How to Settle Debt in 3 Steps: A Complete Guide

Dealing with unsecured debts in default can feel overwhelming. You have options. With some work, savings, and strategic negotiation, you can settle for significantly less.

The debt settlement process works. You make an offer. The creditor accepts or counteroffers. You pay once both parties agree. The debt disappears.

Follow these three steps to settle your debt:

1. Respond to pending debt lawsuits
2. Determine how much you can afford, then send an offer
3. Get the debt settlement terms in writing

Our partner Solo can help you navigate each of these steps successfully.

Step 1: Respond to Pending Debt Lawsuits

If you’re being sued, you received court documents. These include the Summons and Complaint. Never ignore a debt collection lawsuit, even if you plan to settle.

Failing to respond can result in a default judgment. The consequences include wage garnishments or property liens.

Each state has a deadline to respond to debt lawsuits. The timeframe ranges between 14-35 days. Court documents sometimes specify your deadline, but not always. You must file an Answer before your state’s deadline expires.

Your Answer should respond to each claim and assert your affirmative defenses. File the Answer with your local court and send a copy to the opposing attorney.

Respond to Every Claim

The Summons and Complaint list reasons why the creditor is suing you. Respond to every paragraph carefully.

For every complaint, state whether you deny, agree, or deny due to lack of knowledge.

• Deny means you want the plaintiff to prove the accusation. Denying everything forces your opponent to prove each claim.
• Admit means you accept guilt. Admitting all claims means the judge would rule against you.
• Deny due to lack of knowledge means you cannot verify the accusation’s truth or falsity.

After answering each claim, you’re ready to state your defense.

Assert Your Affirmative Defenses

State the reasons why you’re not guilty of the accusations. You only have this chance to assert your affirmative defenses. Once the trial begins, you cannot bring them up.

Choose the affirmative defense that applies in your case:

• You don’t have a contract with the creditor or debt collector
• Another court already dismissed the debt
• The amount is incorrect
• The debt is past the statute of limitations
• You already paid the debt

Our partner Solo helps you make the right defense the right way.

File the Answer With the Court and Plaintiff’s Lawyer

Properly filing the Answer is the most critical step. Even an excellently crafted Answer only works if it reaches court in time.

If you’re filing yourself:

• Print two copies of the Answer document
• Mail one copy to the court and one to the debt collector’s attorney
• Use certified mail with a return receipt requested

Step 2: Send an Offer to Start Negotiations

Send an initial offer to kick start the negotiation process. You’ll never know how much a creditor is willing to accept until you make an offer.

How much should you offer to settle your debt?

Your original offer should be less than the maximum you can afford. That way, if the creditor counteroffers, you have room to negotiate. Once you’ve saved your settlement offer, contact the creditor to present your proposal.

Never make an offer you can’t afford to pay. Wait until you’ve saved enough to move forward. Be prepared to pay off your debt as soon as the creditor accepts your offer.

There are several ways to negotiate a debt settlement. Here are proven methods.

The Ackerman Method

The Ackerman Method helps you convincingly negotiate a settlement using six basic tips:

1. Determine a target settlement amount: You should be able to pay this as one lump sum.
2. Make your first offer at 65% of the target amount: Start low. Give yourself room to negotiate.
3. Use empathetic “no’s”: When the creditor counteroffers, use empathetic “no’s” to show your initial offer was already a stretch. Say something like, “How am I supposed to accept that? I just don’t think I can afford that amount.”
4. Up your offer: Increase your offer to 85% of target amount, then 95%, then 100%, depending on what the creditor will accept.
5. Use non-round numbers on each offer: Make an offer of $998.76 instead of $1,000. Non-round numbers suggest you’ve thoroughly examined your budget.
6. Offer something nonmonetary: After the final offer, throw in a nonmonetary offer to show you’re at your limit.

Example: Jonny is being sued by LVNV Funding for $5,000. He can afford to settle by paying 75% right now, or $3,750. He uses the Ackerman approach to negotiate with LVNV. First, he sets his target amount at $3,750 before reaching out. Next, he makes his first offer at 65% of his target amount, which is $2,437.50. When LVNV Funding replies with a counteroffer above his target amount, Johnny empathetically tells them he understands they want the full amount, but there’s no way he can afford that right now. He increases his offer to 85% of the target amount, or $3,187.50. LVNV Funding doesn’t budge, so he tries 90%, or $3,375. At this point, LVNV Funding accepts.

Determine How Much You Can Afford

You can try a less structured approach than the Ackerman Method. Determine how much you’ll offer based on two factors:

• How much you can pay: Calculate how much money you have left over each month after paying for basics: food, shelter, utilities, and transportation. Subtract other costs that must be paid like other non-delinquent debt. Add the difference to any savings you have available. The sum is the amount you have available to pay off the debt. Use this formula: Amount available to settle = (monthly income – monthly costs) + savings
• How much you think the collector will accept: Debts settle within a broad range of amounts. They can settle for amounts ranging from 1% to over 100% of the total debt. More frequently, they settle for 60% or more.

Example: Jennifer receives notice that Midland Credit Management is suing her for $6,000. She takes a close look at her finances and decides she can afford to pay 75%, or $4,500 to settle the debt. She researches Midland Credit Management and finds out they often settle for as little as 20-40%. She uses this information to make an offer at 50% of the debt, or $3,000. Midland Credit Management accepts and the lawsuit is dismissed.

Pick a Price and Stick to It

You can make your initial offer at the best you can afford and stick with the amount. When the creditor comes back with a counteroffer, don’t budge.

Debt collectors use this tactic with people frequently. It turns into a game of chicken to see who breaks first. If you have the time and persistence, it could really pay off.

Example: Brian is being sued by his credit card company, Discover, for $4,500. He has enough to pay $3,500 upfront and calls Discover to offer this amount as a final settlement. Discover tries to counter, but Brian sticks to his guns with his original amount. After a few weeks of negotiation attempts, Discover finally agrees to settle for $3,500. Brian’s persistence pays off, and Discover dismisses the case after he sends the settlement amount over.

Step 3: Get the Agreement in Writing

Having your offer accepted can be exciting. Before you make any payments, the creditor must agree to the terms in writing. The creditor should provide you with a written settlement offer. Both you and the creditor should sign the document before you make your settlement payment.

It can be tempting to skip this step in your rush to be done with creditors. However, a settlement agreement is only valid if it’s in writing. More than one consumer has made what they believed to be a settlement offer, only to later face harassment from a debt collector.

Some have even faced legal action attempting to collect the remainder of the debt. All because the agreement was never recorded.

Once the debt settlement terms are in writing and both parties have signed, you can make the payment.

There’s more to debt settlement than just paying less than the amount owed. First, respond to any debt collection lawsuits. Make an offer you can afford. Get everything in writing. Our partner Solo makes the process simple, even after you’ve been sued.