The main reason many people choose debt settlement is so that they can avoid declaring bankruptcy. Filing for bankruptcy is a debt solution that stays on your credit record for 10 years, but even after 10 years, many creditors and employers will ask applicants for loans or jobs if they have ever filed for bankruptcy. The applicant must give the honest answer even if it was years ago because to lie could result in being found guilty of fraud. Debt settlement will stay on your credit report for seven years, and there is no public record of debt settlement, so once a debt settlement is agreed upon by the debtor and creditor, the debtor can request that the debt be removed from his or her credit report.
Many creditors are happy to reach a debt settlement agreement, especially if it originated from the debtor. This is because it is worth getting part of a debt repaid than getting nothing. Worse, the creditor may have to hire a collection agency or go to court, both of which the creditor would like to avoid because these processes can be expensive.
In the case of credit cards, the bank that owns the credit card has priorities. It wants to make as much money from the credit card as possible. However, when a customer cannot make payments for a legitimate reason, the priority shifts, and this will help the debtor. If the debtor declares bankruptcy, the bank will not get any of the credit card debt because it is unsecured, which means it is not backed by assets. This is why the bank will be happy to take a lower amount and close the account. If the bank has to charge off the debt on its income statement, it could cause the stock to fall, reduce dividend payments and reduce manager’s bonuses.
People who are unable to pay the full amount of their debt, may be able to reduce the amount they pay by sending their creditor a debt settlement proposal letter. When payments on debt become overdue for months, some creditors are willing to accept a lower amount than what is owed rather than receive nothing. The debtor needs to have a legitimate reason for defaulting on debt payments.
Some, but not all, of the valid reasons are:
• Loss of job or spouse's loss of job
• Death in the family
• Illness or injury that results in lack of work
• Job relocation
• Failed business venture
Below is a sample letter to creditors to settle debt. It is a formal business letter, so it should be written in business-letter style and sent by certified mail with a return request. Debtors should remember that their creditors are not obligated to reduce the debt, and it is always a good idea for the debtor to be courteous and humble when asking for help.
Sample Letter to Creditors to Settle Debt
Name of Debtor
Address of Debtor
City, State, Zip Code
Name of Creditor
Address of Creditor
City, State, Zip Code
RE: Debt settlement proposal for ACCOUNT NUMBER
Dear Name of Creditor:
With respect to our telephone conversation on DATE, I want to thank you for considering a settlement proposal for my debt. As I mentioned, I have not been able to make the necessary payments on my debt because my wife required cancer treatment for the past four months. Much of the treatment was covered by our medical insurance, but since she was unable to work, we also suffered loss of income.
I would like to propose the following plan to settle my debt. I can afford to make a one-time payment of 60 percent of my total debt that I would pay by cashier’s check. The following conditions are part of my settlement offer:
• I will receive a written agreement from you that my account is paid in full and that no further money is owed on this account.
• There will be no litigation against me relating to this account.
• Any negative information relating to this debt on my credit report will be removed by you from each of the three major credit bureaus.
Since I have other debt, I will only be able to pay creditors who are willing to accept a settlement offer that I can afford.
Please find a copy of my financial statement as well as the medical report of my wife’s treatments as well as a debt settlement agreement for you to sign and return to me.
When I receive a signed agreement from you, I will send you the cashier’s check for the above amount within five working days. If you have any questions, I can be reached at Phone Number or as Email Address. Thank you for your kind consideration of this matter.
Signature of Debtor
Printed Name of Debtor
List of Enclosures: Financial Statements, Medical Records, Debt Proposal Agreement
By Andre Bradley