More For Your Money - University of Illinois Extension

Talk to Your Creditors

Negotiating a Settlement

Sometimes called debt arbitration or debt negotiation, a debt settlement is an agreement with your creditor whereby you repay only a portion of your debt owed and the creditor writes off the remaining amount.

For example, you owe $7,000 on a credit card.  You were unable to make payments for several months, and the creditor is threatening legal action.  You can offer the creditor a lump sum payment of $3,500 if they agree to discharge the remaining $3,500.  Some creditors may want 75 percent of the amount owed, instead of 50 percent.  And, some creditors will not accept a settlement offer.

Debt settlement can be a good option, because you only pay back part of your debt.  However, there is a negative side.  Most creditors will want the settlement in a lump sum.  Settling your debt may also have a negative affect on your credit report.  You may also be liable to pay taxes on the portion of the debt that was written off.

Once you’ve reached an agreement with your creditor:

  • Follow your plan.
  • Pay bills on time.
  • Contact him about any changes that affect your new repayment.