Debt-burdened consumers should consider all debt relief options, including out-of-court settlement, prior to filing for bankruptcy. 

In an out-of-court settlement, you contact your creditors

in an effort to reduce the amount of debt you owe.

Sometimes the balance or interest rate is reduced, or the term of loan is extended to reduce your monthly payment by giving you more time to pay.  In some instances, late fees, fines, or even the debt itself can be eliminated.

Contrary to popular belief, creditors are interested in talking with you.  The creditor’s job is to collect as much of the debt as possible and negotiating with you will likely net them a better payout than what they’ll get in a bankruptcy settlement.  When you open the lines of communication by contacting the creditor directly, explain your situation openly and honestly, and demonstrate a strong desire to clear your debt as quickly as possible, the creditor is more likely to consider your offer.  Honesty and clarity of intention are key to reaching a settlement. 

Before you contact any creditor, review of all your debts.  Be clear in your own mind what you can pay and how long it will take you to pay it, and evaluate which debts are most important to pay off or settle and which you may have to let fall aside. Concentrate your time and attention on the most important debts first. That way you won’t find yourself at the end of the day with your less important debts taken care of and no financial room to negotiate the more critical debt obligations.  Be strategic in how you approach your negotiations.  View your debt as a whole rather than looking at one debt at a time.

When you contact your creditors, you can expect them to push for a larger payout or shorter timeframe than what you offer.  It will do you no good to make promises you can’t keep.  Coming back to renegotiate your negotiated settlement will not be viewed positively.  Know your financial capacity and ability to pay beforehand and don’t let yourself be pressured into making commitments you can’t keep. 

While you can contact the creditors yourself, some borrowers may want to engage a private firm that specializes in out-of-court debt settlement; and some may want to contact a credit counseling agency for negotiating help. While many debt settlement and credit counseling agencies are reputable, check with your Better Business Bureau before engaging outside assistance.

In the case of credit counseling services, check to see if

the firm is listed with the Association of Independent Consumer Credit Counseling Agencies (aiccca.org); or with the National Foundation for Consumer Credit Counseling (nfcc.org).  Both agencies test members for quality, financial soundness, and ethical behavior. 

Bottom line: if you are seriously at the point of declaring bankruptcy, talk with your creditors.  Most would rather negotiate with you and reduce your debt than take what they’ll get from a bankruptcy proceeding.  Call them yourself or get some help.  There are services at all price points to assist you with this.