How to Settle a Debt Without an Attorney

For those potential clients who would like to settle a debt on their own or where it is not cost effective to retain us, we have created this page to help you along the way.

Tips for Settling a Debt on your Own

First- Determine what type or person or entity own the debt

You need to understand your opposition. It comes down to who owns the debt (debt owner), who services the debt (collection agency or law firm), and who is suing upon the debt (law firm).

Collection Agency: Depending upon how they are compensated will make a difference in their approach. Most get a percentage of what is collected and therefore benefit from a case dragging on and on while gaining interest. The only concern is usually if you can file bankruptcy, avoid the debt, or cannot pay.
Debt Owner (Debt Buyer): This is the most common high volume debt owner you will come across. They purchase old debt for anywhere from .01 to .10 on the dollar typically. However, they have paid to purchase this debt and so usually need to see .20 or more to break even and begin to the profit. Discount is not based upon how little they paid but rather your leverage, but it is possible to work their low investment to your advantage.
Debt Owner (Government): This is the worst to deal with in the long term as they can garnish SSI, offset benefits or tax refunds, and often times have no statute of limitations. In most instances the debts are non-dischargeable and therefore there are precious few options to resolve beyond settling or litigation. The only positive is they are usually not very aggressive as they know they will get you sooner or later to include your estate if you die with the debt unresolved.
Debt Owner (Original Creditor- Business Debt): Generally you can rely on these types of creditors to be rational and willing to make a deal if they are big bank/lender types. If it is a vendor/vendee or other more personal business relationship it can be more punitive and less numbers focused.
Debt Owner (Original Creditor- Consumer Debt): This is one of the most common situations and there is a new trend to in house collections rather than sell debts on the secondary market. Most of these owners are rational and will make a deal in a normal range.
Debt Owner (Original Creditor- Hard Money Lender): The loans are typically designed with default in mind and the creditor is ready and prepared to push litigation and go all the way. Settlements tend to be high and they will happily force you to file bankruptcy or litigate. While rational, they are the most aggressive of all debt holders on balance.
Debt Owner (Original Creditor- Personal Loan from Friend/Family): Depending on the connection, default on a personal loan of this kind either resolves with compassion or extreme prejudice. There is rarely an in between. The debt owner is usually less focused on numbers and more on emotional/justice/retribution concepts. It is often best to have an attorney settle these as it places a degree of separation between you and keeps the focus on the numbers not the breach.
Law firm: They typically do not get paid until the there is a garnishment or a settlement. Their agreements are either contingent as a percentage of the debt or a flat fee and sometimes both. High end firms relish litigation and see it as a chance to churn the fees on a file. Low end high volume firms usually try to avoid litigation or are working flat fee so it is not advantageous to litigate.

Second- Determine their likely investment, ability to resell, ability to recover

Original creditors typically have extended money, credit, and/or products and are facing an actual loss. They typically have three choices: 1) write it off (forgive the debt) and send you a 1099 tax form, 2) charge it off (change the accounting status) and sell it on the secondary market, or 3) keep the debt and try to collect on it until they decide to charge it off or write it off. They know that if they sell it they will only get .01 to .10 on the dollar for debts. This means any offer should be above that if you hope to settle the debt.
Debt buyers typically buy at .01 to .10 on the dollar for debt but have overhead that they need to account for to break even on a file. Usually they will need to see at a very minimum .20 to .30 on the dollar to break even. They of course want more.
Beyond the investment, both original creditors and debt buyers will likely run an asset investigation and determine 1) can you file bankruptcy, 2) are your assets exemptable, 3) is your income exemptable, 4) are you likely judgment proof? These factors will determine the ceiling on the settlement while the ability to sell or the amount they invested tend to establish the floor of the negotiation.

Third- Determine your leverage

There are many types of leverage, here are the most common:

Assets- are they protected or exposed? By protected this means either the lack of assets, the asset are exemptable in a bankruptcy, or are protected or hidden somewhere like in a trust, 401k, etc. Exposed assets means you have a distinct lack of leverage while protected assets improves your position.
Income- is it garnishable or un-garnishable? If you work a standard w-2 position and make more than minimum wage you are likely garnishable. If you work in a cash only basis, as a 1099 contractor, are in the gig economy and job hop frequently, self-employed, or are receiving benefits, you are likely not garnishable or you are hard to garnish in which case you have leverage. If you are garnishable, this harms your position.
Is the debt dischargeable in bankruptcy and are you qualified to file? If the debt is dischargeable and you are able to file, this is very strong leverage. If it is non-dischargeable or if you cannot file, then that is poor leverage.
Do you have consumer protection claims or a defense to the debt? This is very strong leverage if you do and if not it harms your position.
Is there a political, social media, report to authority, or other non-traditional option that you can bring to bear? If so, this can be strong leverage. Otherwise, this is neutral as it is not common these factors apply or that the creditor believes these are options.

There are more forms of leverage but the above are the most common. There is no hard and fast formula for what leverage produces what deal. Every creditor and case are different. Some creditors get aggressive hoping to outspend you in litigation while others will fold like a wet rag at even small forms of leverage. If you have leverage, use it or allege it.

Fourth- Determine your initial offer and alternatives if negotiations fail

There are many stories online of creditors that settle at .10 on the dollar all the time and you are an idiot if you can’t get that.

Fifth- Contact the collector and make your pitch

Sixth- Confirming the deal

Seventh- Making the payment

Either- Following up regarding satisfaction of judgment and credit report