How to Negotiate and Settle Your Debts Without Bankruptcy

Dealing with debt can be really stressful. I’ve been there myself — the constant calls from creditors, the letters in the mail, the fear of what might happen if I can’t pay. It felt like there was no way out except for bankruptcy. But I want you to know there are other options! You can negotiate and settle your debts without having to file for bankruptcy if you’re willing to put in some work.

In this article, I’ll walk you through the steps I took to settle my debts one by one. I was able to get three credit cards and two personal loans reduced by 50-80%! It took me about six months to do it, but it saved my credit and I avoided bankruptcy.

Step 1: Make a List of All Your Debts

The first thing you need to do is get organized. Make a big list of every single debt you owe – credit cards, medical bills, personal loans, everything. For each debt, include:

• The name of the creditor
• The account number
• The original amount owed
• The current balance
• The interest rate
• The minimum monthly payment

This gives you a bird’s eye view of every debt so you know exactly what you’re dealing with. I recommend putting it in a spreadsheet so you can easily see the totals and sort by highest interest rates.

Step 2: Review Your Budget and Free Up Cash

To save up money for settlements, you need to trim your expenses as much as possible. Review your monthly budget – take a hard look at every category. What can you cut out or reduce? Here are some ideas:

• Downgrade cable/internet/phone plans
• Cut out restaurant meals
• Cancel gym memberships or subscriptions you don’t use
• Shop thrift stores and use coupons for groceries
• Pause retirement contributions temporarily

Even small changes add up. I saved over $200/month just by being really frugal with my spending. Every dollar you free up can go towards settling your debts.

Step 3: Stop Paying Your Debts

This is a scary but necessary step. To build up lump sums for settlements, you need to actually stop making monthly payments. I know – it sounds crazy. But hear me out.

Creditors have no incentive to settle if you’re reliably paying every month. But if they see you’re in serious default, they’ll be much more likely to negotiate since the alternative is you defaulting completely.

Just be prepared for an onslaught of calls and letters when you stop paying. Don’t let them intimidate you – stand firm and stick to your plan. Let them know you intend to settle the debt for less than owed.

Step 4: Save Up Your Settlement Funds

Now comes the hard part – saving up the lump sums you’ll use to settle your debts. Those budget cuts you made in Step 2 will help a lot. Here are some other ways to build up your settlement fund quickly:

• Pick up a side gig like Uber driving, freelancing, etc.
• Sell stuff you don’t need on eBay or Craigslist
• Ask family members for help (as a gift, not a loan)

I drove for Lyft on weekends and sold a bunch of my old clothes and furniture. Every extra dollar went straight into my settlement fund.

Aim to save up 20-50% of the debt amount for each settlement offer. I’ll explain how to make offers later.

Step 5: Start Negotiating Your Settlements

Now it’s time to start settling those debts! Make a list of which ones you want to tackle first. I went after the highest interest rate debts first, but you could also start with the smallest balances to get some quick wins.

Here’s the process I used to negotiate with each creditor:

1. Call the creditor and explain you’re having financial hardship and want to settle the debt at a discount.
2. Start low – offer 25% of the balance as your first offer. See what they counter with.
3. Go back and forth making offers until you reach a deal both sides can accept.
4. Get EVERYTHING in writing before sending payment!

It took me 2-3 rounds of counteroffers before settling on an amount. Don’t take the first offer – keep negotiating! I was able to settle my $5k Visa for $2k, a 60% discount.

Step 6: Send Payment and Get Proof

Once you agree on a settlement amount, it’s time to pay up! But make sure you:

• Get the agreement IN WRITING first
• Keep records of payment (cancelled check, bank statement, etc)
• Follow up to confirm 0 balance after payment

This protects you legally in case there are any issues down the road. I had one creditor try to come back and say I still owed them money even after settling – but I had the paperwork to prove the debt was paid!

Step 7: Rebuild Your Credit

Settling your debts will trash your credit score temporarily. But now that your debts are reduced, you can start rebuilding by:

• Paying any open accounts on time
• Keeping credit card balances low
• Avoiding new credit checks

Within 6-12 months of settling your debts, you should see your score improving. Mine went from the 500s back up to the 700s within a year!

The Bottom Line

Debt settlement is hard work, but so worthwhile if it helps you avoid bankruptcy. If you commit to cutting expenses, saving aggressively, and negotiating with each creditor, you can settle your debts for pennies on the dollar. It saved my financial life – and it can work for you too!

Let me know in the comments if you have any other questions about negotiating debt settlements. I’m happy to help any way I can!