How to Negotiate With Your Creditors and Settle Your Debts

Settle with your creditors and avoid bankruptcy

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Are you looking for ways to avoid bankruptcy? If you have some cash, but not enough to pay your debts outright, you can try negotiating new payment terms or even a payoff for less than you owe. These negotiations can lead to lowered account balances, affordable monthly payments, or even complete resolution of the debt. Although this strategy is generally geared towards settling with private and institutional creditors (e.g., credit card companies and banks), it may also be applicable to government creditors, such as the IRS.

Initial Contact

Before you talk with a collector, it is best to know your rights. Collectors are bound by the Fair Debt Collection Practices Act and many similar state statutes, but they violate these laws all the time. If you know your rights before you go in, you'll be dealing from a position of strength.

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 can initiate contact. That may sound intimidating, but the fact is you're the one who's actually in control. When you talk with the creditor: 

  • act confidently and decisively,
  • expect respect, and demand it if the creditor treats you otherwise,
  • ask for clarification if you don't understand something, 
  • don't agree to any terms unless you understand what is expected from you completely,
  • don't agree to anything until you see it in writing.


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, but only if you know that you can pay that amount within a reasonable period, say 30 days. 

Start Low

You have nothing to lose (and maybe a lot to gain) by starting 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 on 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

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.

The settlement agreement should always be in writing. Although it is not necessarily cost effective to involve an attorney, it is legally in your best interests to do so. 

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. 

To learn more about what happens to debts in collections, see:

Timeline of a Consumer Debt Lawsuit: Collecting the Judgment

Is It Worth It To Defend a Credit Card Lawsuit?


Updated March 2018 by Carron Nicks

Please note that this article does not constitute tax or legal advice.