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How to Settle Your Debts in Tennessee

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In a Nutshell

If you decide to move forward with debt settlement in Tennessee, you’ll want to make sure that you're confident it's a good debt relief option for your current situation. Below, we will help you learn how to figure that out, as well as what to expect throughout the debt settlement process.

Written by Upsolve Team
Updated February 25, 2020

When you're struggling financially, it can be hard to know where to turn to get your personal finances back on track. You’ve probably heard about all sorts of debt management and debt relief options but may not know which ones are legitimate and which one may be the best fit for you. Fortunately, there’s information and trusted resources available that can help as you explore your various options. This article will focus on debt settlement, which can be a cost-saving solution under certain circumstances. 

The debt settlement process involves negotiating with a creditor to pay less than the total amount you owe in exchange for partial debt forgiveness. This may sound like a great option for you, but you’re probably wondering why any creditor would agree to take less than the full amount of debt owed. The reason that so many creditors, particularly unsecured ones, will enter into settlement agreements is that they are trying to lessen their overall losses. Creditors know that after a debt becomes significantly delinquent (more than 90 days) they only have a chance of receiving payments on one out of five accounts, and will likely have to write off the other four entirely. So, if they have an option to get some of the money owed, with the added incentive of a lump sum that represents a significant fraction of the balance due, they may well enter into settlement agreements. 

Keep in mind, however, that this process doesn’t work with all types of debt, and creditors are under no obligation to agree to any settlement. Debt settlement works best for unsecured debts, like credit card debts, gas cards, and some medical bills. It's not usually an option for a wider variety of debts, like payday loans, title loans, student loans, online loans from out of the country lenders or overdue taxes. A good candidate for debt settlement is someone who has all or mostly unsecured debt, who has already fallen behind, and who can quickly set aside money to build-up lump sum payments or otherwise fund their settlement offers. You can decide to pursue your own debt negotiation or you might choose to work with a Tennessee debt settlement company. 

It’s important to consider the risks involved with debt settlements, such as a negative hit to your credit score when you get behind and possible tax consequences from the settlement agreements, before deciding to move forward. It’s also key to learn how to spot red flags and avoid Tennessee debt settlement companies that are only out for profit. 

Learn More Through Free Nonprofit Credit Counseling

The best first step you can take involves credit counseling. You can find a reputable nonprofit credit counseling agency by researching agencies where you live and then confirming that the one you’re most interested in working with has been accredited by the National Foundation for Credit Counseling (“NFCC”) which holds its member organizations to rigorous standards. Credit counseling offers a free initial session, one-on-one with a certified credit counselor, to go over your current financial circumstances. Your credit counselor will conduct an in-depth review of your income, expenses and total debt, taking into account your short-term and long-term financial goals. At the end of the session, they will recommend a personalized action plan for your next best steps for debt relief, which may include debt consolidation, a debt management plan, or bankruptcy. If you're interested in debt settlement, credit counseling provides a good opportunity to see whether a credit counselor believes it might work for you, or another option is the way to go. Note that you're under no obligation to follow the recommendations provided by your credit counselor. You can choose to explore these recommendations further or you can choose to learn more about alternatives. 

How to Settle Your Debts in Tennessee

If you decide to move forward with debt settlement in Tennessee, you’ll want to make sure that you're confident it's a good debt relief option for your current situation. Below, we will help you learn how to figure that out, as well as what to expect throughout the debt settlement process.

Collect the Details About Your Debts 

First, you’ll need to collect detailed information about all of your debts. Your most recent statements will have most of the relevant information you and your credit counselor will need to reference, like your minimum payment, your current interest rate, and the total amount of your debt. You’ll also want to categorize your debts into unsecured debts, secured debts such as a loan on your car or house, and any unsecured debt you don't expect to settle, like federal student loans. It’s a good idea to include the information about all of your debts so that you can offer a complete financial picture to your credit counselor and to creditors when you are negotiating settlement offers. If you don’t already have one, you should get a free copy of your credit report. It’s not at all unusual for credit card companies to assign or sell delinquent debts to collection agencies or other debt collectors, and it’s important to know who is currently holding your debts before you approach your creditors about possible settlement plans. 

Collect Details About Your Ability to Settle Your Debts

Next, and equally important, you need to figure out how much money you have access to or can set aside to save up for your settlement offers. If you don’t have any money left at the end of the month after paying your reasonable living expenses, then debt settlement probably won’t work for you and you may want to explore alternatives, such as Chapter 7 bankruptcy. It’s important to figure out your income and budget accurately at this stage. 

To evaluate your income, you can use your most recent paycheck stubs, although you’ll want to check to make sure they reflect a few representative pay periods. If you’ve been working a lot of overtime, chances are your checks won’t always be that high and you don’t want to commit to a payment plan you won’t be able to afford. It’s easy to figure out your monthly net, or take-home, income if you’re paid once a month. If you’re paid bi-weekly or weekly you’ll need to figure out the average per month. To do this, multiply your net income from a paycheck by your pay frequency (by 26 for biweekly or 52 for weekly) and then divide by 12 months to get the average. If you aren’t working or have other sources of income available to pay your expenses, include those as well. 

Next, you’ll want to figure out your monthly budget, which will include your monthly payments for any living expenses. Some of these bills are fixed, which means they’re the same amount each month (like an insurance payment) and some are variable (like groceries), so try to pick a reasonable average for those. You should also include money for expected expenses that are not monthly (like oil changes) so that you have those funds available when those bills are due. After you account for all of your expenses, you can see how much disposable income you have left at the end of the month that you can set aside for your settlements. You’ll need to save up a decent amount (at least 25% of each debt amount) before you can make any settlement offers.. You should resist any temptation to raid your retirement accounts to fund debt settlements. Taking out money early results in stiff penalties by the IRS and you risk not having enough saved for when you do retire. Additionally, if you do decide to pursue Chapter 7 bankruptcy instead, your retirement accounts would remain fully protected. 

Learn About the Costs to Settle Your Debts in Tennessee 

You’ll also want to consider the costs for any debt settlements you may wish to pursue. Whether you hire a Tennessee debt settlement company or not, you can expect to incur costs in the form of late fees and any other penalties from defaulting on your payments, whether you are already behind or soon will be. Ideally, you can include these costs in any settlement agreement you and your creditors agree to, but you won’t know if that arrangement will work until later in the process. If you do decide to hire a Tennessee debt settlement company, you'll need to pay their fees as well. Typically, Tennessee debt settlement companies will base their fees on a percentage of your debt. At the most expensive end, they will charge a percentage of your total debt. On the less expensive side, they will charge a percentage of your total savings, which has the added benefit of incentivizing the company to get you the best possible deal. Additionally, if paying into an escrow account or some other third party bank account is a part of their debt settlement program, you’ll be held responsible for any fees associated with that account. You should expect to be charged by your Tennessee debt settlement company as each debt settles for a portion of their overall fees. If a Tennessee debt settlement company tries to charge their fees upfront, that's a huge red flag and you should not move forward with that company. 

Decide Whether to Work with a Tennessee Debt Settlement Company

The next decision you’ll need to make is whether to work with a Tennessee debt settlement company or negotiate with your creditors on your own. You may be well-suited to settling your debts on your own if you're organized, computer savvy, detail-oriented, and not scared to negotiate. Benefits to handling this process yourself include saving on fees, being in complete control of the process, and settling debts with companies who have a policy of never working with debt settlement companies. It can, however, take a significant commitment in terms of both  time and effort, and could easily get overwhelming on top of everything else in your life. If you haven’t been behind on payments before, getting used to collection calls can be very stressful. The most significant benefit to working with a Tennessee debt settlement company is their insider knowledge. A reputable Tennessee debt settlement company likely has established relationships with some or all of your creditors, so they can predict which ones might be open to settlement and estimate what amount would be accepted. 

Research Tennessee Debt Settlement Companies

Before you sign up with a Tennessee debt settlement company, you should do some research to make sure that the enterprise's approach to debt settlement is a good fit for you. Your Tennessee debt settlement company must give you information in advance regarding their prices and terms, an anticipated timeline for results, an estimate for amounts needed for your offers, and details about any negative consequences that may result from non-payment if that's part of their program. This can include late fees and other penalties. 

It pays to be aware of common red flags, so you can avoid any Tennessee debt settlement companies that function as scams or are focused primarily on making a profit instead of doing what’s best for their clients. If a Tennessee debt settlement company offers any guarantees for debt settlements, they should be avoided. Remember that no creditor has to agree to participate, so you should avoid companies offering a guarantee on something they don't have any control over. If a company is hyping a “new government program,” that probably bears looking a little closer at their operations. Also, if a company tells you to stop communicating with your creditors or stop minimum payments before you have agreed on any action plan, they should be avoided. The biggest red flag to watch out for concerns payment of a Tennessee debt settlement company’s fees. If they charge you their fees before you have reached any settlement agreements, you should immediately refuse and find another provider. You can also check in with the Tennessee office of the attorney general, specifically with their consumer protection division, to see if any complaints have been filed against a company you're considering. You can also use these resources to more easily identify specific scams to avoid. Additionally, you can also check with the Better Business Bureau for complaint history information, as well as any Tennessee debt settlement company’s overall rating.

How to Make Your Debt Settlement Work

You should strongly consider following some best practices to better ensure that your debt settlement will be successful.First, if part of your debt settlement program involves making a monthly payment to save toward your lump sums, make sure that you're scheduling this payment on a day that doesn't have a large payment, like rent or your car payment, already due. In general, you're better off avoiding the first of the month. Next, make sure that you have a system in place to set aside funds for expected expenses so that you have the money available when your debt settlement bill is due. Also, make sure that you have built an emergency fund into your budget that sets aside some amount of money each month so that you can cover unexpected expenses when they arise. If you come into extra money, like your income tax return, you can always make more payments toward your savings, but always make sure that your emergency fund is in good shape first.

Alternatives to Debt Settlement

Always keep in mind that while debt settlement may sound like a great debt relief solution, it has to be one that works well for your specific financial circumstances. If your credit counselor recommends a different debt management method or you want to explore further options, several debt management alternatives may better suit your needs. These include debt consolidation, a debt management plan, and bankruptcy. 

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Tennessee Debt Consolidation

Debt consolidation is a popular method of debt relief. If you take out a Tennessee debt consolidation loan, you’ll secure a new line of credit to pay off your existing debts and streamline your bills down to one monthly payment. This can be a very effective way to save on interest fees, presuming you qualify to secure a debt consolidation loan at a lower interest rate than your current debts. The catch is that to qualify for a debt consolidation loan with a low interest rate, you generally need to have a good or excellent credit score, which unfortunately cuts a lot of people off from this option.

Tennessee Debt Management Plan

If you don't have a good or excellent credit score, you may want to consider a debt management plan. A Tennessee debt management plan (“DMP”) involves working with a credit counseling agency to create a monthly payment plan to address your debt. The credit counseling agency can potentially negotiate on your behalf to lower interest rates and eliminate or reduce late fees and penalties, resulting in cost savings. You’ll then make one monthly payment to the agency, which will distribute those funds to the creditors included in your plan. 

Tennessee Bankruptcy

If you find that you have little or no money at the end of the month after paying your regular expenses, you may want to focus instead on exploring bankruptcy as an alternative. Bankruptcy is a legal remedy that may allow you to eliminate all or most of your unsecured debts. Most bankruptcy attorneys offer a free consultation that you can take advantage of at any point in the process. If you decide to move forward with a Tennessee bankruptcy, you should check to see if you qualify for free assistance from Upsolve by checking our free screening tool.

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