7 Steps to Prepare For the Debt Settlement Process

Debt settlement is a negotiated process which can lead to creditors accepting less than the full amount that you owe. It may be the right way out if you've concluded that there's no way you’ll be able to afford to pay all of your debts.

Some types of debts are better suited to debt settlement than others. Even if you can settle just a few of your debts, it may make the others more affordable. 

If you need help with this process, you don't have to do it alone. Debt settlement professionals have been through this many times. They can help you find your way toward a successful outcome. 

Whether you pursue debt settlement yourself or work with a professional, the process will go more smoothly if you prepare carefully. Break the process into a series of individual steps to work on. As you put in the time on each step, remember that you’re working toward a better financial future.

Debt Settlement Prep Step 1: Trim Your Budget

Debt settlement is a negotiation. In order to negotiate, you need something to bargain with. That means saving up some money for a settlement fund. This will be money you can offer your creditors.

To build a settlement fund, trim any unnecessary spending from your budget. Consider what you spend money on every month. Figure out what’s essential (like your housing, groceries, and other necessary line items), and what can be cut (dining out and other leisure spending). Use the savings to start building up your settlement fund. 

Besides helping you save money, this tighter budget can help you figure out how much you could afford to put toward debt payments each month if you negotiate a payment plan as part of a debt settlement.

Cutting expenses to tighten your budget involves making sacrifices. That’s never fun. To make it easier, keep your goal in mind. You’re working toward a future where you have enough money every month to pay your bills. This can allow you to build toward bigger and better financial goals. 

Just starting on your new budget gets you one step closer to that brighter future. 

How do you save if you’re broke?

If you’re struggling to afford your debts, you might not have much money to save each month. That’s a common challenge for people with overwhelming debt. To address the budget shortfall, most people pursuing debt settlement choose to stop making payments on their debts. This frees up cash each month, and also sends a strong signal to your creditors that you’re in financial distress. 

Stopping payments has a negative impact on your credit standing. Also, creditors are likely to step up collection efforts. A debt settlement strategy is a big gun for big debt problems, and it’s not appropriate for everyone. 

The consequences may sound scary, but you might decide that debt relief is the right path, especially if your long-term financial stability is more important than your credit score today. Also, if you’re working with a professional debt settlement company, they’ll guide you and support you through the process.

Just how much should you try to save up for a settlement fund? That depends on the type and amount of debt you have. Debt settlement is most likely to work with unsecured debt. 

A study by the Association for Consumer Debt Relief found that in 2022, consumers who worked with a professional debt settlement company settled their debts for roughly half the amount of the debt, on average.  

So, 50% of your unsecured debt is a good starting target to shoot for when saving for a debt settlement fund. Naturally, the more you can save, the stronger your negotiating position will be.

At the same time, it might not be realistic for you to save an amount equal to 50% of your unsecured debt. That's understandable, so start by saving what you can. If your resources are too limited to save much for your debt settlement fund, that might also help with your negotiation. If creditors are convinced you can't afford to pay any more, they may agree to accept less. 

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Debt Settlement Prep Step 2: Plan for Upcoming Needs

Slimming down your budget will help you prepare a debt settlement fund, but at the same time, think about upcoming expenses that you can’t avoid. These might be essential home or car repairs, or necessities for your kids. Even while you’re putting aside every penny that you can, you don’t want to get caught short for these needs. 

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 does more than diminish your savings. It could also weaken your negotiating position. When you ask your creditor to forgive a portion of your debt, your case for debt relief will be stronger if you can demonstrate that you’ve done everything you can to make ends meet. 

Debt Settlement Prep Step 3: Prioritize Your Debts

Not all debts are good candidates for debt settlement. To prepare for the debt settlement process, you need to sort out which of your debts have the best chance of being settled by negotiation.

Secured debts can’t be settled. This is debt that is protected by collateral. Collateral is something valuable that guarantees the loan. The creditor can take your collateral if you don’t repay the loan as agreed, so there is no reason for them to accept less than you owe.

For example, if you default on your car loan, the lender could take the car. Unless you’re willing to give up the car, your car loan payment is a necessary expense that should be part of your budget. Debt settlement won’t help you with secured debts. But it might be easier to manage your secured debts after you settle your eligible unsecured debts. 

Federal student loans also can’t be negotiated through the same kind of debt settlement process that you might use for credit card debt. There may be payment options available to make your student loans more affordable. 

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 to may be willing to negotiate.  

Debt Settlement Prep Step 4: Decide What Help You Need

You can negotiate with creditors yourself, or you can work with a debt settlement professional. 

If you negotiate on your own, prepare carefully. Get ready to provide detailed information about your finances. Make it clear that you’re making a good faith effort to pay as much as you can. Be realistic—creditors may be convinced to accept a reduced amount if necessary, but they have little incentive to accept an offer that’s next to nothing. 

Debt settlement professionals are very familiar with this process. They know how to offer deals in ways that make sense to creditors. Most of all, having been through this many times before, they’re familiar with what creditors will accept. In fact, a professional debt settlement company may already have relationships with all or most of your creditors. That means they might be able to get better results than you could get for yourself.

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

• Has been in the debt relief business for a long time

• 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

• Doesn’t charge an upfront fee

• Is a member of a reputable industry association, like the ACDR or IAPDA

Debt Settlement Prep Step 5: Prepare a Communication Strategy

During the debt settlement process, 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. The goal is to negotiate with your creditors on your terms, when you’re ready. 

If you work with a debt settlement professional, they should help you develop 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. 

It can be helpful to use this legal protection to limit contacts to communications that are part of your negotiation plan. 

That negotiation plan should include a script for how to explain your financial hardship. This can be an emotional subject, but it's best to be factual. Some relevant basics:

• A description of any financial setbacks that led to your debt troubles. Creditors aren't likely to have much sympathy for simple overspending. Focus on factors beyond your control, such as a job loss or medical expense.

• Detail how much of your income is taken up by essential expenses, such as rent and utilities.

• Without detailing who the other creditors are, explain how much debt you have in addition to what you owe the creditor you're speaking to. A creditor may be quicker to settle if they're concerned that other creditors might grab your resources first.

Finally, document all communications with creditors. Note the dates, times, the name of the person you spoke with, and what was discussed. This can help you keep track of the process. It also might be useful in identifying violations of the Fair Debt Collection Practices Act.

Debt Settlement Prep Step 6: Get Your Family on the Team

If you live with family members, they’ll probably 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. In some cases, debt collectors might reach out to extended family to try to get in touch with you.

It’s best if your family knows why you’re going through all this. Instead of complaining, they’ll be more likely to pitch in if they know how you’ll all benefit in the long run. Less money going toward debt bills, the end of harassment from debt collectors, and continued access to credit should make everyone’s life easier in the long run.

Debt Settlement Prep Step 7: Prepare to Build on Your Success

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

Debt relief programs can take some time, but recognize each sign of progress along the way. Every debt you settle brings you closer to a better financial future. It also makes your remaining debts easier to afford.

Besides reducing your debt burden, the debt settlement process can also boost your financial knowledge. Going through it can help you learn more about budgeting and how different kinds of credit work. That will empower you to make better financial decisions in the future. 

Once you have fewer payments to make and are in a position to begin rebuilding your credit standing, that future should start to look a lot brighter.