taxable gain that you will have to declare on your taxes.

Although debt settlement via creditor negotiation is not a perfect solution or the right fit for every individual, it may be an effective and viable option for many. Please note that this article does not constitute tax or legal advice.

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