Understanding Debt Settlement Letters

If you’re unable to pay back a large amount of debt, you might be interested in learning more about debt settlement. Debt settlement works to negotiate with your creditors to forgive all or part of your debt. Throughout this process, communication is usually done with written letters. Written letters work best to convey the clear and detailed terms you have for your creditor.

A debt settlement letter is a written proposal for you to offer a specific amount of money in exchange for forgiveness of your debt. These letters address why you’re unable to pay the debt, how much you’re willing to pay now, and what you would like from the creditors in return. Working through the proposal is how both parties determine the terms and agreements of the debt settlement exchange.

What Is Debt Settlement?

Debt settlement is the meticulous process of negotiating terms with your creditors, in hopes of them forgiving a portion of your debt. Those who look for debt settlement usually are doing so because they can’t pay off all the debt they’ve accumulated. Instead, they offer a decent portion of the debt owed upfront in exchange for the account to close in full.

The following are the key steps in reaching a debt settlement:

1. Decide if you want to work on your own or hire debt settlement professionals. Professionals can be of great help, but sometimes their fees can get quite expensive.
2. Save up the amount of money you are proposing before even getting started. If the creditor accepts your proposal, you’ll need to pay the agreed amount within a specified time frame.
3. Write a debt settlement letter to your creditor. Explain your current situation and how much you can pay. Also, provide them with a clear description of what you expect in return, such as removal of missed payments or the account shown as paid in full on your report.
4. Ask for a written confirmation after settling on an agreement. Request this before you send the payment, as it acts as an extra layer of liability coverage in the future.
5. Send your payment. Keep in touch with your creditors until all terms and agreements are fulfilled.

What To Consider Before Sending a Debt Settlement Letter

Sending a debt settlement letter has the potential to do both harm and good. The extent to which you are affected depends on your current situation. Some people may not think that the benefits outweigh the negatives when settling debt. Others may be limited when it comes to other options and are more willing to take the risk.

Pros of Writing a Debt Settlement Letter

Sending out a debt settlement letter can be beneficial if you’re in financial hardship. Many people who can’t afford to pay off their debt end up filing for bankruptcy. While settling is never a guarantee, it may put you in a better financial position. If the request is accepted, debt settlement amounts usually settle for around 50 to 80 percent of the total balance. Reaching out to your creditors and addressing the issue can also relieve some of the stress you feel to pay off your debt.

Cons of Writing a Debt Settlement Letter

As mentioned, debt settlement is never a guarantee. If there’s no agreement made, you may end up owing more than you did originally due to missed payments and late fees. If you hire professionals, you may owe them various fees and payments.

Settling debt can often appear as a bad financial move and can negatively impact your credit health. Missed payments on the account may still appear in your report, even if you were negotiating your settlement during that time. There’s also a chance that your account shows up as a debt settlement on your credit report. This may cause other creditors to see you as an unreliable candidate in the future.

How To Write a Debt Settlement Proposal Letter

When writing a debt settlement letter, it’s important to be explicit and detailed. Treat the letter as a contract between you and your creditor. Include your personal information and account number for easy identification. You’ll need to outline the amount you can pay and what you expect in return. If you want to propose a good settlement offer, consider offering around 30 percent of what you owe. This can set the baseline for the negotiations your creditor will put forth.

In order to have your proposal approved, creditors must believe that you’re truly unable to pay off what you owe. This is why elaborating on the reason you can’t pay off your debt can benefit you. Financial hardships can include serious injury, unexpected loss of work, and environmental disasters. Depending on your hardship, creditors may ask for documented proof. For instance, a serious injury may need proof from a doctor.

Below is a template to guide you when writing your letter:

[First & last name]
[Home or mailing address]
[Telephone number]

[Current date]

[Account number of which you’re looking to settle]

[Creditor or organization name]
[Creditor’s address]

Dear Sir/Madam,

I’m writing this letter in regards to the amount of debt on the account number stated above. As a result of financial hardship, I am unable to pay back the amount in full. [Here, take the time to explain your hardship so the creditor has a better picture of what’s going on].

I would like to propose an offer to settle this debt for [$ how much you will pay] as a final settlement. In return, I request [what you expect in return; ex: removing late payments on your credit report]. I would also like freedom from any liability associated with the debt of this account. I expect this to appear in my report by stating that the account is now paid in full.

If you are willing to accept this offer, please send me a signed and written agreement. Once I receive this, I will pay the agreed amount within [number of days they can expect your payment]. Please let me know by [a specified deadline].

Sincerely,

[Your Signature]

[Printed Name]

What To Expect After Sending Your Letter

After sending your letter, you may be eager to see if your creditor approves or declines the request. For this reason, including a response date in your letter will help your chances of a prompt reply. As you wait, ensure you have the agreed amount of money saved up and ready to go if they accept your offer. It can also be a good idea to request confirmation that they have received your payment.

You may want to check and make sure the appropriate changes appear on your credit report and account. Debt settlement may relieve your debt, but it can also negatively impact your financial health. Debt settlement is usually reflected in your report for some time. Seeing this may make you appear as risky to future lenders.

Debt settlement may be worth your while if you find yourself struggling due to a hardship. When writing a letter, remember it’s very important to be careful with your words. A well thought out debt settlement letter can make all the difference when it comes to liability. This helps in ensuring that both parties uphold their part of the agreement.

Since it may negatively impact your credit score, you may feel nervous about settling your debt. You may fear creditors thinking you’re a poor candidate for future financial requests. Keep in mind that there are still many credit card and loan options out there for people who are working towards rebuilding their credit.