If you want to get out of debt quickly, but you also want to avoid bankruptcy, you might consider adding debt settlement to your list of options. Creditors generally don’t like to talk about this option, because they want to squeeze as much money out of you as they can. But under the right circumstances, most creditors and collectors are open to debt settlement.

Ok, debt settlement is a pretty simple concept. Say you owe $5,000 on a credit card. You pay them, say, $4,000, and they go away and leave you alone. Your credit report shows you have paid the debt. And you’ve essentially just taken $5,000 in debt off the pile, which is a huge relief.

Now, like anything financially related, it’s not that simple in practice. This is an option you need to consider carefully, depending on your situation.

Should You Consider Debt Settlement?

Debt settlement only makes sense for some people. If you’ve never missed a payment, your creditor probably won’t hear of it. You’re a good customer, and the creditor stands to earn hundreds or even thousands of dollars more in interest until you pay the damned balance off.

Plus, it doesn’t really work to your advantage if you have a good payment history. A debt settlement will ding your credit score, because you’re paying less than what you owe.

If you’re already a few months behind, the creditor might start warming up to the idea. If you’re four or more months behind, they’ll probably even suggest it. You’re a default risk, so the creditor starts thinking, “We should get as much money as we can out of this guy.” After all, partial payment is better than nothing.

And if you already have bad credit, a settlement probably won’t make it any worse.

In my experience, if the creditor sends the debt to a third party collector, the clock seems to start over. At first, the collection agency will want to take you for the full amount… but a few months down the road, they’ll take what they can get. Collection agencies seem to be more open to the whole thing, because they have less invested – they probably bought your loan for about 10% of the balance. They’ll spend about another 10% in administrative and collection costs. Anything over that is pure profit. (If you’ve ever wondered why any black-hearted soul would ever want to start a collection agency, that’s why.)

Can You Afford Debt Settlement?

The other thing to consider is whether you’ll be able to afford a debt settlement. That depends on how much you owe, and which creditor or collection agency you are dealing with. And, of course, your earnings.

How much you’ll have to pay also depends on the age of the debt. If you’re dealing with a collector on a debt you haven’t paid on in a year, that $5,000 debt might go away for $3,000.

Some creditors will break up a settlement into monthly payments; some won’t. Setting up payments requires extra administrative costs, so creditors aren’t typically in love with the idea. Again, the more desperate the creditor is for your money, the more concessions it will make.

In any case, the payments are almost always higher than what you were paying per month when the loan was in good standing. Much higher. The creditor wants the settlement paid as quickly as possible, before you change your mind. So if you couldn’t make a $60 per month credit card payment, you’re going to have to figure out how you’re going to pay $500 a month for the next 6 months to fulfill a settlement.

Now, I’ve settled debts, and it was worth it for me. The stress of having to make extra money for a few months was much lower than the stress of owing the debt.

If you think it might be a good option for you, stay tuned. In the next post, I’ll tell you how to negotiate a debt settlement.