7 Steps to Prepare For the Debt Settlement Process

Debt settlement may be your best way out of a cycle of unaffordable debt payments. Once you’ve made that decision, the right preparation can be the key to success.

The debt settlement process will go more smoothly if you break it into a series of individual steps. As you put in the work on each step, remember that it’s getting you closer to a fresh financial start.

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 so they have an incentive to settle your debts for less than the full amount you owe.

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, and what can be cut. 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 towards 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 in 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 is all but guaranteed to have a negative impact on your credit standing. Also, you could be contacted by debt collectors. A debt settlement strategy is a big gun for big debt problems, and it’s not appropriate for everyone. 

The consequences sound scary, but you might decide that debt settlement 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.

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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.

Creditors are unlikely to accept a reduced amount for secured debt. This is debt which 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. 

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. 

Government student loans also can’t be negotiated. There may be other payment options available to make these more affordable. Those should be pursued separately from the debt settlement process.

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. 

There are professionals who are very familiar with the debt settlement 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 menas 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

• Won’t charge an upfront fee

• Is a member of a reputable industry association

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. 

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

If you have a family, 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.

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.

The process 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 can begin rebuilding your credit, that future should start to look a lot brighter.