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How To Draft a Persuasive Debt Settlement Letter

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In a Nutshell

Many borrowers face challenges with personal debts. Luckily, there are many debt relief options. Debt settlement is one of the most advertised and for good reason. It’s often used for credit card debts and allows borrowers with unmanageable debt to pay off one or more debts for less than the full amount. The creditor then forgives the remaining debt. This may sound too good to be true, but it’s not. How well it works for you will depend on your financial situation and whether you choose to hire a debt settlement company to help you or do the debt settlement process yourself. This article will explain how to handle debt settlement on your own and how to write the best debt settlement letter possible.

Written by Attorney Curtis Lee.  
Updated October 5, 2021


Many borrowers face challenges with personal debts. Luckily, there are many debt relief options. Debt settlement is one of the most advertised and for good reason. It’s often used for credit card debts and allows borrowers with unmanageable debt to pay off one or more debts for less than the full amount. The creditor then forgives the remaining debt.

This may sound too good to be true, but it’s not. How well it works for you will depend on your financial situation and whether you choose to hire a debt settlement company to help you or do the debt settlement process yourself. This article will explain how to handle debt settlement on your own and how to write the best debt settlement letter possible.

How Debt Settlement Works

Either the borrower or the creditor can start the debt settlement process. If your creditor begins the process, it’ll often consist of them sending you a letter with a debt settlement offer. If a creditor sends you a settlement offer, it’ll probably occur after you haven’t made any account payments for five months or more. 

Why five months? That’s when many creditors will look into sending your debt to a collection company. But before they do that, they may reach out to you with a settlement offer. The offer will be for less than what you owe, but more than what your creditor would receive if it sells your debt to a debt collector. It’s also possible to settle a debt much later in a debt collection process, such as after a debt collection lawsuit has started.

After you receive the letter, you can accept the offer or respond with a counteroffer. If you’re not sure what to do or how to make a counteroffer, it might be a good idea to get in touch with a credit counselor

Debt Settlement: DIY vs. Hiring a Debt Settlement Company

The majority of debt settlements require borrowers to take the first step. There are two ways you can do this: First, you can contact a debt settlement company. These companies agree to negotiate with creditors on your behalf to get you the best debt settlement offer possible. In return, they’ll charge you a fee. Exact fees will vary depending on state law and the debt settlement company. It’s not uncommon for companies to charge up to 25% of the amount of debt you’re settling.

Second, you can handle the debt settlement process by yourself. There are several advantages to negotiating directly with your creditors. One advantage is that it can save you a lot of money. Imagine you have a $10,000 debt and your creditor agrees to accept $5,000 to pay off the debt in its entirety. You just saved yourself $5,000. But if you hired a debt settlement company that charges 25% of the total debt amount, you'll only have saved yourself $2,500 ($5,000 less 25% of $10,000 which is $2,500).

Another major advantage is that the DIY debt settlement process tends to be faster, perhaps six months or less. In contrast, using a debt settlement company can easily take several years. Not only does this extra time mean it takes longer to get debt relief, but that’s more time for your debt to accrue interest and penalties.

The Disadvantages of DIY Debt Settlement

But there are disadvantages to using a DIY debt settlement approach instead of using a debt settlement company. The biggest one is that you’ll miss out on the debt settlement company’s expertise and experience when negotiating with creditors. They’ll know which offers creditors are more likely to accept and which creditors are more likely to settle. 

To increase your chances of getting a creditor to accept your debt, you need to be at least 90 days behind on your payments with that creditor. And during the negotiation process, you’ll need to continue not making any payments. This will hurt your credit score and the extra fees and interest may increase your overall debt. But it’s easier to convince a creditor that you can’t fully pay off your debt when you haven’t made any payments for several months. Remember, a creditor is willing to settle a debt for less than what you owe because they fear your financial situation is so uncertain that they won’t recover any money from you in the near future.

If you’ve decided to handle the debt settlement yourself but aren’t familiar with the process, you can consult with a credit professional at a credit counseling agency. You can find an accredited nonprofit credit counseling agency through the National Foundation for Credit Counseling (NFCC), and you can use the Better Business Bureau to verify any agency’s reputation. Credit counselors can help you navigate the debt settlement process and deal with debt collectors.

Preparing for Negotiations 

The first step in a debt settlement negotiation with a bank, credit card company, or collection agency is to confirm the debt belongs to you. Some debts pass through multiple collection agencies once they leave the original creditor. During that time, mix-ups can occur or debts can become so old they are past the statute of limitations and legally uncollectible

The second step is deciding what terms you’ll agree to. During negotiations, the biggest item to discuss will be how much of the debt you need to pay. But don’t overlook another important term: how the debt will show up on your credit report. 

Creditors and debt collectors typically report settled debts as “partial payment,” “settled,” or something similar to at least one of the three major credit bureaus. But they can report them instead as “paid in full.” When this happens, the settled debt won’t hurt your credit score as much. Depending on your financial situation, it might be worth settling your debt for a slightly higher amount if it means having the debt show up as “paid in full” instead of “settled” or “partial payment.”

Contact Your Creditor 

Now it’s time to reach out to your creditor. You can do this by telephone or by letter. Either way, you’ll need to have some cash saved up beforehand. Most debts get settled after the borrower makes a one-time lump-sum payment of the outstanding debt. In other cases, you’ll need to pay two or three large payments over a short period of time instead. Creditors rarely agree to let borrowers use a payment plan with monthly payments to settle their debts.

The larger chunk of your debt you’re willing to pay, the more likely your creditor will accept your settlement offer. Be prepared to pay at least half of your debt amount to get the debt settled. Also, keep in mind that if you and your lender reach a debt settlement agreement, it’s safe to assume that they’ll close your credit account holding the debt.

When negotiating by telephone, take good notes about each call. Write down the time and date of the call, who you spoke to, and what you discussed. If you reach an agreement over the telephone, you’ll still need to put it into writing. This is one reason why it might be best to send a debt settlement letter.

What Is a Debt Settlement Letter? 

If you’re unable or unsure about negotiating a debt settlement over the telephone, negotiating by letter is a reasonable option. It’s not much different negotiating with your creditor by telephone, but it might take longer. There are several ways to prepare a settlement letter, including hiring an attorney to write it for you or going online to download a template to use as a starting point. There are also several sample letters you can look at to get an idea of what your completed letter should look like.

If you’re writing and sending the debt settlement letter yourself, be sure to follow up on it. There’s a chance it could get lost or the creditor or debt collection company won’t properly process it. If your letter ends up in the wrong department, it could be delayed or never read and processed. 

How To Write a Debt Settlement Proposal Letter 

Your debt settlement letter should include the following pieces of information:

  • Your proposed settlement amount — Make sure you state this as a dollar amount, not a percentage of your debt.

  • How you want the creditor to report the debt to the credit bureaus — Let them know that you want them to report the debt as “paid in full” in your credit history if there’s a settlement.

  • Why they should accept your offer — This can include a description of your financial hardship, like losing a job.

Keep the format and tone of the letter formal but polite. You’ll want to avoid coming across as too casual to make sure the reader takes your letter seriously. When ending the letter, ask the creditor to issue a response, even if they decide to reject your offer. When you mail the letter, send it via certified mail with a return receipt requested.

When a Creditor Replies 

A creditor will reply to your letter in one of four ways. They can:

  • Accept your offer;

  • Reject your offer;

  • Make a counteroffer; or 

  • Request to begin debt settlement negotiations.

If the collection agency or creditor rejects your offer, don’t lose hope. This is especially true if you’re negotiating with an original creditor, like your credit card company. They may have a policy of not settling their debts. In that case, you can try to settle the debt later when the debt gets sold to a third-party debt collection agency. 

There are also other credit repair options available, like bankruptcy, debt consolidation, and debt management plans. You can learn more about these and any other forms of debt relief by searching for a nonprofit credit counseling agency and scheduling a free consultation. A credit counselor can review your unique situation to provide personalized feedback regarding alternative forms of debt relief.

Let's Summarize...

There are many debt settlement companies out there to help you through the debt settlement process. But if you negotiate debt settlements with your creditors yourself, you can save a lot of money. You can find out more about debt settlement by reading Pros & Cons of Debt Settlement to learn about the advantages and disadvantages of the different debt settlement approaches. 

If you decide on the DIY debt settlement approach, you can negotiate a debt settlement by telephone or letter. Make an offer for less than what you owe, and ask your debt collector or lender to agree to report the debt as “paid in full” to the credit reporting bureaus.



Written By:

Attorney Curtis Lee

LinkedIn

Curtis Lee is a writer and co-owner at Marvel Hill Freelance. Curtis earned his Bachelor of Science in Business from Wake Forest University and his Juris Doctor from Villanova University School of Law. After graduating law school, Curtis had the honor of clerking for a state cou... read more about Attorney Curtis Lee

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